Industry Undecided on Valuations 'Regulation'
Published 05/19/2010
Industry sources are still undecided as to whether the two highest profile regulators-the Securities and Exchange Commission in the US, and the UK's Financial Services Authority-are likely to require buy-side organizations to use "preferred," or a specified number of independent third-party pricing sources, when valuing thinly traded assets. There are currently no regulations covering this area of the buy side, not even for US-based asset managers managing 401(k) money, even though there are over 400,000 companies managing in excess of $3 trillion on behalf of approximately 70 million Americans.
"I think the need for third-party valuation is currently important to our clients, as a lot of them are already moving in that direction anyway," says Gurpeet Banwait, product manager at Fincad, a Vancouver-based provider of derivatives pricing and risk management software. "Many of them already have an existing system in addition to Fincad, as they see value in accessing multiple sources. But whether or not that gets mandated is difficult to predict."
Stephen Baker, head of sales for the UK, Ireland, the Middle East and Africa at London-based SuperDerivatives, agrees with Banwait that asset managers need to use independent third-party valuations providers, but he suggests that the answer could lie in the development of a central counterparty (CCP) utility as a way of minimizing costs.
"Things may go down the central counterparty route because regulators may feel that the costs of using multiple valuations services would be too punitive," Baker says. "Historically, people have been comfortable to an extent with counterparty pricing but now they are moving away from that because counterparties are placing more indemnities around their valuations, and the buy side is moving toward a position of confidence, which means they will control what's on their books. If they're confident about what they have on their books then perhaps they will stay with counterparty pricing, but the discussions we are having with our clients, regardless of what the SEC or FSA is saying, is that they are asking for a minimum of two independent valuations."