Pricing - Mind the Gap

Two widely-accepted facts: valuation processes sit in the front office, reporting sits in the back.

But what's in the middle? Often, it's been a chasm where the basic details on how/when/why an asset or portfolio was priced disappear, never to be found - a problem when the regulators knock on the door.

Demand for independent price verification (IPV) is driving the sell side to start bridging this gap. Investors, regulators and auditors - who've realised that ignorance isn't bliss after all - are all playing the role of interrogator: why is this asset worth X? What did you validate your internal price against? Can you show me how you did it?

Many firms lost control over how and where prices are used - and they want it back. Because the same price is used across so many different functions, the sell side is increasingly moving to bring valuation out of the front office and establish a middle-office control function. They want to ensure the same pricing and risk models are consistently and efficiently used across all risk and P&L monitoring. In July, Aite Group confirmed that "five of the top eight 2009 IT initiatives [of senior IT executives] are valuation risk-related."

Yet the old temptation of throwing together manual processes is creeping back in. These will always provide a quick fix in the short term but pricing challenges will not go away. Firms face two challenges in particular - ensuring consistency of data sources and, on a grander scale, ensuring consistent models are used across the industry to calculate value. The latter is a long way off.

Firms are unaware of how far they can go to automate their processes for managing multiple data sources using tried-and-tested golden copy methods. And building this foundation for automation will put them in a stronger position to feed consistent data into a new industry consensus on valuation methods if and when it arrives.