2014 CDS Independent Price
Verification (IPV) Survey
SCI/Fitch Solutions CDS IPV Survey Results
Structured Credit Investor (SCI), in conjunction with Fitch Solutions, has
undertaken a global survey of independent price verification (IPV) and valuation
professionals in order to gather intelligence on current market practices and
attitudes within this increasingly important banking function.
SCI interviewed 26 IPV and valuation heads from financial
institutions around the world with the following geographic
break-down: Europe 54%, North America 38% and Asia 8%.
Job titles included VP of product control, IPV valuations manager,
credit product control, senior investment strategist, and others.
All respondents took part in the survey on the understanding
that their answers would be treated anonymously.
With often surprising results, themes explored included the
importance, relevance and number of data sources used by
IPV desks; vendor transparency; IPV processes–particularly in
the case of names lacking market data; and the impact of new
regulation on auditing and valuation processes.
Transparency Conundrum
A dominant theme uncovered by the survey was the continued
importance of transparency in CDS pricing data, whether that
concerns the data vendor’s collation methodology, the granularity
of prices in a consensus service, or the way in which the data is
presented to clients. At the same time, however, the survey also
exposed unwillingness from many banks to disclose their CDS
pricing data due to litigation fears and damages stemming from
the Libor scandal.
“I think all banks undertook a review of the
submissions they make following the Libor scandal –
consensus-driven or anything else,” says one survey
respondent. “I believe a lot of banks now shy away
from giving information to these sorts of services,
and I think there are fewer submissions as a result.”
There are differing internal policies at banks in terms of the
internal department that owns the responsibility to contribute
– or not – to consensus pricing. In some instances, the decision
resides with the valuations or compliance departments. In other
institutions, the more extreme examples show that responsibility
lies solely with the front office. These different approaches
suggest that there is no industry standard. This potentially
worrying development, and its ultimate resolution by the regulators
and the CDS industry itself, is yet to be played out.
September 2014
“Banks are seeking reassurance from vendors around the scrutiny
and data cleaning of submitted data through increasing due
diligence on vendor processes and enhanced documentation,”
says Fitch Solutions’ director of CDS pricing and analytics, Diana
Allmendinger. “This gives banks some level of comfort with the
data submission process but even then the nervousness remains.
Where this is the case there is little we can do to combat the
banks’ reticence other than try to meet with the decision-makers
and educate them about the importance of submitting and
receiving CDS consensus pricing.”
Allmendinger also suggests that regulators could issue a directive
to encourage banks to cooperate, but adds that all of these
avenues currently prove challenging.
While offering more transparency for regulators, submitting
pricing data to trade repositories is not akin to – nor a
replacement for – consensus pricing services as banks do not
receive data back to use in their IPV processes.
Multiple pricing sources
Away from transparency issues, the survey revealed that the
vast majority of IPV desks use more than one data source for
verification processes and reserving methodologies, thereby
highlighting the need for multiple data sources for the prudent
valuation of CDS. Varying sources are used by institutions,
including trade, executable, consensus vendor and clearing house
prices, as well as quote vendors.
Each institution noted that they utilise a hierarchy of pricing
sources, with trade data tending to appear at the top of most lists.
Proxy pricing and modelled prices tended to be used as a last resort
where no other data are available. However, there were variations. A
trade price, for example, was not always deemed the most reliable
if the trade was small. And while quote vendors were low in the
hierarchy of usage, their importance was highlighted thus making it
systematically possible to cover a large number of names.
With so many pricing options available to IPV desks, the survey’s
findings highlighted a potential need to be able to view multiple
pricing sources simultaneously (i.e. trade, executable and consensus).
This would be particularly useful if a firm’s typical first port of call (e.g.
trade price) was not always going to be the most reliable.
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The importance of multiple pricing sources was also underscored
by the fact that pricing data is not always available for certain
securities. CDS with very long or very short tenors (less than one
year or more than 10 years), as well as illiquid or distressed names,
were often cited as ‘black spots’ for accurate data.
“We see gaps in illiquid areas or distressed names,”
says one valuation head. “However, we have so
many data sources that if they are missing from
one area we can usually find a price from a
different source.”
