OTC Valuations Limited (OTC Val), a provider of independent derivatives valuation and risk reports for structured products and exotic derivatives, has expanded its securities coverage to address valuation for illiquid mortgage, credit card, and bank loan related products.
Under liquid market conditions, the fair value of these asset-backed products could be obtained from a broker quote, which would be based on that day’s trading activity for a specific security. This has and always will be an accepted practice in active markets. However, in today’s environment, a large number of these securities have not traded for several months, leading to stale broker quotes which are poor indications of current fair value.
Despite the recent legislation submitted to Congress by the US Treasury Department to purchase up to $700 billion of troubled residential and commercial-related assets, pricing challenges will continue to hamper this market segment due to limited underlying data availability, information on particular structural parameters of an asset, and credit standing of the component pieces of the asset.
“In an inactive market, we believe that market participants are as concerned about the assumptions and data behind a product’s price as the price itself,” says Bob Sangha, managing director at OTC Val. “Our valuation methods enable us to provide this level of transparency and disclosure. In addition, we employ a variety of reasonableness tests to ensure consistency and accuracy, while utilizing observable market inputs where possible.”
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