As a multi-trillion dollar market, structured products offer many unique benefits around returns, diversification, and internal and external protections. Due to this fact, asset managers deal in a lot of structured instruments, especially CLOs, MBSs, CDOs and others. However, this asset class comes with its own set of complexities around pricing and associated reporting as prices of these instruments are not readily available and can be highly disputed. As a result, funds who deal in these instruments have a more complex and elaborate pricing process that involves multiple counterparties and intricate approval workflows. We will explore some of these complexities below:

Specialized Sources: Most exchange-traded products can be priced using standard pricing vendors like Bloomberg, Reuters, etc. However, for structured instruments, asset managers use specialized pricing vendors and broker-dealer quotes as well. Some funds also supplement the broker quotes with their internal valuation tools, ranging from basic spreadsheets to complicated statistical models, while others rely on fund administrators. Dealing with a multitude of sources is a manually intensive exercise that requires an additional amount of dedicated effort from pricing teams.

  • Challenges: Price challenges, which is when the pricing team reaches out to the vendor or broker to explain their rationale for contesting a price, happen very frequently, especially during the month-end period. In fact, a typical fund will challenge between 10% and 30% of quotes for their structured book in any given month. Initiating and tracking challenges, and subsequently updating prices with revised quotes, adds up to be a significant burden on the pricing team, making it difficult to keep up with the revisions and provide timely updates to the associated teams involved. For larger asset managers, where the challenges can originate from multiple teams, collaboration is another obstacle that needs to be addressed.
  • Input Variables & Sensitivity Analysis: While there are many specialized sources to price structured securities, it becomes crucial to perform internal pricing analysis at times. However, this requires additional inputs of data ranging from volatility curves, forward prices, interest rate curves and much more. These datapoints act as a base to perform scenario analysis and discover the right price using an appropriate model. This can help the pricing team regress various inputs and understand their impact on the prices of structured instruments.
  • Time Pressure: While a few structured securities get priced on a daily basis from specialized sources, there are others that only get priced during the month-end period. However, the month-end pricing process is much more complex and involves various sources, challenges and approvals, making it very time consuming. The pricing team’s goal here is to price these securities within a reasonable time frame (for both the daily and month-end process) to meet the investor, compliance and risk team’s needs. If employed, an end-to-end automated solution can help in sourcing the quotes, challenging (if required), finalizing and approving prices all within a defined time frame.
  • Audit, Documentation & Transparency: Given the complexity of this asset class, every trade needs to be supplemented with supporting documentation and a comprehensive audit behind selecting the final prices. A fund typically needs to store all instances of this information as and when it is revised with a complete audit history from the compliance perspective. This necessitates the requirement of handling the attachments and pricing audit in an automated manner to reduce human error and risk, providing better compliance for investors and internal analysis purposes.

More regulatory and investor scrutiny on illiquid products, including structured instruments, has put a never-before-seen demand for heightened transparency in pricing these securities. Due to this fact, an increasing number of funds are looking for ways to streamline the pricing of structured products with better data and more efficient tools.

Discover how Price Master, IVP’s industry-leading pricing and valuation solution, can assist managers in automating their pricing and valuation process by visiting IVP Pricing and Valuation Automation Solution or contacting

Read part two of our three-part blog series onNavigating the Maze of Structured Credit : Impact of COVID-19 on Pricing Structured Credit