Data quality, granularity, transparency, coverage, the price of
the service and ease of use were all cited as important factors
when IPV teams select their primary pricing sources, according
to the survey. One respondent commented that his institution’s
process focused on “minimal valuation uncertainty and maximum
transparency” around the assumptions or prices used.
“When we do our IPV process, we also look at the uncertainty
within the IPV process,” he explains. “If we are given an
independent price, we have to look at how happy we are with
that independent price. The best independent prices are those
that are closest to the executable price, where the prices are
reflective of trading levels.”
With executable pricing unavailable for a large universe of
CDS names that need to be verified, access to quality
consensus pricing is of the utmost importance. Striking the
right balance when deciding how much data to include in the
price discovery process is challenging, as more is not always
better. In fact, Fitch Solutions found that more data does not
necessarily add to the overall quality of consensus CDS pricing.
After careful analysis, Fitch Solutions determined that including
only tier 1 market-making banks in its pricing consortium yielded
better results than when second- and third-tier banks’ prices
were included.
“We found that prices from non-market-making institutions were
often stale and less reflective of market levels and so would dilute
the quality of our consensus pricing,” says Allmendinger.
IPV professionals’ attitudes towards data vendors’ services
appeared fairly positive, based on survey responses. The majority
of respondents were satisfied with the vendors’ approach and
methodology in collecting and aggregating CDS pricing, with
just a small number requiring more transparency. The majority of
respondents were also happy with the quality and presentation of
data provided by vendors, with a minority seeking further clarity
or clarification to vendors’ data.
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SCI/Fitch Solutions CDS IPV Survey Results
Among suggestions to vendors for improvement was a request for
better interfaces, a need for a standardised automated format for
emails or delivery method, and for standard deviation data to be
used in pruval calculations. However, as UK banks prepare for the
implementation of new prudential valuation requirements later this
year, data vendors will inevitably need to tailor their data services.
“Vendors have been making a lot of progress to deal with the
prudent valuations directive and the whole space is in flux as
to what people want from their data providers on that front,”
comments one UK IPV head. “But generally speaking, I don’t
need any more data.”
Regulation and audit
The financial crisis and ensuing regulatory changes have, inevitably,
had an impact on IPV teams and their processes. One institution
interviewed for the survey noted, for example, that its IPV
department did not formally exist before the crisis, while another
firm commented that organisational changes had resulted in a
more influential role for the IPV team within the bank.
“In the past it used to come down to who was more thick-skinned
– the traders or the IPV team,” comments one IPV head. “But
due to organisational changes, the P&L, product control and risk
sections are now working together. While the trader does have
some input into the valuations process, it is now our say at the
end of the day.”
Another respondent noted more trader involvement in the IPV
process since the crisis – not because they are worried about the
IPV, but rather because they are worried about the ramifications
of being seen to have mis-marked by regulators.
Respondents commented that audit – both internal and external
– have some impact on their institution’s pricing and validation
process. Survey respondents indicated that auditors would
request clarification on pricing of certain securities and demanded
transparency in both generating IPV data and the process by which
it was reached. In several cases, respondents commented that
auditors may challenge their data vendor choice.
New Fitch CDS Portal
Fitch Solutions is launching a web-based CDS portal to provide
clients with additional transparency into consensus CDS spreads.
The Fitch CDS Portal will contain various data quality statistics,
customisable enhanced reporting capabilities as well as graphical
analysis to help streamline the IPV workflow and allow a deep dive
analysis of CDS pricing. The ability to drive workflow will help make
valuations teams more efficient while also enhancing their
control environments.
September 2014
SCI/Fitch Solutions CDS IPV Survey Results
1. How many pricing sources does your IPV 3. Which of the following price sources do you
desk utilise in its pricing verification
process and reserving methodologies?
A wide variety of responses were given to the survey’s opening
question. While the majority of institutions tend to use three
pricing sources in their pricing verification processes, a
large number of IPV desks use five or more sources. Several
respondents noted that the number of sources used would
depend on the product or name in question and the availability
of relevant pricing data.
2. Have the number of sources increased or decreased in the last 12 months?
use and by which method do you access
them in the valuation process?
