Risk professionals and asset managers are responsible for correctly assessing the values of the OTC derivative assets that the bank holds. The increasingly complex, evolving markets coupled with stringent regulatory requirements have further complicated this process. EMIR, Dodd-Frank, and Solvency II are a few regulations that have recently honed in on both transparency and accuracy within the verification process. Inaccurate pricing affects compliance and can cause operational inefficiencies and reputational damage.
Today, firms are looking for a transparent, streamlined, and high-quality independent price verification solution to achieve their business, operational, and regulatory goals.
Accurate and transparent Independent Price Verification (IPV) has become increasingly important to financial firms, especially when it comes to mitigating risk and meeting regulatory compliance.
According to Basel II Prudent Valuation Guidance, independent price valuation is “the process by which market prices or model inputs are regularly verified for accuracy. While daily marking-to-market may be performed by dealers, valuation of market prices or model inputs should be performed by a unit independent of the dealing room, at least monthly (or, depending on the nature of the market/trading activity, more frequently)”. The actual IPV process requires firms to verify their internal prices against authoritative, external third-party sources.
Robust, timely, and transparent IPV is crucial because it helps build the foundation of financial risk at an institution. Asset managers must access multiple independent sources to analyze and compare their pricing methods for accuracy, market alignment, and completeness to mitigate risk, avoid regulatory fines, improve operational efficiencies, and avoid poor business decision-making.
Traditionally, firms utilize opaque and resource-intensive processes for IPV. These efforts don’t always provide the quality, transparency, and auditability that regulators and stakeholders require. IPV executives need a powerful, automated, and transparent solution that helps them with their position justifications.
One of the factors that can help ensure a more transparent and enriched consensus result is the automatic inclusion of authoritative and third-party trade data sources. Today, firms may independently use authoritative data sources to evaluate their consensus results further. However, the process is manual and does not fundamentally address the issue upstream. The inclusion of additional post-consensus data through the challenge process isn’t guaranteed.
With an effective independent price verification solution, financial firms can confidently assert and manage their risk and improve capital allocation, resulting in new revenue opportunities.
Parameta Solutions and PeerNova® solve these current challenges with independent price verification through ClearConsensus™, a transparent, high-fidelity consensus network. The solution uniquely addresses data quality issues throughout the consensus process, provides richer consensus price calculation using Parameta Solutions’ Evidential Price (EvP), and offers a robust and timely challenge process to enrich the final consensus price further.
Firms will have confidence in their business resilience and regulatory response, while also improving capital optimization and reducing the operational cost-of-ownership. With easy integration and ease-of-use, the solution can quickly adapt, as business and regulatory needs evolve in the future. Capital optimization is achieved through the reduction of outliers by using market observable data as part of the consensus methodology. As the solution incorporates market observable trade data, it simplifies existing operational and IPV workflows, thereby reducing total cost of ownership for the IPV and risk teams.
ClearConsensus specifically offers the following benefits:
– High-fidelity Transparent Consensus for Better Position Justification
– Richer Consensus Using Evidential Price (EvP)
– Automated Challenge Process Further Enriching Consensus Results
– Insightful Statistics, Time-Series Analytics, and Participant Trends
– Extensible Consensus Methodology with Transparency to Ensure Auditability
– Community-driven Unified Experience with Rule-based Policy Governance
ClearConsensus ensures that independent price verification and consensus pricing is always reliable and defensible to empower its clients to act with confidence.
In future articles, we will be exploring additional topics, such as how to enrich consensus through EvP, the challenge process, and automation.
For more information, please contact us or request a no-commitment demo with a member of Parameta Solutions and PeerNova today.
Sources:
https://www.bis.org/basel_framework/chapter/CAP/50.htm?tldate=20221231&inforce=20191215
