London, United Kingdom
5 June 2007 Risk
and Pricing Analytics: Addressing Valuation Challenges in OTC and
Structured Products
Report Published by Celent
Celent predicts OTC derivatives will cross
the US$550 trillion mark in 2008, up from US$375 trillion as of year end
2006.
Growing OTC derivatives trading volume, escalating
exposure to over-the-counter (OTC) derivatives and structured deals, the
increased complexity of products, and lack of trade automation have
increased the importance of accurate valuation, according to the new
Celent report, Risk and Pricing Analytics: Addressing Valuation
Challenges in OTC and Structured Products.
Recent incidents associated with Amaranth Advisors
and Bank of Montreal’s loss illustrate the risks associated with the use
of derivative instruments. They also bring to light the need to address
inappropriate valuation practices and insufficient management oversight.
At the heart of things, pricing and valuation of financial assets are core
to a financial institution’s existence and tied to the stability of the
financial sector as a whole. Accordingly, getting it right is crucial.
"As a whole, the determination of fair market
value for the positions that make up a complex trade, fund, or portfolio
is, more often than not, fraught with complications," says Cubillas
Ding, Celent
analyst and author of the report. "Complexities often arise from
multi-layered product valuation requirements, the fault-prone use of
spreadsheets, and the transparency of valuation processes."
To address this situation, vendors have adopted
different "routes to market" for pricing analytics. Solutions
are differentiated along several lines: specialized vs. mixed asset
models, coverage across various parts of the OTC and structuring
lifestyle, scope of vendors’ analytics, and the quality of partnerships
related to market data, integrated trading, and risk management systems.
Ding says that institutions implementing pricing
solutions need to weigh the level of granularity required for their OTC
derivatives and structured products valuation activities, the type and
nature of users, and time-to-market considerations in the context of the
availability of internal resources. "Each approach trades off
granularity, end user focus, and time to market", he adds.
In this report, Celent examines the activities
around securities pricing and draws lessons from valuation challenges, as
well as highlighting considerations for the implementation of solutions.
Eight firms are profiled in this report, which
contains pertinent information about each vendor solution, including
company and organizational details, solution strengths and drawbacks,
reference feedback, market presence, and solution coverage. Vendors
covered include FinCAD, NumeriX, Pricing Partners, Quantify
Solutions, SciComp, SunGard Reech, SuperDerivatives,
UniRist / MathConsult.
The 45-page report contains 19 figures and tables. A
table
of contents is
available online.
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