Understanding the mark-to-market meltdown
How do you mark to market?
The push for greater transparency, greater use of formal processes and an independent pricing source in valuing portfolios started even before the credit market crisis started. But now the spotlight has extra focus and regulators, trade bodies and various consultancies have all come out with statements on standards and market practice.
The International Organization of Securities Commissions (Iosco)’s Principles for the Valuation of Hedge Funds and FAS157 have raised the regulatory hurdle, meaning that banks’ clients require valuations. Last autumn Iosco published nine principles that formalized best practice to avoid distortion and conflict of interest in hedge fund valuations.
Furthermore, EU law – the Ucits III regulations – includes stipulations governing derivatives use by fund managers. One of these requires reconciliation weekly to an independent price source. Given the increased participation of traditional managers using derivatives, it is clear that valuations activity is of increasing importance.
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