COVID-19 has drastically changed the world and its economy in unprecedented ways. With a specific focus on the financial industry, the pandemic has caused securitized credit instruments to face a much higher risk of credit downgrade and default. This risk is due to the decreased ability of the counterparty to honor payment obligations and to make matters worse given the current situation, lower valuations and changing credit ratings pose an additional challenge in the pricing process. Throughout this blog, we will explore a few aspects involved in the process of pricing structured credit instruments to help you navigate these uncertain times.
- Time Series of Prices: A simple graph showing how the instrument’s prices have moved over time is a key parameter to look out for. Some other important attributes like market value and data source quotes can also be added to this time series graph. This security-level view will help you analyze important data points like the change in the security’s final price due to a specific event that affected the instrument. It is also useful to see how the quotes received from different brokers and vendors change over time. The changing marks should tell you a story behind how the instrument was impacted over the chosen interval. Any specific data source that sends an outlier quote in relation to the comparison mark will be a good candidate for challenging the quote to receive an updated price. Also, any data source that didn’t send a quote on a particular occasion can be sent a solicitation request for the quote.
- Transparency, Audit & Report: A transparent pricing process for credit instruments should provide the ability to track the audit of manual changes performed. Here, every data point change should be available and coincide with details such as a timestamp of the change, the user who performed the change, original values and changed values. Generating reports for investors, valuation committee packages and auditors is a key function that your current pricing process should support. In fact, a pricing solution can easily help you generate these reports without manual intervention, and can be intuitive and customizable based on the level of details that are required by the report’s recipient.
- Pricing Analytics: Analytics on top of your standard pricing information will be a good tool to help you navigate through these uncertain times. Some important indicators you can track are:
- Top five and bottom five gainers/losers that moved your portfolio
- Number of quotes challenged for a broker-dealer as a percentage of total quotes received over a single pricing day or specific time interval
- The data sources that are providing stale quotes for specific instruments over a time period
- Number of securities priced by manually overridden prices as a percentage of the total population being priced
A comprehensive and accountable pricing process with minimal need for manual intervention is now long sought-after by managers. Given the remote and decentralized environment we are facing, funds are moving towards digital solutions that provide the dual benefit of making their pricing process transparent and also future ready as they prepare for managing the pricing of higher AUMs.
IVP’s automated Pricing Automation is equipped to handle 100+ asset classes and can help you move away from manually intensive spreadsheets.
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