Shifting Gears to Navigate the New World of Valuations: Pressures, Priorities, Practices, and Prospects

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3 January 2010


Vulnerabilities in managing new/complex product risks and achieving the appropriate level of transparency are the main issues faced by end users during OTC asset valuation. With end users asking for more information and increased access, the cost of managing these activities is on the rise.

One of the major issues during the credit crisis was the price variability and illiquidity of OTC portfolios. When the markets dislocated, the vetting and reconciliation challenges related to valuations of illiquid assets became apparent. In today’s climate, there is still a strong aversion to valuation risks, and the investing community has focused scrutiny on assets with valuations based on models, asking for greater levels of granularity in terms of how prices are derived and how valuation processes are executed, managed and vetted.

In this report, Shifting Gears to Navigate the New World of Valuations: Pressures, Priorities, Practices, and Prospects, Celent explains the valuation services ecosystem. It analyzes the future of the valuations industry and explains best practices for success in the long run.

“The fragmentation in organizational valuation practices and growing regulatory overheads is already taking a toll on the costs for end users, and Celent expects to see more concerted efforts from users to centralize and align valuation practices for the entire organization,” says Cubillas Ding, senior analyst with Celent and coauthor of the report.

“Due to the recent financial crisis and increased need for transparency, Celent sees forward thinking firms looking at the bigger picture of achieving firmwide 'front to back' valuation consistency and pursuing longer term transformation programmes to achieve these goals,” adds Sreekrishna Sankar, Celent analyst and coauthor of the report.

This report analyzes the various users of valuation services and how they utilise these services. It looks at the best practices in the industry as well as how a firm chooses a valuation service. The insights for this study are a result of interviews with more than 40 senior executives from buy side firms, sell side institutions, and vendors across the financial services industry to understand pain points faced by firms, the spectrum of industry practices, insights into best practice approaches and considerations for investing in and building out valuation capabilities.