Survey respondents were asked to indicate the method by which
they access data in the valuation process, including consensus
vendor prices, quote vendor prices, trade prices, executable
prices, clearing house prices and evaluated/model prices. The
results indicate that consensus vendor price data was most
often accessed by FTP, Bloomberg or vendor websites; quote
vendor prices are accessed most often via email or Bloomberg;
trade prices are accessed via Bloomberg or internal databases;
executable prices are accessed most often via Bloomberg;
clearing house prices via FTP, Bloomberg or vendor website; and
evaluated/model price via internal databases or Bloomberg.
4. Is there a hierarchy to your pricing source usage? If so, can you describe the hierarchy?
A hierarchy in pricing source usage was confirmed by an
overwhelming majority of respondents. The vast majority said
that trade price would always take priority in the hierarchy, followed
by executable price, then consensus/vendor price. A proxy or
modelled price would usually come at the bottom of the list.
Although the majority of respondents confirmed that the number
of sources used by their IPV desk had not changed within the last
year, almost a quarter of desks have increased the number of
pricing sources that they employ. Just 8% of respondents said that
they had lowered the number of pricing sources used.
September 2014
However, there was some variance. Some U.S. institutions, for
example, noted that in certain instances clearinghouse data
would be used as a first-option pricing source, but this does
not necessarily cover the IPV requirements of the firms’ entire
portfolio. For derivatives which are not systemically cleared like
single-name CDS, this would apply to only a small universe of
names, leaving IPV teams to rely heavily on indicative pricing
provided by consensus pricing providers.
One asset manager noted that his firm would use
vendor price first, followed by executable price, then
model price. “Trade price,” he noted, “would only
come in if it were significantly different to vendor
price, in which case it would be over-ridden.”
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“For every product, we have a hierarchy,” said one bank IPV head.
“Trades are the number one priority; then we’ll pick a vendor or
external price that we think is most reliable.”
While trade vendors tended to come quite low in the hierarchy
of usage, respondents highlighted their importance for making it
systematically possible to cover a large number of names. It was
also observed that the use of trade data could be problematic if
the trades were small – for example, a retail trade – that would not
be deemed as reliable as a large trade. In addition, respondents
noted that the product in question would affect the order of
the hierarchy.
“A global waterfall is applied,” commented one UK IPV executive.
“This takes into account independency, reliability, staleness,
ageing and the number of contributors to rank the sources.
Some sources may appear multiple times within the waterfall
with different quality requirements.”
“Vendors tend to be at the bottom of our hierarchy,” added
another European valuation executive. “We rely more on
quotes/dealer consensus, followed by vendors. We try to
triangulate the price of one security, given other similar security
prices, using in-house cashflow models.”
SCI/Fitch Solutions CDS IPV Survey Results
that where contracts with certain providers had expired, they had
not renewed because of this.
Coverage provided by pricing sources was, in some cases,
deemed patchy or better in some jurisdictions than others. One
provider was deemed to have good CDS coverage in the U.S.
but poor coverage in Europe, while the opposite was true for
another provider.
Some respondents said that they rarely changed pricing provider,
while others appear to carry out reviews periodically. “We do an
annual vendor review,” one valuation executive confirmed. “We
make sure we’re comfortable with the vendor’s valuation process
and how they eliminate outliers. The vendors that fit most are the
ones that are prioritised. We don’t change vendor often, but
there is a possibility that we would change a vendor based on
our review.”
One respondent noted that providers are reviewed at least
annually, while another commented that primary pricing sources
are selected through a due diligence process organised by the
valuations committee.
5. How are primary pricing sources selected?
6. Where are you seeing gaps in coverage
from your primary data vendors? What is
your process for covering these gaps?
Data quality, granularity, transparency, coverage, the price of
the service and ease of use are all factors that are taken into
consideration when IPV teams select their primary pricing
sources, according to the survey. Many firms also stressed the
importance of historical back-testing of prices and due diligence
being carried out on providers before selection.
Over half of the survey’s respondents said they were not currently
seeing any major gaps in data coverage. Of those that did
report gaps, however, the same types of securities and tenors
– i.e. illiquid and distressed names, or very long or very short
tenors (more than 10 years or less than one year) – cropped up
repeatedly in responses.
