Markit's Valuations Manager: A beacon in the valuations storm?

"The banks were pumping more and more money into their valuations teams to provide prices to investors but their clients were not happy with the outcome" Jeff Gooch, Markit

Valuing even the most simple, straightforward security has become a difficult business in the present turmoil. Just as ample liquidity was taken for granted by investors and fund managers, so were tight bid-offer spreads and narrow ranges between different dealers’ marks. Now that landscape has transformed; with liquidity scarce, prices, correspondingly, lack anything like the near unanimity that was prevalent before – especially in complex securities.

This product will enable fund clients to compare their dealers’ marks with the composite created by Markit and thus provide a response to regulatory fears of conflicts of interest in the valuations process. International securities regulators organization Iosco, for instance, has encouraged greater transparency and independence through the inclusion of third-party valuation service providers. Valuations Manager should also help address the accounting requirements of marking to market for many financial institutions.

Before launch a few weeks ago, the Valuations Manager was identified inside Markit as Project Lighthouse – so called because the platform helps provide a central point of reference for buy-side clients to determine net asset values. That may well be the case but it has also gained traction because the sell side should gain operationally.

"The project started pre credit crunch but it’s more relevant than ever," says Jeff Gooch, executive vice-president and head of valuations and trade processing at Markit. "We started looking at this a year ago following feedback from the banks. They were pumping more and more money into their valuations teams to provide prices to investors but their clients were not happy with the outcome."

Many funds or funds administrators are operating with 15 different dealers or more, all using different formats to provide valuations. These dealers are having to tailor their data to suit clients and are finding these processes very onerous in terms of time and money.

Given the increasing requirements for data, including the same-day pricing of data, it is understandable that the big operators are looking for a solution that is more efficient: one that is scalable in a way that current practices are not.

"One of the hardest parts of doing valuations is that if somebody sends you an Excel spreadsheet with a series of trades on it and says they would like you to value them, it is quite a manual process," says Lance Uggla, chief executive of Markit. "You have to check and make sure the trades are right and then you take those trades and apply them to your models. The room for error is quite large."

Valuations Manager is a natural extension of what Markit does because it already receives portfolios electronically.

"When we take someone onto our automated valuations platform, the relevant information is fed into the valuations engine in a predefined format – XML," says Uggla. "In this way, you eliminate the error factor and ensure scalability. Our data, which is a combination of Markit Totem and feeds, provides us with a competitive edge because we have composite, independent data to feed into the valuations engine."

Gooch says the product (with core coverage of bonds and derivatives) should be up and running in the second half of this year. Thereafter, the platform will be expanded to include more banks and leading cash and derivative asset classes. This should include ABS and MBS securities.

"This is an efficient way of accessing independent data," says Gooch. "The industry needed a broad solution; this is it. Within the next couple of years the majority of funds – that will be hundreds if not thousands of funds – will be on the system."