Independent valuation

Structured Products Europe Awards 2007

Driven by the regulators, independent valuation of financial products is becoming a way of life. There are many who offer such valuation services, but problems arise when a product is a one-off, and complex to boot. The requirements of a valuation service provider for today's structured products are daunting. The provider must understand the ever-expanding range of structures, their underlyings and the way in which the structures are traded, as well as have access to the relevant data, models and quant skills, plus offer support to clients who are often struggling to understand just what it is that they are having priced.

One of the first to meet these requirements in Europe was London-based Future Value Consultants (FVC). Established in 1998, the company set out to offer some independent guidance and a reference point for the then emerging UK retail structured products market. In nearly 10 years, FVC has established itself as a key source of research, analytics and consultancy as well as of accurate pricing for a wide range of instruments, not only for the UK, but for the US and Europe. It is a measure of the degree to which the market has evolved and the challenge faced by valuation service providers that FVC now provides prices on instruments linked to equity indexes, funds, constant proportion portfolio insurance structures, baskets, corporate bonds, credit instruments, interest rates, currencies, property and inflation rates.

Tim Mortimer, managing director of FVC, believes that it is his company's engagement with the market that gives it the edge when it comes to providing accurate and realistic market prices. "Analysis of product pricing in the UK, US and other markets through our product research services and analyses, coupled with regular and detailed contact with issuers and providers, gives us a unique insight into the way institutions price products, how they determine mid, offer and bid prices, and how their practices change with different market conditions and as the industry evolves," he says. "This gives us the ability to ensure our prices reflect market practice rather than remain theoretical valuations."

Furthermore, the company's index calculation service gives it inside knowledge of how companies treat the growing business of custom indexes - a discipline related to structured products, and one which gives more information about risk management and pricing techniques.

Over the past year, FVC has integrated its valuation and research services and index calculations under its Datapricer web service. This includes up-to-date pricing information for the main underlyings used for structured products, such as the FTSE 100, SPX 500 and DJ Eurostoxx 50, as well as models for the majority of products available - a suite which is continuously updated as the market evolves, says Mortimer. The integration and web interface make the service quick to implement and easy to use.

FVC now prices many hundreds of deals at frequencies up to daily for 25 clients, which include JP Morgan, Lehman Brothers, Merrill Lynch, Prudential, ABN Amro and Citi. One of the company's first customers was Santander Global Banking & Markets (SGBM, formerly Abbey Financial Markets). In the late 1990s, FVC was one of the few that could provide sufficiently accurate prices for the products SGBM was issuing - through its special purpose vehicle in Dublin - that met the requirements of its custodian, says Mehdi Kadhim, head of the private investor products desk at SGBM. Since then, the bank has used FVC to price a wide range of structures and underlyings. "We've never had a problem with FVC not being able to value a structure for us, and their product reports are very technical and useful," says Kadhim, who has dealt with the firm since 2001. Kadhim recently took over the structured products desk at SGM and says, "Using FVC for valuations is one thing I wouldn't consider changing."

FVC believes the key components of a good valuation service are high quality data (the firm uses a range of sources including exchange-traded products and private sources) and models (its quants develop the company's own models), confidentiality (which is where independence counts), speed of service, and support. This latter aspect is of enormous importance in an area such as structured products, where innovation is a constant requirement. Many users need assistance in understanding pricing and risk measures, why price differences arise and other issues. This is an area where FVC clients give the company top marks in addition to the accuracy of its pricing.

FVC provides an accurate, reliable, easy-to-use valuation service that has evolved with the market and kept pace with its challenges over the past 10 years. The company is also engaged in the market through research, consultancy and index calculation, and so brings a depth of knowledge to its price calculations, which are used by a number of major institutions, and provides a high level of support.

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