OTC Derivatives and Structured Product Pricing Practices: Trends and Technology Strategies for the Coming Market Reformation

by Cubillas Ding, March 25, 2009
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London, United Kingdom 25 March 2009

OTC Derivatives and Structured Product Pricing Practices: Trends and Technology Strategies for the Coming Market Reformation

Celent believes that firms cannot afford continued fragmentation in the way prices are derived in the front office, and therefore advises firms to adopt a joint approach to the pricing functions.

Greater transparency in pricing and valuation functions was a visible trend even before the onset of the credit crisis. However, in a post-crisis era that is moving towards financial reform, we are seeing unprecedented levels of scrutiny and requirements for firms to show procedural consistency in their complex deal pricing and portfolio valuation activities. Disclosure and pricing/valuation methodologies are now critical building blocks for restoring confidence in derivatives and structured finance markets.

Regulators, investor groups, quasigovernmental organizations, and government agencies are driving for greater transparency, independence, and accountability, with the emphasis on having well-defined processes and ensuring that these processes are repeatable. Industry reform is already on the way, but the full fallout is yet to be felt.

To prepare for this, Celent advises firms to adopt align their pricing functions and avoid continued fragmentation in the manner prices are derived in the front office. Celent believes that the starting point should be to move towards a federated "publish and subscribe" organizational model for pricing functions.

"This line of thinking is likely to be a paradigm shift for many institutions, as many are still in early stages of strengthening pricing and valuation practices to meet the growing expectations of investors, regulators, and other market participants," says Cubillas Ding, Celent senior analyst and author of the report.

Looking forward, with pricing and valuation practices standing at the heart of future reforms, all firms participating in listed, over-the-counter derivatives and structured instrument markets need to develop a coherent strategy for executing derivatives pricing, risk management, and product control with a greater degree of procedural consistency. We are heading into an increasingly stringent post-reformation era in financial markets. There is significant rebuilding work to be done, and firms need to be smart in choosing their routes to recovering confidence and stature.

"With the weight of scrutiny, the issue is no longer if, when, or what we need to do, but how to best think about the issue of pricing transparency, independence, and accountability in an aligned manner. Anything less is not likely to suffice," Ding adds.

This report is part of Celent’s ongoing research to deliver the most up-to-date and detailed research and analysis into pricing and risk practices associated with OTC and structured markets after the credit crisis, emerging industry dynamics, and its implications for a firm. This study brings forth deeper and broader business and technology implications downstream in relation to analytics consistency, model management infrastructure, valuation IT architecture, and the topic of alignment between front office, risk/product control units and other end user, "price consumer" functions. It also highlights solution strategies, key learnings, and recommendations in the areas of pricing and valuation practices, especially from a technology and data perspective.

The 36-page report contains 14 figures and tables. A table of contents is available online.

Members of Celent's Finance & Risk research service can download the report electronically by clicking on the icon to the left.  Non-members should contact info@celent.com for more information.  

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

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Michele Pace
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Europe (London)
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Yumi Nagaoka
Tel.: +81 3 3500 3023

Table of Contents

London, United Kingdom 25 March 2009

OTC Derivatives and Structured Product Pricing Practices: Trends and Technology Strategies for the Coming Market Reformation


Introduction 3
Executive Summary 4
Fallout from the Market Crisis 6
How Market Trends and Business Dynamics Are Changing Pricing Practices 14
Pillars for Post-Crisis Reformation: Strategic Business and IT Implications 20
Looking Forward / Conclusions 34


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