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Price and Prejudice and Zombies

Easily the most unusual literary success story of the year, the Jane Austen inspired mash-up novel which inspires this blog title is terrific trashy fun. If you are looking for a quirky Christmas present for any Regency pulp fiction obsessed bibliophiles in your acquaintance, you could do worse than look here.

Improbably, there are quite a few interesting parallels between this novelty example of a remix of legacy and new content and goings on in the data management industry. Searching for better information sources and better data mixing desks is the hot topic in pricing and valuation departments this year. There is I am told no shortage of prices, quite a few prejudices and the odd legion of the undead in many middle and back offices.

So why is everyone talking about pricing and valuation? As Aite Group pointed out in its recent report, "greater scrutiny by interested parties, coupled with changing regulations, accounting standards and changing dealer landscapes, has made the pricing and valuation process a high-visibility, high-importance business activity for years to come."


Nothing like injecting a bit of glamour (as usual of the fascinosum et tremendum variety) into a previously humdrum back office task. An event we co-hosted last week looked at the trouble faced by current valuations teams on the buy-side. Getting to grips with calls for complete and utter transparency and accountability, while being told you have less time and less money to do it in, is enough to turn anyone into a dead-eyed zombie - but that is enough about me: the consensus in the room, and in a preceding survey of asset managers, Tier-1 and Tier-2 banks, broker/dealers, and custodians, was that people are looking to multi-sourcing to validate prices for non-vanilla assets and support due diligence.

But at the same time the average size of the valuation team is only 6 to 15 people. Take into account the explosion in data that such a multi-source approach will trigger, on top of the existing data maelstrom caused by product complexity and market volatility, and that team is suddenly more than overloaded. And as Matthew Cox at BNY Mellon Asset Servicing pointed out, if 80 percent of the multi-source data falls on the floor due to a lack of resources to process it, you're going to be wasting a lot of money and not solving your original problem particularly well.

If a higher degree of automation is essential to ensure that valuations teams are effectively mitigating operational risk, how can centralised data management help achieve this? Celent analyst Cubillas Ding recently defined four elements of best practice for non-vanilla pricing and valuation in their webinar on OTC and structured asset pricing and valuation services. Along with aligning pricing methodologies and understanding model risks, data connectedness (centralising pricing and valuations data), and automation of repeatable activities (data/price sourcing, price verification, price challenges and valuation adjustments) are seen as key.

And when you consider the size of the task these valuations teams face, they simply can't continue to rely on manual processing if they are going to succeed. Without automation, those responsible for pricing will find themselves starting their 2010 staffing plan with the first line of Pride and Prejudice and Zombies: 'It is a truth universally acknowledged that a zombie in possession of brains must be in want of more brains.'

Pride and Prejudice and Zombies Cover
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Gert Raeves
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Gert Raeves

Research Director

Adox Research Limited

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25 Jul 2005

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London

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