Supporting OTC Derivatives Workshop 2
OTC derivative pricing, valuation and data management
| Date: | December 2006 |
| Author: | Ian Dando and Rob Sanders |
| Price: | £250 to non-members of the Investit Intelligence Member service |
Why Intelligence workshops?
The Intelligence membership asked Investit to cover 'Supporting OTC Derivatives' (OTCs) as a series of three workshops, in order to stay abreast of this fast moving topic and benefit from other members' experiences.
The first workshop was titled OTC Derivative Pricing, Valuation and Data management.
This report captures the experiences of both Intelligence member company delegates and Investit consultants. Much of the detail was covered in the workshop itself. The report is intended to be an outline of current best practice experience.
Pricing and valuation
Of particular concern to investment management firms are the questions and issues arising from the pricing and valuation of OTCs. The requirements for new types of market data and the challenges in sourcing, storing, managing, controlling and distributing this data have placed additional stress on managers' infrastructures.
The infrastructure and business knowledge contained in traditional buy-side firms often do not compare favourably with the equivalent components and resources available to the sell-side broker community. This has led to an over reliance by many investment management firms on sell-side firms to provide valuations.
A significant investment is required to bring the resources and components of investment management firms to the same level as investment banks. This has led to a growth in the use of third party administrators and the emergence of third party valuation services.
However, the need for these OTC data services, and the third parties providing the services, brings its own need for caution. Investment managers and administrators need to fully explore issues such as depth and breadth of instrument coverage and operational concerns around cleaning data and addressing disagreements in valuations.
Data management
The traditional problems associated with data governance are being brought into sharp relief once again with OTCs - new types of market data, alongside sharply increasing volumes and the need to share data and models.
Table of contents
| Management Summary | 1 | |||
| 1.0 | Introduction | 2 | ||
| 1.1 | Scope and framework of the research | 3 | ||
| 1.2 | Defining OTC pricing and valuation | 4 | ||
| 1.3 | Background example - pricing an interest rate swap | 4 | ||
| 2.0 | OTC Derivative Pricing | 7 | ||
| 2.1 | The challenges of OTC pricing | 7 | ||
| 2.2 | Who is involved in the pricing process? | 8 | ||
| 2.3 | Who checks the pricing process is being followed? | 9 | ||
| 3.0 | OTC Derivative Valuation | 11 | ||
| 3.1 | The challenges to OTC valuation | 11 | ||
| 3.2 | Who’s interested in OTC derivative valuations? | 12 | ||
| 3.3 | Mark to market and mark to model | 12 | ||
| 3.4 | Model risk | 13 | ||
| 3.5 | Third party valuation service providers | 13 | ||
| 4.0 | OTC Derivative Data Management | 15 | ||
| 4.1 | External pricing data sources | 15 | ||
| 4.2 | Data and model governance | 16 | ||
| 4.3 | Data scrubbing | 16 | ||
| 4.4 | Data/model storage | 17 | ||
| 4.5 | Data/model access and distribution | 17 | ||
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