In 2023, there has been an increased demand from banks and regulators alike to see multiple data sources and transparency in the valuation processes of financial products. In particular, there was an emphasis on ensuring a complete and robust methodology for third parties involved in providing data and data services to the financial sector.
The UK Prudential Regulatory Authority (PRA) stated in their 2023/2024 business plan to “continue our work on operational risks and resilience, including for critical third parties that provide vital services to the financial sector ... [to] continue to review trading book risk management in light of incidents like the failure of Archegos and events in the nickel market last year”.
In light of recent developments, the International Valuations Standard Council (IVSC) has set out to update its standards to take into account the ongoing changes to valuation practices.
Accordingly, the IVSC released its revised valuation standards in June 2023 with emphasis on the following attributes: accuracy, appropriateness, completeness, observability, timeliness and transparency.
Given that Skylight IPV provides important information used in the valuation of over-the-counter (OTC) derivatives across all the major asset classes, we decided to examine how Skylight stacks up against the latest proposed valuation standards by the IVSC.
Accuracy
Arguably, the most important characteristic of any service a vendor can provide is the accuracy of the dataset itself. This is particularly true for vendors who provide data for the purposes of asset and liability valuation. Skylight’s recently developed back-testing and R2 feature enables banks to see how well their submitted prices are correlated to the consensus price as well as comparisons with any authorised third party transaction data vendors. Moreover, Skylight welcomes price challenges for any claims which can be legitimately verified, thereby ensuring consensus data remains as accurate as possible.
Appropriateness
The IVSC standards encourage financial institutions to choose an appropriate set of data to be used in their valuation process. Skylight’s list of contributors is comprised of the leading global investment banking and commodity trading community. By targeting only the active participants, the Skylight IPV consensus will always be the most accurate reflection of the inter-bank OTC market, lowering the risk that less active market participants or those only interested in price discovery will cause the consensus valuations to lag real market prices.
Completeness
Clients are fully equipped to meet their valuation requirements as there is daily continuity in the returned data, covering a deeper and broader set of prices than may be observable in the traded market on any given day. The entire portfolio can be tested and in the event of a mismark or operational issue with submissions, data is still returned.
Furthermore, Skylight maintains a comprehensive set of guidelines and robust methodologies that are consistently reviewed by Skylight’s peers including banks, commodity firms and regulatory authorities.
Observability
Traditionally the size and depth of contributors for a service is often enough for the data to be considered ‘observable’ and classified from a Level 3 instrument to a Level 2 instrument. Skylight take this a step further with the incorporation of trade and quote data, the addition of which is used to satisfy updated regulatory requirements around consensus substantiation.
Transaction data overlays are a powerful tool to assess the provenance of data used to challenge consensus and to provide instant feedback in the case of uncertainty.
The incorporation of transaction data allows for Skylight to generate liquidity reports at a range of granularities to show patterns of liquidity across different time periods and sectors.
Timeliness
All of the major services in each asset class covered by Skylight have been configured to run on a daily basis and the consensus data is published shortly after all the contributor prices have been submitted.
Transaction data, where available, is added immediately after publication to assist in the assessment of data quality, transparency and observability.
Transparency
All of Skylight IPV data processes are completely transparent. All submitted data is available to clients on an anonymised basis, including rejected data, and can be viewed graphically or downloaded. Full transparency enables the clients to develop a significantly better understanding of the provenance of the data.
It is becoming increasingly clear that transparency and multiple data sources will continue to play a pivotal role in setting industry standards for valuation processes over the coming years. By setting itself at the forefront of latest regulatory and technological developments, Skylight is poised in an excellent position to provide banks and global commodity firms with high quality, reliable data as per the foundation laid out in the proposed IVSC standards.
Furthermore, the head of pricing in each of Skylight’s asset classes has a minimum of 15 years of directly related work experience. Resultantly, clients are assured of the expert judgement involved in the data cleaning processes.
To read more about the proposed IVSC standards, click here. You can also read about the PRA business plan for 2023/2024 here. If you would like to know more about us, please contact us at info@skylightipv.com.
Bibliography
- Bank of England (2023) Prudential Regulation Authority Business Plan 2023/24, Bank of England. Available at: https://www.bankofengland.co.uk/prudential-regulation/publication/2023/may/pra-business-plan-2023-24 (Accessed: 07 June 2023).
- IVSC (2023) IVS exposure draft for consultation 2023, International Valuation Standards Council. Available at: https://www.ivsc.org/consultations/ivs-exposure-draft-for-consultation-2023/ (Accessed: 07 June 2023).
Talha Bin Fahim