“For any chosen pricing source, we will have typically done a lot of
back-testing and looked at historical pricing and live pricing,” said
one U.S. IPV executive. “There is a certain amount of regression
testing. The pricing sources are effectively beta tested through
monthly usage.”
“We see gaps in illiquid areas or distressed names,”
said one valuation head. “However, we have so
many data sources that if they are missing from
one area, we can usually find a price from a different
source.”
Another respondent commented that the process focused on
“minimal valuation uncertainty and maximum transparency” around
the assumptions or prices used. “When we do our IPV process, we
also look at the uncertainty within the IPV process,” he explained. “If
we are given an independent price, we have to look at how happy
we are with that independent price. The best independent prices are
those that are closest to the executable price.”
In terms of quality, many respondents said they looked to whether
the data provided was executable or not, as well as looking at
the volume size of the quote in question. Price appeared to also
play an important role, too. Some respondents commented that
certain pricing providers were “ridiculously expensive,” and noted
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He added: “CDS with tenors of less than one year can be lacking
in data, but people only care about that for distressed trades, or
when they are trying to hedge gap risk. For example, when Greece
was trading wide, there was just one price for six-month risk and
one-year risk.”
Clearinghouse data was criticised for having limited tenors and
limited names available and consensus services were criticised
for having prices that are not always executable, while others
said coverage was vendor-dependent. As described earlier,
some vendors appear to be stronger in the U.S. than Europe,
and vice-versa.
September 2014
SCI/Fitch Solutions CDS IPV Survey Results
“It’s not only the breadth of coverage, but also the number of
contributors and the liquidity and score of the curve,” says one
U.S. IPV head.
Of the various methods reported for covering gaps in data, none
were deemed perfect. Several respondents said they calculate a
proxy value using internal databases. Others either escalate to the
vendor – which will go out to dealers and get a consensus price
– or if that’s not possible, proxy methods will be used. One bank
noted that in some cases where there was no satisfactory data for
an illiquid CDS, it would be marked as untested.
provider to trade a security. Trading securities is a very marketdependent function. If firms have the budget to employ such
things and compare internal valuations with external valuations,
then it’s good back-up.”
8. How well do they respond to individual price
challenges?
Respondents noted that in certain cases where coverage was
lacking, these issues would be challenged with the vendor.
However, answers were not always received early enough to meet
deadlines.
“We try to look at trade reviews, proxies, benchmark levels,
change-over times (e.g. a trade we did three months ago and do a
proxy with that),” explained one participant.
Another respondent stated, “We do due diligence and look at
independent broker quotes, firms’ executed trades, historical data
and trends and any other vendor data if available.”
Longer-term, respondents said they remain in discussion with
the vendors to improve their processes for addressing gaps in
coverage.
7. How well is your vendors’ approach and methodology in collecting and aggregating CDS pricing understood?
The majority of respondents said that vendors do a good or
satisfactory job of explaining their approach and methodology in
collecting and aggregating CDS pricing, while a small proportion
(8%) said that more transparency is needed.
“Understanding vendors’ methodologies is one thing, but
knowing how to use this data is another,” commented a UK bank
valuations executive. “By no means would I ever use a pricing
September 2014
An overwhelming proportion of survey respondents were
generally satisfied with the challenge process, while 12% of
respondents said the process needs improvement.
9. Should improvements be made in the
quality, quantity or presentation of data supplied by your vendors?
The majority of respondents to this question said that no
improvements were needed in the quality, quantity or
presentation of data supplied by their vendors. But it was a
marginal majority, with 38% of respondents seeking further
clarity or clarification to vendors’ data.
Among the suggestions for improvement was a request for better
interfaces, a need for a standardised automated format for emails
or delivery method, and for standard deviation data to be used in
pruval calculations.
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One respondent noted that there is always room for
improvement. “We need more data covering the gaps that we
see,” he said. “The presentation of the data that they do have is
fine, although it would be good to see flows and the quantity of a
particular product that has been traded.”
A number of respondents stressed that the one thing that they
did not need from vendors was more data. “It’s hard to know how
to use all the data all the time,” said one IPV head.
“Vendors have been making a lot of progress to deal with the
prudent valuations directive and the whole space is in flux as to
what people want from their data providers on that front,” added
another. “But generally speaking, I don’t need any more data.”
