09 challenges of evaluation services in an illiquid market firma – national risk management...
TRANSCRIPT
09
Challenges of Evaluation Services in an Illiquid Market
FIRMA – National Risk Management Training Conference – April 29, 2009Chris Krupa, Director Evaluated Services
2
Agenda
The Role of a Pricing Service So what is an evaluation? Evaluations as input to fair value process
Challenges in the current market Current Environment Greatest concern: transparency Where is the industry now?
– Focus on Fundamentals
– Deleveraging
3
Today’s Market
Increasing Industry Recognition of the Importance of Valuation-Valuation is on Everyone’s Mind
Today’s market is characterized by high volatility and a lack of liquidity
Continued Focus on Valuation Standards and Regulation e.g. FAS 157
4
Interactive Data’s Definition of a Fixed-Income Evaluation
We are an independent source of evaluated prices.*
An evaluation represents our good faith opinion, based on information available to us at the time, as to what a buyer in the marketplace would pay for a security (typically in an institutional round lot position) in a current sale.
Given that, on average, less than 1% of the outstanding U.S. dollar debt trades on any given day†, we generally draw parallels from current market activity to generate evaluations for the majority of issues that have not traded.
* Interactive Data Pricing and Reference Data Inc. does not advise clients as to what securities they should hold, buy or sell. We do not calculate net asset values (NAVs) for mutual fund clients, nor do we assess the suitability of any evaluations for any particular situation.
† Calculated from: Securities Industry and Financial Markets Association, “Outstanding U.S. Bond Market Debt,” Securities Industry and Financial Markets Association, http://www.sifma.org/research/pdf/Overall_Outstanding.pdf; and Securities Industry and Financial Markets Association, “Trading Volume in the U.S. Bond Markets,” Securities Industry and Financial Markets Association, http://www.sifma.org/research/pdf/Overall_Trading_Volume.pdf.
5
How Market Activity Drives the Fixed–Income Evaluated Pricing Process
Transaction Activity
Client Trades
Broker Trades
Dealer Posts
Results of Bids-Wanted
Institutional Secondary Offerings
Primary Market Offerings
MSRB & TRACESM Trade Feeds
Transaction Activity
Client Trades
Broker Trades
Dealer Posts
Results of Bids-Wanted
Institutional Secondary Offerings
Primary Market Offerings
MSRB & TRACESM Trade Feeds
Market “Color”
Actively Quoted Issues (Benchmarks)
Buy-side/Evaluator Dialogue
Sell-side/Evaluator Dialogue
Market “Color”
Actively Quoted Issues (Benchmarks)
Buy-side/Evaluator Dialogue
Sell-side/Evaluator Dialogue
Compared to prior
Evaluations;
necessary
adjustments
determined
Compared to prior
Evaluations;
necessary
adjustments
determined
Identify changes
and intraday
movements since
previous close
Identify changes
and intraday
movements since
previous close
Daily
Evaluations
Daily
Evaluations
6
Fixed Income Evaluated Pricing
Standard Inputs: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. Interactive Data also monitors market indicators, industry and economic events.
Inputs:
Standard Inputs plus other input(s) for particular asset type • By electronic Feeds • By evaluators, including market color, throughout day
1. Evaluated Pricing Applications and Models:
Varies According to Asset Class and Security Type
· Review and analysis by evaluators throughout day, based on inputs and model outputs
· Daily tolerance reviews and other daily/weekly checks
3.2. Release of Evaluations:
Client may “challenge” evaluation.
· Evaluators assess challenges, including any market information provided by clients
7
The Current Environment
High volatility in global markets Subprime mortgage market turmoil
Bond insurer difficulties
Failing auctions for Auction Rate Securities
Lessened liquidity
Credit freeze
Recession
Accounting and regulatory focus on valuation, e.g. FAS 157
Federal funds rate at historic lows
Troubled Assets Relief Program (TARP)
Treasury, Federal Reserve, and FDIC programs to bolster credit markets
8
Current Volatility in the Market
No. of Days When the Change in the S&P 500® Index Exceeded 100 bpsQuarterly Results from January 2004 to December 2008
14
9 108
6
13
3
85
12
73
59
1816
19
12
20
11
7
9
3
8
102
8
29
2
8
3
0
10
20
30
40
50
Q1 20
04
Q2 20
04
Q3 20
04
Q4 20
04
Q1 20
05
Q2 20
05
Q3 20
05
Q4 20
05
Q1 20
06
Q2 20
06
Q3 20
06
Q4 20
06
Q1 20
07
Q2 20
07
Q3 20
07
Q4 20
07
Q1 20
08
Q2 20
08
Q3 20
08
Q4 20
08
Greater than 300 bps
Between 200 bps and 300 bps
Between 100 bps and 200 bps
9
Valuation Issues in the Current Market
Transparency
Trading desk attrition
Sources have merged
Bid/Ask spread is widening
Less reliance on ratings
Buy side's uncertainty due to government intervention
10
Transparency at Interactive Data
