When no active market exists, how do you value assets? Reuters is promoting a plan to develop industry consensus pricing for derivatives and complex securities – see my article in Securities Industry News 10 March.

Philippe Carrel, EVP and global head of business development at Reuters, calls the service, announced on 28 January, an open pricing-model strategy for valuation risk.
Reuters has invented a new type of risk – valuation risk – which Carrel says falls between market and credit risk and operations risk.
“Operational risk is mostly valuation and data procedures,” adds Carrel, who says that a substantial percentage of operational risk mistakes that he has reviewed were caused by valuation problem, often arising from the mismanagement of static data in the back office.

He wants to bring together the buy side, sell side, quants and the regulators to agree on valuation procedures for complex securities.
Following FAS 157, the pricing is based on a hypothetical sale today, not a forced sale. Models can change with time and conditions; as a derivative gets closers to maturity the volatility increases, so Reuters would switch from implied volatility to historic volatility, he says.
“We are looking for a solution to restart the market,” says Carrel. “We have to make them confident enough that our process and our clout will be good enough to trust it and start very slowly re-trusting each other.”

Filed under: Securities & Capital Markets, Suppliers, Technology, risk