SCI/Fitch Solutions CDS IPV Survey Results
reserve against that to deal with any uncertainty,” he says. “We
have to have a methodology for each type of adjustment that
we make. We have a fair value adjustment to reflect our view of
fair value, but this would be backed up by a methodology that
would go through our modelling team and go through audit. It’s a
formalised process.”
Building a spread curve internally and using Intex alongside this
curve was also an option cited by more than one respondent.
Marking to model was one of the least popular answers. This option
tended to be a secondary option if proxy pricing was not possible.
11.In price challenges, does the burden of proof
lie with the trading desk or IPV team?
10. What is the process of valuing a trade
position where there is no readily available market data?
The majority of respondents use proxy to value a trade position
where there is no readily available market data. Of those that
use the proxy method, a number reported using an internallydeveloped proxy pricing system or in-house models.
According to the survey results, proxy pricing could reference
corresponding bond or loan spreads, collateral values, or CDS
based within the same or similar industry. “We value via proxy
relationship to another reference entity or group of entities,”
explained one respondent. “We benchmark the traded level to the
proxies and maintain a constant relationship until a further data
point is found - i.e. a secondary traded level.”
“If there’s no vendor or dealer mark that we can find, we are
typically going to go through an enterprise value of the company
and value the position that way with comparables - by proxy,”
added another.
As with several other questions in the survey, respondents
stressed that each valuation would be treated individually –
with different approaches for different types of CDS. One CVA
executive said that it depends on the underlying product. If it was
an exotic name, for example, his institution would start by looking
at the model risk involved and mark to model, then they would
look at which hedges are on the position and how to “flatten
the risk”.
“We’d do it piece by piece,” he explained. “For a CDO, we’d look at
comparable names and data. For a CDS, we’d pinpoint the rating
and market sector in terms of seniority and currency. You won’t
pinpoint anything, but you can triangulate to a range.”
Another IPV head said that his institution has a hierarchy of data
sources – again dependent on each type of product. “If it is a
vanilla product, we use proxy market data and have a trading
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Responses to this question showed that the burden of proof in
price challenges tends to lie with the trading desk, rather than the
IPV team. In almost a quarter of cases, the burden of proof was
shown to lie with both the IPV team and trading desk.
12.Has the burden of proof changed since the financial crisis and how?
Two key trends emerged from the second part to this question:
the first was the increased presence and influence of the IPV
team within a bank. Respondents commented on the fact that
IPV teams are more involved now than ever before and that other
sectors of the bank are now taking them more seriously.
September 2014
SCI/Fitch Solutions CDS IPV Survey Results
“In the past it used to come down to who was more
thick-skinned – the trader or the IPV person,” said
one IPV head. “But due to organisational changes,
the P&L, product control and risk sections are all
working together. While the trader does have some
input into the valuations process, it is now our say at
the end of the day.”
14.What portion of your price reconciliation
process, to the nearest % range, is
automated versus manual?
A U.S.-based structured credit IPV head noted that the IPV team is
the first stop for data as a source of independence, while another
IPV executive pointed out that his institution’s current IPV process
was created post-crisis. “The previous process was irregularly
performed and did not calculate a P&L impact.”
The second theme that emerged was increased scrutiny of
traders’ pricing within this process. One firm noted that it had
seen much more trader involvement since the crisis – not
because they are worried about the IPV, but rather because they
are worried about the ramifications of being seen to have
mis-marked by regulators.
There were a wide variety of responses to this question,
highlighting the varied systems and practices currently used by
IPV desks across the globe. While the majority of respondents
(23%) said that their institution used a combination of 70%
automated to 30% manual, it was not an overriding majority.
13.In addition to the month-end process, how
frequently are traders’ marks checked
against consensus?
15.How frequently are your IPV methodologies
re-evaluated or recalibrated?
The majority of respondents said that traders’ marks are checked
against consensus daily, while a small portion said they were
checked against consensus annually or not at all. Those that
chose the “other” option, where clarified, said that marks tended
to be checked monthly and not at any other interval.
