A panel discussion hosted by Interactive Data last week examined the findings of a new A-Team Group survey, 'Valuations in European Buy-Side Institutions'. The survey focused on valuation issues across the OTC derivatives market and how valuations will be impacted by upcoming regulatory and accounting changes.

In terms of financial institutions' preparations for the regulatory changes ahead, BNY Mellon Asset Servicing securities data management md Matthew Cox expects the impact to be significant. "The function and remit of our data management group will increase. As an example, we're now being asked to place category levels on assets, meaning we have to work closely with vendors to source and validate additional data before it can be processed," he said.

Anthony Belcher, director of European fixed income at Interactive Data, added that - as a vendor - there is increasing client demand for an understanding of how valuations are derived to support regulation and accounting standards. "The wave of proposed regulations over the coming year is profound and auditors, regulators, risk managers and investors are all demanding more transparency in the procedures for valuing OTC instruments. Vendors such as us are responding to the need for transparency by introducing new assumptive data services."

Looking ahead to the next 12 months, the survey results found that - at 18% - the majority of respondents identified automation as their 'top goal' for valuations. Daniel Simpson, ceo of Cadis, explained that data management firms are now making automation a priority by creating specialised in-house valuation teams and investing in data management tools.

Huw Bishop, director of valuations & investment services at Blackrock, said: "Trying to establish fair value for an asset is the main aim across the board and establishing the quality of the price is important for reporting disclosures."

He further commented on the level of quality that investors can come to expect, with valuators aiming to provide longer-term value. "Increased transparency of methodology, number and type of contributing sources, and the quality of evaluating teams are all required from valuators as key medium and long-term expectations from users."

Valuation has been a topical debate since the start of the financial crisis and, with the new accounting standards and regulations coming online, all eyes are on this area of the market. Cox added: "We've seen valuation firms creating new models for new-to-market assets in order to meet client demand, but the coverage versus volume is always a challenge for the evaluators to balance."

He went on to discuss the evolving methods of valuation in the market and, in particular, among data warehouses. "I think the warehouses understand the importance of asset pricing now; the awareness has been raised. However, OTC valuations need to be priced differently, in that greater data sets are required to evaluate an OTC asset. Warehouses need to consider whether separate OTC systems should exist rather than including the functionality within the main model," Cox warned.

Moving on to valuation data budgets, the survey findings show that almost 40% of respondents - primarily the securities services firms - have budgets in place for over US$1m. Bishop said that he believes many firms already spend on vendor feeds and most have no specific new investment plans to spend more.

"The focus should be more on making sure that there is an appropriate balance between spending on vendors versus spending on in-house pricing activities," he noted.

Meanwhile, from a vendor perspective, Simpson added: "Clients are much more sophisticated when it comes to vendor performance and budget is always an issue. We deliver rapid ROI - a key determinant in securing funds, work with incumbent legacy systems and prove our ability to provide efficient and better quality data."

In concluding the discussion, the panel debated the issue of pricing liability and who should take responsibility for errors in valuations. The ultimate liability lies with the consumers, as they have a responsibility to validate the data, panellists suggested.

The survey participants included valuation managers and securities services companies across 67 institutions in Europe.

LB