Nicholas Stewart, head of structured credit products at Prime Source, answers SCI's questions

Nick Stewart

Q: How and when did Prime Source become involved in the structured credit/ABS market?
A: Prime Source (NYSE Euronext) Limited was launched in early 2008 by NYSE Euronext group as part of its drive to provide more transparent and reliable independent asset pricing to the market. The Prime Source service has been built by merging an existing business on structured credit and a new platform for the valuation of other asset classes and by signing strategic partnerships with renowned specialised firms.

The business had initially become involved in complex structured credit valuations in 2006, leveraging off a strategic partnership with analytics software provider, CDO2 Solutions, and leveraging off the business's existing well-regarded capabilities for valuing more vanilla credit derivatives such as CDS.

Q: How has your service/offering developed since then?
A: Over the last two years, the key areas of development in structured credit have been in building a systems infrastructure that allows for a high degree of transparency and automation across multiple position valuations. Of particular focus more recently for the valuations of synthetic structures has been the issue of calibration in a volatile and relatively illiquid credit correlation market and Prime Source has worked closely with CDO2 Solutions in implementing a variety of alternative market-standard approaches to deal with this.

We have recently extended our capabilities to cover the valuations of complex structured credit securities with cash collateral underlyings, such as CLOs, ABS, CMBS, RMBS, trust preferred structures and ABS CDOs etc. The valuations are based on detailed assessment and modelling of the underlying collateral, as well as the features of each structure. This is being handled in partnership with a team of very experienced practitioners and advisers in these markets.

Q: Which market constituent is your main client base?
A: Historically our client base has consisted of principally buy-side participants such as hedge funds, mutual funds and asset managers, including their custodians and administrators. After the recent market turmoil, we are seeing growing demand for independent valuations and verifications from sell-side institutions that need to demonstrate more effectively to investors and regulators, as well as for their own compliance purposes, that their pricing is fair and transparent. We have seen quite a significant growth in demand for our services from structuring desks and product controllers at sell-side firms.

Q: Do you focus on a broad range of asset classes or only one?
A: Across the business as a whole we provide modelled values, as well as contributed and evaluated prices, on a wide range of products and asset classes. There is very strong client interest in our ability to value, with complete independence and full transparency, a wide range of assets and structures - from fairly vanilla derivatives, such as for example CDS or equity variance swaps or interest rate swaptions handled through highly efficient and fast processes, through to the breadth of bespoke structured products and complex securities. This breadth makes Prime Source a very compelling and comprehensive valuation service provider.

Q: How do you differentiate yourself from your competitors?
A: Aside from the breadth of our coverage, one of the key differentiators for us is the extent of our interaction with clients, particularly on the hard-to-value structured products. The NYSE Euronext group has a very strong culture of client relationship and support. We maintain an informed dialogue with clients, enabling us to keep in touch with latest market developments and allowing us to refine our levels of scrutiny when it comes to generating accurate and reliable valuations, including for hard-to-value structures.

Q: Which challenges/opportunities does the current financial environment bring to your business and how do you intend to manage them?
A: The current environment has seen radical changes in the financial markets, particularly in structured products. After the collapse in confidence of the ratings industry and regulators alike, we are receiving more valuation requests for bespoke structures and complex securities such as ABS CDOs, particularly in cases where the originating institution is no longer making a market in the products and investors have few alternatives available for fair and accurate pricing. Being able to respond quickly and reliably to such requests has necessitated increased flexibility in terms of our processes and our modelling and data resources.

Q: What major developments do you need/expect from the market in the future?
A: The ongoing debate about reorganising the OTC derivatives market along the lines of the exchanges is likely to produce a sea-change not only in the way that business is transacted, most obviously mitigating counterparty risk, but also in the way in which models and model risk becomes far less opaque. Until this happens and the inherent risks are better understood by all concerned, product innovation cannot return any time soon. In the short to medium term, we expect to see new structured credit products or variants of existing ones, where structural simplicity and widely available information on the performance of the underlying collateral become the norms.

www.nyxprimesource.com