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The Crisis And The Future Of Valuations
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The Crisis And The Future Of Valuations


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  • 1. StatPro Breakfast Seminar The Credit Crisis and The Future of Valuations
  • 2. Agenda
    • The Crisis and its Consequences
    • CAP – Complex Asset Pricing Service
    • Instruments
    • Data & Models
    • Frequency
    • Service
    pricing service
  • 4. The Illusion of Liquidity
    • As we observed during the credit crisis, when things go wrong,
    • liquidity disappears all of a sudden
    • BONDS
      • Liquidity decreased dramatically, reducing the observed prices
      • As “peered” prices are still based on observed prices, the “peering” approach did not help
      • For risk factors we mean market variables such as: Interest Rate Curves (e.g. IRS), CDS Indices, Single Name CDSs, etc.
      • Since risk factors such as IRS curves or CDS Indices concentrate liquidity on a single instrument, these instruments maintained their liquidity through the crisis. E.g. a 5y IRS is one instrument, instead you can have a multitude of 5y-bonds. When liquidity dries up, it is important to concentrate the remaining liquidity in one place
      • Another factor that protected liquidity in these OTC instruments vis-à-vis bonds is that they do not require an upfront cash payment for the Nominal amount
    pricing service
  • 5. The Big “De-leveraging”
    • The disappearance and concentration of investment banks on one side and the de-leveraging process on the other imply that the reduction of liquidity is there to stay
    • BONDS
      • Each bond is an instrument “per se”
      • Concentration and De-leveraging will reduce the amount of bonds with a liquid market
      • The price of OTC derivatives contract is derived from a more limited set of OTC instruments (e.g. IRS have 20/25 instruments/maturity point per currency)
      • OTC derivatives do not require the cash liquidation of the Nominal
      • These factors will protect the liquidity of these instruments
    pricing service
  • 6. The Future
    • Mark-To-Model approaches will become more and more popular
    • in the market
    • BONDS
      • There will be less liquid bonds for which a market price exists and is reliable
      • The liquid bonds of today can become illiquid tomorrow as the de-leveraging process extends its reach
      • It is already essential to have a Mark-To-Model (MtL) price if no market price is available …
      • It will become essential to have a MtL price in addition to the Market Price
        • For verification purposes
        • For spotting situations of loss-of-liquidity
      • Having multiple source of valuation for OTCs is becoming the norm
      • Processes of verification of prices are and will become requested by regulators (e.g. UCITSIII)
    pricing service
  • 7. Agenda
    • The Crisis and its Consequences
    • CAP – Complex Asset Pricing Service
    • Instruments
    • Data & Models
    • Frequency
    • Service
    pricing service
  • 8. CAP - Complex Asset Pricing
    • The StatPro service CAP covers instruments that need a “complex” valuation model and traded market data for being priced
    • OTC Derivatives
      • Derivative contracts exchanged between two counterparties “Over-The-Counter”
      • Complex bonds and certificates may or may not be liquid. Normally they will be less liquid than traditional bonds. The main characteristic is that their pay-off can be – entirely or partially – replicated by other more liquid instruments and derivatives. Therefore a pricing model can be legitimately used for defining a “fair” price
    pricing service
  • 9. Agenda
    • The Crisis and its Consequences
    • CAP – Complex Asset Pricing Service
    • Instruments
    • Data & Models
    • Frequency
    • Service
    pricing service
  • 10. Asset Coverage
    • Covered Instruments as of Today
      • Interest-rate swaps (IRS)
      • Credit default swaps (CDS) on single names
      • Credit Default swaps (CDS) on baskets
      • Foreign-exchange (FX) Forwards
      • Equity-tranche CDOs on liquid indices (iTraxx and CDX)
      • Mezzanine-tranche CDOs on liquid indices (iTraxx and CDX)
      • Equity Options
      • Average (Asian) Options
      • Equity Variance Swaps
    pricing service
  • 11. Asset Coverage
    • Q1 2009
      • - Equity Certificates
      • - FX Volatility Swaps
      • - FX Options
      • - CDS Swaptions
      • - BMA Swaps
      • - Equity Swaps
      • - CFDs
      • - Cross Currency Swaps
      • - Interest Rate Options: Cap/Floor, Swaptions
      • - Digital Cap-Floor
    • From Q2 2009 Onwards
      • - OTC Derivatives & Complex Bonds on request (Underlying Pricing Library today supports 230 pricing functions)
    pricing service
  • 12. Agenda
    • The Crisis and its Consequences
    • CAP – Complex Asset Pricing Service
    • Instruments
    • Data & Models
    • Frequency
    • Service
    pricing service
  • 13. Data
    • 12 Data Providers Today
      • Traditional Data Providers
      • Specialized Data Providers
      • Investment Banks
      • Inter-Dealer Brokers
    • Data
      • Equity & Other Prices
      • Implied Volatilities (Equity, FX, IR, CDS)
      • Inflation Swap Curves
      • FX Rates
      • Interbank Interest Rate Curves
      • Corporate Asset swap Indices (Investment grade and High Yield)
      • Credit Default Swap Curves
      • Implied Base Default Correlations
      • Municipal Swaps
      • Cross-Currency Basis Swaps
    pricing service
  • 14. Models
    • QuantLib was born at StatPro!
