ASSET MANAGERS | BOARDS | VALUATION AGENTS | SERVICE PROVIDERS
Participants in the financial markets are faced with a perpetual need to innovate. Revenue generating projects receive all the fanfare – but it’s the focus on regulatory initiatives that keeps everyone in business. The SEC’s Rule 2a-5, the “Fair Value” Rule, is an excellent case study. Effectively, Rule 2a-5 requires fund companies to systematically identify, manage, and mitigate material risks associated with fair value determinations. Analyzing the “quality” of fair values, across a variety of financial instruments and valuation sources, becomes even more challenging when faced with a limited set of transactional data to benchmark those valuations against.
To address the myriad of SEC’s requirements under 2a-5, we designed software applications to access our clients’ key data sets, measure valuation quality statistics across vendors, and report results of the assessment.
Central to the effort, our role included designing, developing and deploying Back-Testing Services. Back-testing, in our view, is a critical step — optimized when it is consistently applied across asset classes and pricing sources. In this way, the idea is to systematically measure the effectiveness of valuation inputs at representing fair market value for investments held across the fund complex, including mutual funds, ETFs, and CEFs.
Trade Size Modeling, available at the ASSET CLASS, SECTOR, and ISSUE level, can be a critical approach to measuring the variation in dealer trade spreads as quantity traded increases or decreases. In this way, we can determine reasonable breakpoints between “institutional size” and “retail size”. At the same time, this process generates retail adjustments, which can be applied to relevant fund investment positions, as needed.
Importantly, for any software solution to take shape, it must consider the workflow needs of its users. For instance, we found it necessary to build certain user interaction features, with a front-end to select a date range for the study, offer manual upload capabilities for certain reporting criteria, and deliver summary results. Behind the scenes, this required a surgical approach to data collection, data cleansing, and filtering – providing a rich set of content to form new metrics and validate results across the fund complex.
Please contact rob.haddad@the-innovationengine.com for more information on our experience supporting the asset management industry.