Regulations Drive Valuation Technology

Terry Flanagan

Central clearing and SEFs put premium on mark to market of OTC products.

Regulatory changes are placing a premium on valuation of complex OTC derivative products.

Dodd-Frank in the U.S. and European Market Infrastructure Regulation (EMIR) in Europe will have the greatest impact on derivatives users, as central clearing becomes mandated for specific derivatives transactions.

OTC derivatives will be deemed “clearable,” and if clearable, will need to be executed on a Swap Execution Facility (or SEF) in the U.S. and an Organized Trading Facility in Europe (or OTF), and cleared through a clearing member of a central counterparty, or CCP.

“The increased volumes coming from the newly created SEFs and CCPs require clients to look differently at OTC valuations; it has to be done on demand and when the client needs it,” Zohar Hod, vice president and head of the Americas at SuperDerivatives, told Markets Media. “Valuation processes have to include much deeper transparency and be able to handle higher volume of trades from different venues.”

In addition to the challenges of selecting and integrating with the appropriate SEF, clearing broker, and CCP for each trade, derivatives users will be faced with maintaining all of their derivatives in a mixed clearing environment, where some transactions are centrally cleared and others remain bilateral.

“This new ‘mixed’ model will greatly increase operational complexity and introduce significant new data requirements,” Ted Leveroni, executive director of derivatives strategy at Omgeo, told Markets Media.

Extreme market volatility and stringent compliance demands have generated a new urgency for intraday, independent valuations. Financial firms can no longer wait until end of day for these updates – real time data is vital.

“The OTC valuation process is very data-intensive and is getting worse, owing to the new volumes of data that will arrive from swap execution facilities (SEFs),” said Hod.

eValueX, SuperDerivatives’ platform for on-demand derivatives revaluation, addresses key key business issues associated with OTC valuation.

“The first is a lack of transparency in the valuation process due to a lack of market data explanations and hard-to-get prices,” Hod said. “The second business issue is the need to reduce operational risk. 99.99% of valuation teams do their work on multiple excel spreadsheets, cutting and pasting from other spreadsheets or term sheets.”

eValueX creates one online system for valuation needs, including setting thresholds of comparison between valuation data.

“The third business driver for eValueX is the normalization of valuation data. With multiple sources, multiple formats and multiple times at which data arrives during the day, eValueX creates a normalized data repository for the valuation team,” said Hod.

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