There was not one clear trend within the IPV space when
it comes to regularity of methodology recalibration or reevaluation. However, most desks (62%) appear to address
their methodologies either quarterly or annually, with a small
proportion (12%) confirming that they never re-evaluate their
methodologies.
September 2014
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16.Does your bank employ the same IPV
process in all locations or do you see
regional differences?
SCI/Fitch Solutions CDS IPV Survey Results
18. What are the key drivers in determining the
positions that are price challenged?
Three key responses were heard when valuation professionals
were asked what the key drivers are in determining the positions
that are price-challenged. They included the impact on P&L, a
discrepancy between desk and vendor prices, and the materiality
of the position in question.
One respondent suggested a position would be price-challenged
depending on whether a trader had a position – or not – in that
particular product and how the position would affect his P&L. “It’s
a cynical view, but an accurate one,” he added.
Responses to this question were almost evenly split, with a
marginal majority of institutions (54%) indicating that they use
the same process everywhere.
17.How do you track and analyse price
variances?
There was no clear-cut response to the question of how
institutions track and analyse price variances. Many respondents
said they have an automated system, while a good number of
others track pricing manually.
Nearly all respondents said they use a proprietary internal
database to collate price variances, with a set of thresholds that
would trigger a warning, should they be breached. The frequency
of tracking price variances ranges from daily to monthly.
“There is an automated process where our system picks up
variances,” said one IPV head. “There are certain thresholds that
we set within the system – anything over those levels will be
flagged. Once they are flagged, they are escalated.”
The majority of respondents said a position would be pricechallenged if there was a discrepancy between prices from
different sources. “We find that we don’t challenge a lot of prices,
but those that we do challenge, we will flag up if we see a much
different price. The materiality of a position would also have some
bearing as to whether it is price-challenged,” noted one.
Another respondent clarified this by saying that if his team
recorded a 1% in aggregate difference to the investment manager
in P&L for the month – but one that was taken over 200 positions
– his team probably would not challenge any of those prices.
On the other hand, if they had a percentage difference that was
based on only two positions, those positions would be challenged.
One IPV executive further qualified this: “If you’ve got a £7m
difference and it comes down to a third of a basis point, we’ll
challenge it differently to a £7m difference due to a 150bp difference.
If it’s a 150bp difference, we know that something is wrong, but if it’s
a third of a basis point, it’s more likely to be timing issues.”
19. Has your bank’s governance practices changed as a result of new regulatory requirements?
Another IPV head noted that when tracking and analysing price
variances, his institution tends to work at a portfolio level. “We
quantify valuation uncertainty at a portfolio level,” he explains. “It
is unlikely that we would be concerned by small price variances on
a small position, but we would be if there were big differences on a
big position. By quantifying it at a portfolio level, we’re able to see
how much uncertainty there is.”
An overwhelming majority of respondents said that their
bank’s governances had changed as a result of new regulatory
requirements.
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September 2014
SCI/Fitch Solutions CDS IPV Survey Results
20.Have the recent banking scandals, most
notably Libor, had any impact on your data
suppliers and in-house pricing contributors?
One representative commented that benchmarking services and
indices required integrity, and that banks should be encouraged
to submit data to consensus services. However, he also noted that
a lot of focus has been towards the upcoming implementation
of reporting requirements such as the revised MIFID/MFIR
legislation in Europe and the new requirements for transaction
data reporting to trade repositories.
While offering more transparency for regulators, submitting
pricing data to trade repositories is not akin to – nor a
replacement for – consensus pricing services as banks do not
receive data back to use in their IPV processes.
21.How does an audit impact your pricing validation process?
Although a marginal majority of respondents said that recent
banking scandals had not impacted their data suppliers and
in-house pricing contributors, SCI’s survey uncovered an
unwillingness from many banks to disclose much of their CDS
pricing data due to litigation fears and damages stemming from
the Libor scandal. One respondent also noted additional costs for
provisions following the Libor scandal and a reduction in services.
“All banks undertook a review of the submissions they make –
consensus-driven or anything else,” said one European IPV head.
“I believe a lot of banks now shy away from giving information to
these sorts of services and I think there are fewer submissions as
a result of the Libor scandal.”
This unintended consequence of the regulatory response to
the recent benchmark scandals is thereby making markets less
transparent across all asset classes.
