Challenges of evaluation services in an illiquid market
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Challenges of Evaluation Services in an Illiquid Market. FIRMA – National Risk Management Training Conference – April 29, 2009 Chris Krupa, Director Evaluated Services . Agenda. The Role of a Pricing Service So what is an evaluation? Evaluations as input to fair value process

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Challenges of evaluation services in an illiquid market l.jpg

Challenges of Evaluation Services in an Illiquid Market

FIRMA – National Risk Management Training Conference – April 29, 2009

Chris Krupa, Director Evaluated Services

Agenda l.jpg

  • The Role of a Pricing Service

    • So what is an evaluation?

    • Evaluations as input to fair value process

      Challenges in the current market

    • Current Environment

    • Greatest concern: transparency

    • Where is the industry now?

      • Focus on Fundamentals

      • Deleveraging

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Today’s Market

  • Increasing Industry Recognition of the Importance of Valuation-Valuation is on Everyone’s Mind

  • Today’s market is characterized by high volatility and a lack of liquidity

  • Continued Focus on Valuation Standards and Regulation

    • e.g. FAS 157

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Interactive Data’s Definition of a Fixed-Income Evaluation

  • We are an independent source of evaluated prices.*

  • An evaluation represents our good faith opinion, based on information available to us at the time, as to what a buyer in the marketplace would pay for a security (typically in an institutional round lot position) in a current sale.

  • Given that, on average, less than 1% of the outstanding U.S. dollar debt trades on any given day†, we generally draw parallels from current market activity to generate evaluations for the majority of issues that have not traded.

  • * Interactive Data Pricing and Reference Data Inc. does not advise clients as to what securities they should hold, buy or sell. We do not calculate net asset values (NAVs) for mutual fund clients, nor do we assess the suitability of any evaluations for any particular situation.

  • † Calculated from: Securities Industry and Financial Markets Association, “Outstanding U.S. Bond Market Debt,” Securities Industry and Financial Markets Association,; and Securities Industry and Financial Markets Association, “Trading Volume in the U.S. Bond Markets,” Securities Industry and Financial Markets Association,

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How Market Activity Drives the Fixed–Income Evaluated Pricing Process

Transaction Activity

Client Trades

Broker Trades

Dealer Posts

Results of Bids-Wanted

Institutional Secondary Offerings

Primary Market Offerings

MSRB & TRACESM Trade Feeds

Compared to prior







Identify changes

and intraday

movements since

previous close

Market “Color”

Actively Quoted Issues (Benchmarks)

Buy-side/Evaluator Dialogue

Sell-side/Evaluator Dialogue

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Fixed Income Evaluated Pricing Pricing Process

  • Standard Inputs: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. Interactive Data also monitors market indicators, industry and economic events.

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The Current Environment Pricing Process

High volatility in global markets

  • Subprime mortgage market turmoil

  • Bond insurer difficulties

  • Failing auctions for Auction Rate Securities

  • Lessened liquidity

  • Credit freeze

  • Recession

  • Accounting and regulatory focus on valuation, e.g. FAS 157

  • Federal funds rate at historic lows

  • Troubled Assets Relief Program (TARP)

  • Treasury, Federal Reserve, and FDIC programs to bolster credit markets

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Current Volatility in the Market Pricing Process

No. of Days When the Change in the S&P 500® Index Exceeded 100 bps

Quarterly Results from January 2004 to December 2008

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Valuation Issues in the Current Market Pricing Process

  • Transparency

  • Trading desk attrition

  • Sources have merged

  • Bid/Ask spread is widening

  • Less reliance on ratings

  • Buy side's uncertainty due to government intervention

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Transparency at Interactive Data Pricing Process

  • SAS 70 (municipal evaluations premium service and Fair Value Information Service for international equities)

  • Summary of Inputs Document

  • Methodology Documents

  • Evaluation Input Reports

  • Daily Market Commentary

  • Market Data Report (in development)

  • EVS Tolerance Report (corporate evaluations)

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Valuation Techniques using Indices/Derivatives Pricing Process

Use of Indices

  • ABX

  • CMBX

    Use of derivatives

  • CDS

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ABX 2007-2 AAA vs. Cash Bond Market Pricing Process

*Reflects the average of Interactive Data’s evaluated prices each day for the 20 AAA securities that comprise the ABX 2007-2 AAA Index.

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So where is the industry now? Pricing Process

  • Refocus on fundamentals

    • grouping approach

    • less reliance on ratings

    • more emphasis on underlying deal structure, collateral, and ratings for transactions that are insured by monolines

  • Deleveraging-less profitability for asset managers

  • Investors waiting on sidelines as government programs are implemented

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Evaluation Process for Alt-A and Subprime CMOs & ABS Pricing Process

Market Inputs:

Observed Trades

Results of Bids-Wanted

Buy-side/Sell-side Evaluator Dialogue

Dealer Offerings

ABX Index for Subprimes

Market Research Reports




Other Market


Deriving Cash flow:

Evaluators review and update assumptive data using third party monthly reported information to reflect current market convention

Cash flow Inputs:







Categorizing Securities:

Collateral Type

Deal Structure

Deal Performance


Application of Spreads:

Reviewed daily based on observed market inputs

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Questions? Pricing Process

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Limitations Pricing Process

  • This document is provided for informational purposes only. The information contained in this document is subject to change and does not constitute any form of warranty, representation, or undertaking. Nothing herein should in any way be deemed to alter the legal rights and obligations contained in agreements between Interactive Data Pricing and Reference Data and its clients relating to any of the products or services described herein. Nothing herein is intended to constitute legal or accounting advice.

  • Interactive Data Pricing and Reference Data makes no warranties whatsoever, either express or implied, as to merchantability, fitness for a particular purpose, or any other matter. Without limiting the foregoing, Interactive Data Pricing and Reference Data makes no representation or warranty that any data or information (including, but not limited to, evaluations) supplied to or by it are complete or free from errors, omissions or defects.

  • Evaluated pricing is provided in the U.S. through Interactive Data Pricing and Reference Data, Inc. and internationally through Interactive Data (Europe) Ltd. and Interactive Data (Australia) Pty Ltd. Interactive Data(SM) and the Interactive Data logo are service marks of Interactive Data Corporation. Other products, services or company names mentioned herein are the property of, and may be the service mark or trademark of, their respective owners.

© 2009 Interactive Data Pricing and Reference Data, Inc.