SAS 70 (municipal evaluations premium service and Fair Value Information Service for international equities)
Summary of Inputs Document
Methodology Documents
Evaluation Input Reports
Daily Market Commentary
Market Data Report (in development)
EVS Tolerance Report (corporate evaluations)
11
Valuation Techniques using Indices/Derivatives
Use of Indices
ABX
CMBX
Use of derivatives
CDS
12
ABX 2007-2 AAA vs. Cash Bond Market
2007-2 AAA
0
10
20
30
40
50
60
70
80
90
1/2/
2008
1/10
/200
8
1/18
/200
8
1/29
/200
8
2/6/
2008
2/14
/200
8
2/25
/200
8
3/4/
2008
3/12
/200
8
3/20
/200
8
3/31
/200
8
4/8/
2008
4/16
/200
8
4/24
/200
8
5/2/
2008
5/12
/200
8
5/20
/200
8
5/29
/200
8
6/6/
2008
6/16
/200
8
6/24
/200
8
7/2/
2008
7/11
/200
8
7/21
/200
8
7/29
/200
8
8/6/
2008
8/14
/200
8
8/22
/200
8
9/2/
2008
9/10
/200
8
9/18
/200
8
9/26
/200
8
10/6
/200
8
10/1
5/20
08
10/2
3/20
08
10/3
1/20
08
11/1
0/20
08
11/1
9/20
08
11/2
8/20
08
12/8
/200
8
12/1
6/20
08
12/2
4/20
08
1/5/
2009
1/13
/200
9
1/22
/200
9
1/30
/200
9
2/9/
2009
2/18
/200
9
2007-2 Cash Bonds* AAA 2007-2 ABX AAA
2007-2 AA
0
5
10
15
20
25
30
35
40
45
50
1/2/
2008
1/10
/200
8
1/18
/200
8
1/29
/200
8
2/6/
2008
2/14
/200
8
2/25
/200
8
3/4/
2008
3/12
/200
8
3/20
/200
8
3/31
/200
8
4/8/
2008
4/16
/200
8
4/24
/200
8
5/2/
2008
5/12
/200
8
5/20
/200
8
5/29
/200
8
6/6/
2008
6/16
/200
8
6/24
/200
8
7/2/
2008
7/11
/200
8
7/21
/200
8
7/29
/200
8
8/6/
2008
8/14
/200
8
8/22
/200
8
9/2/
2008
9/10
/200
8
9/18
/200
8
9/26
/200
8
10/6
/200
8
10/1
5/20
08
10/2
3/20
08
10/3
1/20
08
11/1
0/20
08
11/1
9/20
08
11/2
8/20
08
12/8
/200
8
12/1
6/20
08
12/2
4/20
08
1/5/
2009
1/13
/200
9
1/22
/200
9
1/30
/200
9
2/9/
2009
2/18
/200
9
2007-2 IDC AA 2007-2 ABX AA
*Reflects the average of Interactive Data’s evaluated prices each day for the 20 AAA securities that comprise the ABX 2007-2 AAA Index.
13
So where is the industry now?
Refocus on fundamentals– grouping approach – less reliance on ratings– more emphasis on underlying deal structure, collateral, and ratings
for transactions that are insured by monolines
Deleveraging-less profitability for asset managers
Investors waiting on sidelines as government programs are implemented
14
Evaluation Process for Alt-A and Subprime CMOs & ABS
Market Inputs:
Observed Trades
Results of Bids-Wanted
Buy-side/Sell-side Evaluator Dialogue
Dealer Offerings
ABX Index for Subprimes
Market Research Reports
Market Inputs:
Observed Trades
Results of Bids-Wanted
Buy-side/Sell-side Evaluator Dialogue
Dealer Offerings
ABX Index for Subprimes
Market Research Reports
Cash flow Inputs:
CPR
CDR
Severity
Delinquency
Cash flow Inputs:
CPR
CDR
Severity
Delinquency
Sources;Traders
PMs
Other Market
Participants
Sources;Traders
PMs
Other Market
Participants
Deriving Cash flow:Evaluators review and update
assumptive data using third party monthly reported information to reflect current market convention
Deriving Cash flow:Evaluators review and update
assumptive data using third party monthly reported information to reflect current market convention
Daily
Evaluations
Daily
Evaluations
Categorizing Securities:
Collateral Type
Deal Structure
Deal Performance
Vintage
Categorizing Securities:
Collateral Type
Deal Structure
Deal Performance
Vintage
Application of Spreads:
Reviewed daily based on observed market
inputs
Application of Spreads:
Reviewed daily based on observed market
inputs
15
Questions?
16
Limitations
This document is provided for informational purposes only. The information contained in this document is subject to change and does not constitute any form of warranty, representation, or undertaking. Nothing herein should in any way be deemed to alter the legal rights and obligations contained in agreements between Interactive Data Pricing and Reference Data and its clients relating to any of the products or services described herein. Nothing herein is intended to constitute legal or accounting advice.
Interactive Data Pricing and Reference Data makes no warranties whatsoever, either express or implied, as to merchantability, fitness for a particular purpose, or any other matter. Without limiting the foregoing, Interactive Data Pricing and Reference Data makes no representation or warranty that any data or information (including, but not limited to, evaluations) supplied to or by it are complete or free from errors, omissions or defects.
Evaluated pricing is provided in the U.S. through Interactive Data Pricing and Reference Data, Inc. and internationally through Interactive Data (Europe) Ltd. and Interactive Data (Australia) Pty Ltd. Interactive Data(SM) and the Interactive Data logo are service marks of Interactive Data Corporation. Other products, services or company names mentioned herein are the property of, and may be the service mark or trademark of, their respective owners.
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