Transparency and Integrity of Data Key to Effectively Managing Valuation Risk

A new Thomson Reuters and Aite Group study indicates that transparency and integrity must be at the center of any business during the current volatile marketplace and conservative regulatory climate.

The new report entitled, "Getting a Mark is no Longer Enough: Valuation Risk Goes Beyond Pricing," found that today's market challenges require an expanded definition of valuation risk.

The days of treating the valuation process as a pricing or reporting function are long gone, the report found.

Attaching an accurate price to a security is only one aspect of valuation risk.

Capital-at-risk participants and regulators must now equally consider underlying security data as well as embedded credit and systemic risk.

As such, the realization of the new market paradigm of increased market volatility and interconnectedness between trading parties forces organizations to require more transparency in order to minimize valuation risk, the report concluded.

The research study, which focused on senior managers working on valuations, risk and data management functions, identified current challenges with valuation risk in valuation, transparency and compliance.

Responses from buy-side and sell-side firms, risk managers, fund administrators, and pricing and valuation vendors revealed their priorities to be concentrated on improving the data environment, pricing workflow and risk management and compliance enhancements.

Validating pricing vendors and the diversity of pricing and evaluation sources also are key among industry players.

Deeper integration of counterparty and credit data into workflow was cited as important along with a review of the data management environment to identify key tactical areas of improvement and strategic shortcomings.

"These industry responses are just a starting point for senior managers to think about the adequacy of their own firm's valuation risk management scheme," Richard Clements, global head of valuation risk at Thomson Reuters, said in the release.

"Each organization must determine for itself what needs to be done as they consider the impacts of regulatory changes. Yet while managing their internal systems, they must keep observant of the overall global economic framework with an eye to the impacts of systemic risk," he added.

John Jay, senior analyst, Aite Group, said: "Valuation risk is forcing senior managers to be cognizant of what takes place behind the curtain, in terms of processes and data of holdings and business relationships. In short, managing the business from both the front and back of the curtain is what will give senior executives the confidence in the firm's true valuations and risk exposures."

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio