SunGard UCITS white paper calls for independent valuation of OTC derivatives

Date: Monday, January 24, 2011
Author: M Kitchen, Hedgeweek.com

Industry leading financial software development company SunGard, whose proprietary financial systems process more than five million trades daily, released a white paper this week entitled: The importance of independent valuation for OTC derivatives under UCITS. The paper points out that with the impending ratification of UCITS IV, regular independent valuations of OTC derivatives will become more necessary and challenging. Particularly if more fund managers make their funds UCITS-compliant in response to the impending AIFM Directive. Speaking to Hedgeweek, Paul Compton (pictured), SunGard’s Head of Product Management, Alternative Investment – one of the paper’s authors – said that even if hedge funds choose not to go down the UCITS road they would still have to put in place the same kinds of processes and transparencies. “What’s coming down the pipe with AIFMD means that independent valuation provisions will largely be the same as those stipulated in the UCITS framework,” said Compton.
Independent valuation and transparency of derivative pricings are key considerations in the white paper. Even though valuation services for OTC derivatives have been around since day one, the report stresses that what is new is the existence of truly independent valuation service providers “that are neither a counterparty nor a clearing provider”. Some investors, says the report, will only be satisfied by a provider that has no links to sell-side institutions. “One of the benefits of true independent valuation is the reassurance to clients that each contract is being accurately valued,” said Compton. “What we bring to the table is a team of financial engineers, mathematical models and independently sourced market data. This gives clients real peace of mind.”
The second key focus of the report is transparency. The report argues that a preferable approach would be for fund managers to view valuations on a “per transaction” basis. Even though most asset servicing companies and custodians can value contracts, many of them fail to invest in the resources necessary to perform pricing calculations, instead preferring to source them out to third party vendors. The downfall with this is that fund managers lack the ability to see the underlying methodology behind those calculations. “Most of our clients talk to us daily about valuations,” said Compton. “We offer an entire online service. Clients can use the browser, FASTVAL, look at every derivative’s price and drill down to understand how that price was calculated. It’s a thorough, transparent process and a very important tool.”