To help Wall Street clients deal with risk and forthcoming regulations related to the pricing of financial instruments, GoldenSource announced today a new pricing feature in version 8.2 of its enterprise data management software.
"Over a year ago, before the major market crashes, we started to see clients look at their pricing policies, how prices were determined, the visibility into how those prices were determined and the auditability of how prices were being derived and deciding which was the preferable price," says Tom Stock, senior vice president. "The regulatory frameworks that are starting to emerge as a result of last year's market collapse are putting more emphasis on pricing — how do you know the values of the assets on your balance sheet are correct? Or the asset values you're plugging into risk models or passing on to clients via client statements? How were those prices derived and is there visibility and the ability to audit that data so that you can at any point in time see where that information came from and what validation routines were used to ensure that that was good, clean data."
Although Stock hasn't spoken to any regulators about this, GoldenSource clients say regulators have been questioning them more often about where their prices came from and about their pricing processes and procedures.
Using the new GoldenSource price auditing feature, if a user clicks on a price, he can see what validation tests were run, and if prices were validated against multiple vendors, which vendors they were, the values they sent in, which prices were preferred and why.
The new feature in the 8.2 release scrubs and processes rules around the validation of incoming data (from vendors such as Bloomberg, Telekurs and Reuters), such as comparing vendors' data sets. For hard-to-price assets such as derivatives, GoldenSource doesn't create price calculation models, but it can use them. For instance, it could derive bond prices from other prices plus a spread, or perform calculations for ADRs and GDRs based on the underlying securities.
For valuations of complex products such as interest rate swaps and credit default swaps, GoldenSource allows Markit and IDC prices to be imported directly into its software. Internal and external price estimates can be brought into GoldenSource and tolerance rules and logic applied to them to make sure the independent sources are coming up with similar values as staff.
How do preset rules work when there's extreme volatility in the markets or for specific stocks? "We have the ability to tie a tolerance in the price of a security against an index," Stock says. "Say the market dropped or went up 500 points in a day. If you have your securities tied to a market index like the S&P 500, and it happened to go up 5%, you could set a tolerance that says I'm willing to accept a price from yesterday equal to the movement in the market plus or minus 2%. So you can build some of that variability into it."
Rules can also take into account the fact that low-priced stocks tend to be more volatile than higher priced stocks, Stock says. "Recently the prices of some of the more traded financial stocks, like Freddie Mac, Fannie Mae, and AIG have been going up and down dramatically and the values of those stocks are all under $5 per share," he says. "You can set rules up in our system that say if the price for a security is between zero and $5 per share, the tolerance for price movement is plus or minus 10%. But if the share price is greater than $50, then the tolerance for movement is only 2%."