Evaluated Security Pricing Service Offerings Have Increased Recently

Why the Renewed Interest?

A host of drivers are generating a new interest in evaluated pricing and are pushing vendors to increase their capabilities and coverage. Among these are investors' search for alpha, growth in derivatives, global regulation and the need for information transparency.

As investors -- both retail and institutional -- have become disillusioned with the moderate returns from traditional asset classes, they've begun to shift assets to alternative investments and portfolio strategies. These may be retail products like "go-anywhere" and hedge-like mutual funds, or institutional products like portable alpha and liability-driven investment (LDI) strategies. Many of these products rely heavily on the use of derivatives, which will require evaluated prices for portfolio valuation.

Another key driver influencing spending on evaluated pricing is regulation. Specific regulations -- such as Sarbanes-Oxley and Regulation NMS in the United States, the Markets in Financial Instruments Directive (MiFID) in Europe, and anti-money laundering (AML)/Know Your Customer (KYC) regulations globally -- place a high degree of importance on information transparency, reference data content and data-management processes. More directly, several examples have driven and will continue to drive the use of evaluated pricing, including IAS 39 fair value option, UCITS III and FAS 157, which provides guidance for fair valuing securities.

Future regulations also are likely to address the valuation of derivatives by hedge funds and hedge fund administrators. The current practices of self-valuation by fund managers and broker-quoting by administrators are likely to come under scrutiny because of their inherent conflict of interest, and the industry should expect to see a mandate requiring independent valuations of all OTC derivative positions either from an industry body such as the AIMA or from a government regulator.

Who's Buying Evaluated Prices?

The primary consumer of evaluated pricing data is the buy side, particularly fund companies and fund administrators. To these firms, receiving accurate evaluations shortly after market close to value their funds and calculate net asset values is critical.

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