Markit launches derivatives valuations service

Markit Portfolio Valuations is aimed at mutual funds, hedge funds, traditional asset managers, fund administrators, custodians and banks. The service was launched to address growing concerns among investors and regulators over the lack of accurate, independent valuations for complex, illiquid instruments.

Markit Portfolio Valuations is a bespoke service that provides critical, independent post-trade calculation of the gross asset value of a portfolio of trades. The service covers a wide range of securities and OTC derivative instruments, both vanilla and exotic.

Markit draws upon its proprietary data, received from over 60 leading market makers, to drive its Portfolio Valuations service. The ability to refer to these prices, which span over one million data points collected daily, sets Markit apart from alternative services.

Markit's unique view of the second order inputs, such as option volatility, smile and skew as well as detailed correlations, is used to ensure the accuracy of valuations. Inputs are rigorously cleaned and validated, and valuations are audited by Markit's valuation specialists for unusual P&L moves. These independently verified valuations are provided on a daily, weekly or monthly basis which in turn allows clients to establish fund Net Asset Value (NAV).

In June last year, the Financial Services Authority (FSA) published a discussion paper on "Hedge Funds: a Discussion of Risk and Regulatory Engagement" in which it warned about valuation weakness methodologies and processes creating "significant potential for ill-informed investment decisions."

In August last year, the Managed Funds Association published its 2005 "Sound Practices for Hedge Fund Managers" in which it highlighted the importance of establishing valuation policies and procedures that incorporate the concept of fair value, and that are fair, consistent and verifiable.

Further concerns were voiced in January this year by the FSA in its 2006 "Financial Risk Outlook" report, in which it cautioned that uncertainty over valuations of bespoke OTC derivative instruments was a "priority risk" in the financial services sector. Dan Waters, FSA Director of Retail Policy, signalled earlier this month that the regulator was reviewing valuation practices at hedge funds.

Markit believes its service will help to allay these regulatory concerns by bringing transparency to the valuations practices that exist in the fast growing OTC derivatives markets. The market for privately negotiated derivatives now totals $236 trillion in notional, according to the recently published International Swaps and Derivatives Association's Year-End 2005 Market Survey. Markit Portfolio Valuations meets investor requirements for reliable, accurate pricing, allowing institutions to better understand and manage their risks with valuations from an independent and trusted third party.

Markit began to provide its Portfolio Valuations service to twenty fund administration, asset management and hedge fund clients in 2005. Following significant investment in systems and staff, the service is now offered to clients worldwide.

Stephanie Whitford, Head of Derivative Operations at Schroders said: "We were looking for independent valuations of our funds and a quick time to market was essential. Markit's outsourced solution helped us to implement this by providing a robust, best-of-breed service in just two days. The alternative would have been a large scale system implementation which would have taken many months."

Tim Barker, Executive Vice President and Head of Valuations at Markit said: "Client demand for reliable, transparent marks on complex, illiquid assets coupled with the increased pressure from regulators for a move to best practice in price verification, spurred the launch of Markit's Portfolio Valuations service. We see this as a key opportunity over the next two years as we work with our clients to enhance their risk management capabilities by providing them with an accurate, independent valuations service."