The new report entitled, âGetting a Mark is no Longer Enough: Valuation Risk Goes Beyond Pricing,â finds that todayâs market challenges require an expanded definition of valuation risk.
The days of treating the valuation process as a pricing or reporting function are long gone, according to the report.
Attaching an accurate price to a security is only one aspect of valuation risk. âCapital-at-risk participants and regulators must now equally consider underlying security data as well as embedded credit and systemic risk. As such, the realization of the new market paradigm of increased market volatility and interconnectedness between trading parties forces organizations to require more transparency in order to minimize valuation risk,â the report concludes.
The research study focused on gathering feedback on the operational âpain pointsâ for senior managers working on valuations, risk and data management functions. They identified current challenges with valuation risk in three areas:
Reponses from buy-side and sell-side firms, risk managers, fund administrators, and pricing and valuation vendors revealed their priorities to be concentrated on improving the data environment, pricing workflow and risk management and compliance enhancements. Validating pricing vendors and the diversity of pricing and evaluation sources also are key among industry players. Deeper integration of counterparty and credit data into workflow was cited as important along with a review of the data management environment to identify key tactical areas of improvement and strategic shortcomings.
Richard Clements, Global Head of Valuation Risk at Thomson Reuters, said: âThese industry responses are just a starting point for senior managers to think about the adequacy of their own firmâs valuation risk management scheme. Each organization must determine for itself what needs to be done as they consider the impacts of regulatory changes. Yet while managing their internal systems, they must keep observant of the overall global economic framework with an eye to the impacts of systemic risk.â
John Jay, senior analyst, Aite Group, said: âValuation risk is forcing senior managers to be cognizant of what takes place âbehind the curtain,â in terms of processes and data of holdings and business relationships. In short, managing the business from both the front and back of the curtain is what will give senior executives the confidence in the firmâs true valuations and risk exposures.â