In late June, FINCAD sponsored The 2nd Annual Practitioners’ Forum on Valuation & Pricing for Buy-Side Firms. The aim of the London-based conference was to explore the governance and risk management challenges facing today’s buy-sides as they seek to meet regulatory expectations for valuation under AIFMD, OTC reform, EMIR and Solvency II.
One highlight of the forum was an insightful presentation given by Eric Vynckier, Chief Investment Officer, Insurance (EMEA) at the leading investment management and research firm, AllianceBernstein. Vynckier spoke about the regulatory impact facing insurers, asset managers, and pensions – among other types of financial institutions.
Some key takeaways from Vynckier’s presentation are as follows:
- Buy-Side Firms Need Access to Market Data: Regulatory change is significantly impacting the requirements facing buy-side institutions. To successfully adapt to this change, firms will need the ability to evaluate both assets and liabilities consistently, using accurate market data.
- Insurers and Asset Managers Must Adapt Workflow for Increased Complexity: Managing the pricing and risk requirements associated with emerging regulations such as Solvency II represents a major challenge for buy-side firms. While still in use at some institutions, Excel is not an optimal platform for performing much of the related analysis due to the computational intensity.
Firms will ultimately need an enterprise-wide platform for managing today’s pricing and risk requirements. As opposed to an Excel add-on, a scalable platform implemented across the business can enable automated, logical workflow. Vynckier stressed that this workflow is essential to control.
- Buy-Side Firms Need Support for Multi-Curve Construction: Much regulatory change has required insurers and asset managers to perform a sophisticated level of pricing and risk analysis that very few were ready to do several years ago. While some firms have made improvements in this area, still others continue to struggle.
Evidence of this can be seen in the fact that many institutions are challenged by OIS discounting swaps and, generally speaking, building and using curves efficiently. Going forward, Vynckier believes firms will need to utilize derivative and valuation risk platforms with multi-curve support. Advanced sell-side analytics platforms are designed to adapt to multi-curve construction, which can have a material effect on valuation and risk outputs.
- Buy-Side Firms Need Resolution for Pricing & Risk Issues: Insurers that are able to effectively correct issues surrounding pricing and risk stand to experience positive monetary impact. This is largely due to the significant size of many insurer asset portfolios.
In his speech, Vynckier explained that the collateral a buy-side uses has an impact on the discount factors applied to a given trade. The use of different discounting methods, in turn, can have a potentially dramatic affect on pricing. In support of this point, Vynckier gave an example related to the collateral requirements on a $4 BN portfolio, which amount to $91 MN when computing the CVA charge. If for example, this insurance company posts an $800 MN trade, it could end up with a top valuation of $803 MN or $830MN, simply depending on how the firm posts collateral to these contracts.
If you want to learn more about these topics and related issues, please watch our recent webinar Valuation and Risk Best Practices.
Also, if you attended the Buy-Side Valuation & Pricing Forum, we’d love to hear from you. Let us know what areas of the event you found most interesting by leaving a comment below.