OTC Valuations Limited, a provider of transparent and auditable valuation and risk reports for over-the-counter independent derivatives, has introduced a service aimed at providing primary, secondary, and tertiary valuations of both vanilla and exotic derivative instruments. OTC Val’s solution is based on five elements: accuracy, speed, independence, cost effectiveness, and convenience.

With increased regulatory and institutional investor focus on the transparency and accuracy of derivative valuations, independent derivative valuations are fast becoming essential for organizations.  In the past, buy-side organizations relied on their prime brokers or counterparties to provide valuations for derivatives.  However, given the recent regulatory and financial accounting requirements, many derivatives users are searching for alternative pricing sources and avenues of price verification as counterparty marks are no longer a good proxy for fair value.  

To aid organizations with fair value measures, the financial accounting requirement changes introduced by the Financial Accounting Standards Board (‘FASB’) with FAS 157 have provided clarification and direction on how companies should measure fair value of financial instruments such as derivatives.  FASB created a fair value hierarchy of inputs, where the highest priority is given to quoted prices in active markets for identical securities (Level 1) and lowest priority to unobservable inputs (Level 3). 

With many evaluated pricing data vendors, such as Standard & Poors and FT Interactive establishing the infrastructure required to expand their evaluated pricing data capabilities, the availability of level 1 inputs for liquidly traded instruments is growing. However, the same cannot be said for thinly traded derivative securities.  For the latter, FASB has recommended organizations employ level 2 and 3 inputs to ascertain fair market value. 

Since level 2 and 3 inputs must be derived from other securities or assumptions be employed in deriving the data, organizations can use either matrix or model-driven pricing to determine the fair value.  While matrix pricing is a quick and easy solution, the accuracy of a security’s valuation is only as good as the data (from similar securities) used to interpolate the derived data.  A more accurate technique is to use a mark-to-model approach where mathematical models and observable market data are used to establish fair value. A mark-to-model valuation technique enables one to achieve a more accurate valuation by setting the attributes of the security, such as accrual factor, in the pricing algorithm, whereas matrix pricing does not.

Bob Sangha, one of the founders of OTC Val, elaborates, “While the major data vendors have certainly made great strides in improving their infrastructure to address the need for evaluated pric­ing driven by regulatory demands, we still see a significant gap in the area of illiquid structured products, due to the unique nature of the products. So our aim is to tap into that requirement and provide services either directly to cli­ents or to partner with the data vendors to feed them our model-driven prices.”

For derivatives that can be replicated with vanilla, liquidly-traded, instruments and valued in a model-independent way, the focus is on mark-to-market valuation using high-quality market data from leading brokers and data vendors. For exotic and structured products with limited price discovery and imperfect replication, OTC Val’s market professionals offer mark-to-model valuation based on careful calibration of industry standard models.

By using mark-to-market and mark-to-model valuation techniques, OTC Val’s services provide organizations with the ability to meet internal risk and compliance controls and address growing market pressures among regulators and investors for transparent and accurate valuations.  Sangha adds, “We provide our clients fair value insight through unbiased and independent valuations based on quoted market data, carefully calibrated models, and proven valuation methodologies. Our services help firms reduce their operational risk and achieve valuation transparency for their derivative portfolios. Standing behind what we deliver, we truly focus on customer service, and strive to build relationships where we are your trusted partner.”

OTC Val is committed to working with organizations that need to address their independent derivative valuations needs, particularly in achieving greater accuracy and transparency for OTC derivatives.  OTC Val offers services for:

·         Scheduled Valuation and Risk Reports as your primary pricing source.

·         Pre-Deal Pricing as a sanity check for an instrument you are buying or selling.

·         Benchmark Pricing as a complimentary pricing source to your dealer marks or existing solution.

·         Interim Solutions until you are able to fill the analytical or market data gaps.

·         White-Labeled Services for your clients.