securities valuations: a primer

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Securities Valuations: A Primer. The When, Why, What, How and Who of Evaluated Pricing Barry S. Raskin, Managing Director, SIX Telekurs USA Inc. 2011 FIRMA National Risk Management Training Conference, April 20, 2011. Contents. About SIX Telekurs Securities Valuations and Evaluated Pricing - PowerPoint PPT Presentation

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  • Securities Valuations: A PrimerThe When, Why, What, How and Who of Evaluated Pricing

    Barry S. Raskin, Managing Director, SIX Telekurs USA Inc.2011 FIRMA National Risk Management Training Conference, April 20, 2011

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    ContentsAbout SIX Telekurs

    Securities Valuations and Evaluated PricingWhen?Why? What?How?Who?

    And I should care because?

    Atlanta, 20 April 2011*

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    SIX Group a world leader in securities processing, trading and financial dataRevenue of over 1.354 bn USD (2010)Approximately 3,800 employeesPresent in 23 countries around the globeSIX Swiss ExchangeSTOXXScoachSIX ExfeedEurexSwiss Fund Data

    Securities Trading SIX x-clear: ClearingSIX SIS1) Settlement2) Custody3) AdministrationSIX SAGSecurities ServicesStock exchange dataIndex dataEvaluation dataInformation for securities administrationCorporate ActionsFinancial InformationInterbank payments in CHF and EURCard businessPOS servicesLSV (direct debits) / PayNetPayment TransactionsKey figuresAtlanta, 20 April 2011*

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    About SIX Telekurs Gather & distribute all information for securities administration and valuationSecurity master/descriptive dataCorporate actions & eventsPayments & DistributionsPricingCompliance informationClass actionsETF & index constituent dataCustom solutions Founded in Zurich in 1930 Stable ownership & corporate structure Direct presence in 23 countries Nearly 1,290 employees worldwide Annual revenue of $437 million (2010) Over 2,200 worldwide customers 190 in North AmericaAtlanta, 20 April 2011*

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    Commercial, Retail & Investment BanksTechnology & WebAsset/Investment Managers, Fund AdministrationOur clients include some of the worlds best-known firmsAtlanta, 20 April 2011*

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    Securities Valuations: When?

    Nowadays people know the price of everything and the value of nothing- Oscar Wilde

    If I dont get a price for this bond, youll get nothing!- Irate clientAtlanta, 20 April 2011*

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    Securities valuations: When?To provide valuation for an instrument that is,Listed on an exchange but does not trade regularly (illiquid)Not traded on exchange (OTC)Complex or structured

    To approximate a fair value within an orderly market

    As an interim value pending periodic reset/adjustment (as with private equity)

    To provide a range of valuations for a given security that might reflect a benchmark index, economic fundamentals, etc.

    As a reality check on other price sources - even for traded markets that might vary widelyAtlanta, 20 April 2011*

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    Securities Valuations: Why?

    Liquidity is like oxygenyou only notice its absence, not its presence.Atlanta, 20 April 2011*

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    Cash flow, probability, and timeAtlanta, 20 April 2011*

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    Reinvestment riskAtlanta, 20 April 2011*

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    Credit risk and optionality riskAtlanta, 20 April 2011*

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    Applications beyond spot

    Atlanta, 20 April 2011*

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    Applications to swapsAtlanta, 20 April 2011*

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    Securities valuations: Why?In the absence of liquid pricing, financial institutions need to know the value of holdings, To provide clients with the best information possible about their holdingsFor regulatory complianceHowever, Many instruments are rarely, if ever traded on organized marketsAs of March 2011, only 54% of the nearly 7 million securities in SIX Telekurs database are listed on an exchangeAsset classes can include, Fixed incomeStructured securitiesOTC derivativesPrivate equity

    Unusual circumstances can interfere with regular valuation practicesReference data and data on benchmark transactions were and completely unavailable for auction rate securities in the wake of the market collapse in February 2008

    Atlanta, 20 April 2011*

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    Securities valuations: Why?Regulatory drivers FAS 157 and Tier 1, 2, 3 designations

    Internal audit and risk management requirements

    Client demand for arms-length, independent, third-party valuationsAtlanta, 20 April 2011*

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    Securities Valuations: What?

    There is no right or wrong price it depends on the intended usage.Atlanta, 20 April 2011*

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    Securities valuations: What?Evaluated pricing vs. fair value

    An evaluated price is derived using, Market observations (inputs) Quantitative elements

    Fair value is an accounting concept (FAS 157, IAS 30) that defines fair value on three levels: Level 1: Unadjusted, quoted price from an active, orderly marketLevel 2: No observable quotes in active markets, values calculated using comparable instruments or inputs derived from/corroborated by observable market dataLevel 3: No observable quotes or inputs in active markets, values calculated using inputs based on assumptions

    Evaluated prices can be classified as fair value Level 2 or Level 3Atlanta, 20 April 2011*

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    Securities Valuations: How?

    Research is an ongoing process of discovery, and we seek to share our advancements on a continuous basis.Atlanta, 20 April 2011*

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    Securities valuations: How?Maximize market-based observations and inputs

    Ability to reverse-engineer complex instruments

    Market and reference data are just as important as the models

    Verify, verify, verifyAtlanta, 20 April 2011*

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    A common way to provide valuations for complex securitiesSecurities valuations: How?Atlanta, 20 April 2011*

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    And the SIX Telekurs waySecurities valuations: How?Atlanta, 20 April 2011*

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    Securities valuations: How?

    Methodology

    Sourcing primary data wherever that may be found

    Applying quantitative methods where necessary and being transparent

    Having a process around mapping techniques when they are used

    Providing assumptive data when and where practicable

    Developing a framework and sticking to itAtlanta, 20 April 2011*

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    Securities Valuations: Who?

    When you have confidence, you can have a lot of fun. And when you have fun, you can do amazing things.- Joe NamathAtlanta, 20 April 2011*

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    Securities valuations: Who?Use a pricing source that is,IndependentConsistent in process, using commonly accepted methods where plausible and giving maximum consideration of market inputs when possibleExperienced in both theory and practiceTransparent with regard to methodology and inputsFlexibleAble to anticipate requirements and proactively respondCommitted to continual process improvementResponsive to valuations challengesAtlanta, 20 April 2011*

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    And I should care because...?When?Whenever a security is thinly traded, illiquid or complex or to validate another pricing source.

    Why?Customers and regulators demand current, accurate valuations for a wide variety of reasons P&L, capital adequacy, risk management and more.

    What? An evaluated pricing service that can easily handle plain vanilla securities but is also adaptable and extensible to encompass even highly complex structures

    How?Thoughtful consideration of any relevant market-based inputs applied within an appropriate pricing framework

    Who?SIX Telekurs, naturally!

    Atlanta, 20 April 2011*

  • Thank you for your time!For more information, Visit www.six-telekurs.com Email sales@tkusa.com

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