“We’ve stopped supplying prices to certain vendors where they
are not executable,” added another. “We now give away less data,”
confirmed a third, while another IPV head suggested that there
is a lot more scrutiny about what gets submitted following the
scandal.
A UK-based IPV head also commented on the lack of information
on repo following the Libor scandal. “That’s a key variable,” he
said. “We see that as an important gap.” He explained that the BBA
used to offer information on repo spreads, but since the Libor
scandal, they have stopped publishing Sterling repo and took
away a lot of their minor currencies as well.
SCI approached a number of national and international regulators
on this topic. None were able to give an official position on the
situation, and informal conversations uncovered that the problem
with banks’ submissions to consensus services across all asset
types – particularly as a result of the Libor and FX scandals – was
not something that had been flagged up with regulators as yet.
September 2014
Survey respondents indicated that auditors would request
clarification on pricing of certain securities and demanded
transparency in both generating IPV data and the process by
which it was reached. In several cases, respondents commented
that auditors may challenge their data vendor choice.
“Audits impact our validation process, as our auditors ask us
to review our data vendors to make sure we’re happy with the
valuations and prices we’re getting, which was new for us a couple
of years ago,” said one respondent. “So it’s not just the process,
but also the methodology and what we use for validation.”
Another respondent noted that auditors may ask if due diligence
has been carried out on the vendor providing a certain price, and
what their methodology is. A further respondent commented that
higher regulation on the audit side has subsequently resulted in a
greater need for vendor due diligence and documentation.
There was positive and negative feedback surrounding auditors’
involvement in the pricing validation process too. Several
respondents noted that an audit could “slow up the process”
or that the auditors would focus so much on the process of
validation that they would fail to take note of the market in
general. One respondent even suggested that auditors “don’t
understand the pricing process used” by his institution, while
another said that both types of auditors “have a hard time
grasping the complicated matter in which the illiquid and
unobservable products are modelled.”
On the positive side, several respondents said they appreciate
having another opinion on their pricing process and auditors’
opinions on how they could improve their process. “Whether or
not I agree is another matter,” said one IPV executive.
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Another respondent noted that auditors’ involvement does
actually help them overall. “An audit is generally in our favour and
we are usually happy to follow their recommendations,” he said.
“IPV has so many external strands of data to collect, so it’s good to
have an audit process to actually check that what we are doing is
working correctly.”
22.What are the main differences you see
between internal and external audits?
Respondents implied that internal audits tend to be more
process-oriented, whereas external audits would take a more
high-level view. For example, where an internal audit would focus
on ensuring that set procedures and policy are followed or look
at the stability of an institution’s spreadsheet process, an external
audit would seek to ensure not only that procedures are followed,
but also if they make sense.
SCI/Fitch Solutions CDS IPV Survey Results
“Internal audits are more process-oriented,” commented one IPV
executive. “They ask questions such as ‘are the buttons clicked?’
and ‘have you IPV’d everything that you’re supposed to?’ Internal
audit requires a lot more detail than external audit.”
Another respondent commented that an internal audit is more
focused on internal management policies, broadly speaking,
versus external – which focuses on whether it is in line with Bank
of England or FCA requirements.
“External audits take a pretty high-level review and depend a lot
on internal auditors’ forensic work,” added another respondent.
Another IPV head concluded that while external auditors are more
interested in completeness of coverage, internal audit is processdriven and focuses on the stability of his institution’s spreadsheet
process. “Audit is a key part of our process here, as we will go out
and resolve/investigate any points that are raised by them.”
About SCI
SCI is a media and information company bringing readers an independent and impartial perspective on the global securitisation markets. SCI covers all aspects of
securitisation and its constituent asset classes – ABS, CDOs, CLOs, CMBS and RMBS – through a powerful combination of News, Market Data and Events.
About Fitch Solutions
Fitch Solutions delivers credit market data, analytical tools and risk services to the global financial community. In addition to offering proprietary market-based
content, Fitch Solutions distributes the ratings, research and financial data of Fitch Ratings through a variety of flexible platforms. With innovation and experience
behind every solution, Fitch Solutions helps financial professionals meet the diverse and evolving needs of today’s global markets.
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September 2014