      • QuantLib ( is the building block of our risk and pricing services
      • QL is the most successful open-source pricing library for financial instruments in the world (10,000 downloads)
      • Created in November 2000 at StatPro Italia (then RiskMap) by Ferdinando Ametrano, Luigi Ballabio and Dario Cintioli
    • QuantLib 2
      • Built around QuantLib
      • Adds Models and Pricing Functions to QuantLib
      • Sold separately as a pricing library
    • Model Coverage
      • Extensive Coverage including:
        • Interest Rate Models (Single Factor and Multi-Factor)
        • Gaussian Copula
        • Other Credit Models
        • Prepayment Models
    pricing service
  • 15. Agenda
    • The Crisis and its Consequences
    • CAP – Complex Asset Pricing Service
    • Instruments
    • Data & Models
    • Frequency
    • Service
    pricing service
  • 16. Pricing Frequency
    • Today
      • Daily
    • Q3 2009
      • Intra-Day Multi-Run
    pricing service
  • 17. Agenda
    • The Crisis and its Consequences
    • CAP – Complex Asset Pricing Service
    • Instruments
    • Data & Models
    • Frequency
    • Service
    pricing service
  • 18. Solution
    • SaaS
      • True Software-as-a-Service Application (Web 2.0)
    • Instruments Terms & Conditions
      • Can be loaded by the Client via https or FTP
      • Can be loaded by StatPro
    • Unique Pricing Challenge Process
      • 3 Levels of Pricing Challenge, first is automatic
    pricing service
  • 19. Price Challenge
    • Once an outlier is identified, a three-step approach is usually performed
      • 1. Control of Terms & Conditions: most discrepancies come from wrong input
      • 2. Control of the Data used: the underlying data set is made available
      • Validation of the model: if stage 1 & 2 did not explain the difference, this step evaluates how far the pricing models used between providers explain the difference
    • To perform this task, time & reactivity are of essence
    • StatPro Pricing Service is in line with the above standard
    The purpose of a Price Challenge is to understand the origin of a difference between pricing sources The Price Challenge allows you to act based on reliable information pricing service
  • 20. Price Challenge
    • Price Challenge Level 1 – Via web & automatic E-mail
    • Click a button and an e-mail is produced with:
          • Asset Terms & Conditions
          • Description of Pricing Models & Functions
          • Values of the Risk Factors used for that Price on that Day
    Clients need to access the underlying data and models to set up the escalation process pricing service
  • 21. Price Challenge GUI pricing service
  • 22. Price Challenge Output pricing service
  • 23. Transparency
    • Price Challenge Level 2 – Access to StatPro Data Support Team
    • A member of the support team reproduces live the pricing process for analysis
          • Each Pricer has an Excel interface with a pre-defined Data Model Structure
          • Ability to shock the risk factors and look for explanations
          • One can overwrite Data independently
    • => New calculated results with modified input numbers are made available
    Production of documentation for all third parties involved pricing service
  • 24. Excel Add-Ins pricing service
  • 25. Transparency
    • Price Challenge Level 3 – Quantitative Consulting
          • Industry leading expertise
          • In depth analysis of the more complex issues
          • On a consultancy basis
    In case of further issues with the OTC counterparty, a direct access to a Quant Desk is provided pricing service
  • 26. The Price Challenge Process Access web transparency procedure
    • Enter request
    • Client code
    • Instrument code
    • Evaluation date
    • Get via E-mail the answer from SPS
    • Terms & Conditions of the asset
    • Pricing model description
    • Risk factors used with values
    Client still troubled Support Level 2 / 3 Troubled Client - Support Level 1 * Excel Simulation * Quants Advice pricing service
  • 27. Pricing Service Demonstration StatPro Pricing Service is built for Independancy Transparency Coverage pricing service
  • 28. Thank You Dario Cintioli – Global Head of Risk StatPro Group Carsten Steimer – Geschäftsführer StatPro (Deutschland) GmbH