Fair valuation in Asia
Fair valuation regulations in Asia are more or less limited to what is specified in the SFC’s FMCC guidance, which in turn relies on the IOSCO framework. No separate rules have been notified in Singapore.
The Hong Kong SFC’s framework singles out two main areas of focus for fair valuation:
The SFC has clarified that qualified individuals need to perform portfolio valuation validations. These can include internal auditors, controls specialists, accountants and others. The valuation methodologies need to be consistent for similar types of fund assets and valuation policies, and procedures need to be reviewed annually.
Lack of pricing data for a number of assets has been a stumbling block for firms looking to employ consistent valuation methodologies. Many firms dealing in certain structured products don’t necessarily have the capability to price them either.
Bloomberg’s valuation solution (BVAL) prices over 2.5 million fixed income securities through a large base of high-quality market price contributors and yield calculators. For structured products, BVAL combines price data with precise models to come up with accurate and defensible pricing.
For example, BVAL could arrive at a price for a long-dated bond with callable features in Taiwan, a product that was quite popular in spite of most participants being unable to accurately price it. The bond presented further challenges due to its callable features that added re-investment risks and some cash flow management complexities. BVAL’s transparent methodology meant that investors and regulators could validate this price.
The independence of pricing data is an important aspect of global valuation regulations, including for global accounting standards like IFRS 13 that govern pricing. According to Michael Marti, team head for Bloomberg Regulatory Products, BVAL has been designed specifically to respond to similar global accounting standards.
“It gives you transparency from a methodology and data input point of view. BVAL gives you an independent price but our customers can see all the input data that goes into the valuation. If you want to comply with the fair value definition, this is the type of solution you should be subscribing to. By being neutral and transparent on the pricing of a number of simple and structured products, we help increase overall market transparency. That’s a key role that Bloomberg wants to play and where we have a unique strength,” said Marti.
Varun Pawar, global head of Bloomberg’s evaluated pricing service, says that the fundamental aim of fair valuation is to have pricing that is agnostic about position size. “BVAL’s fixed income solution aims to provide an institutional price, looking at institutional trades and quotes from the dealer community, that doesn’t change due to holding size,” he says.
BVAL provides up to nine different snapshots of bond prices throughout the day in a manner that is completely auditable. According to Maggie Wang, ASEAN regulatory data specialist for Bloomberg, clients can revert to Bloomberg on prices where they find discrepancies and find detailed explanations behind each price point.
“We create a curve based on yields of comparable instruments off of which we arrive at a model price for illiquid instruments. For structured and bespoke instruments, BVAL can help clients perform an independent valuation through our sophisticated pricing engines for various asset classes. Clients can describe any kind of pay-off from the structured products to arrive at the pricing. So, this is highly customisable,” she added.
Historically, pricing vendors have produced a bid and offer price without much context on how that price was derived, said Pawar. “What we want to add is the data that we have on the bond itself and how we arrived at that valuation. BVAL’s concept is not just to price illiquid bonds based on their relationship with other more liquid bonds, but how transparent can we make that process,” he adds.
