Bondvalue

We add value to financial information agencies. BONDVALUE filters row data, in order to extract synthetic and reliable information.

The participants in the financial markets evaluating bonds, have access to a lot of market information, but often mixed : contributions “on pages” of different market makers, “executable prices” on ATS (Alternative trading systems), transactions on regulated markets.

The software sweeps, over a large number of bonds, and follows a rigorous method in order to calculate the “fixing” at the client predefined hour. All statistics linked to these fixings are available to the user in files or graphics, and these can be simply transferred to Excel. Therefore, the user (Middle office, Back-office, Compliance, Department of risk…), has a complete audit trail which proves the Fair values have been obtained correctly. This is very useful for both internal and external users, such as Auditors and market Regulators.

The Fair value of a bond, used for evaluating a portfolio or for estimating the transaction price, is calculated by BONDVALUE by taking all available market information at a precise moment in time, using the clients market information source (Bloomberg, Thomson-Reuters, Telekurs…)

This procedure conforms with International Accounting Standards (IAS 39). The Fair value of an asset corresponds to its resalable value under normal market conditions, and for a standard size ( eg. 5-10 M€ for bonds). The VALNEXT Fair value is evaluated by independent means, totally independent from Front office transaction counterparties and therefore avoids any conflict of interest.

In the framework of control of best execution (or best selection) demanded by the new European Directive, we estimate a market price range representing the market consensus at the transaction moment (or over a period of time). This range allows the user to verify that the transaction has, in fact, been realized at market price. Some warnings, listed in order of importance, are sent by the system for all transactions which are outside of the market consensus. The results of this analysis are stocked in a database, which are exportable to Excel and available in graphic form.

This approach preserves all audit trails necessary to comply with internal controls and market authorities.

For bonds, where no market information exists, a fair value is estimated by a proxy model based on spreads, by comparing similar bond in terms of rating, maturity, activity sector… The information on CDS (Credit default swap) are also used, but only in certain particular case.

This valuing method « by proxy » also conforms with accounting standards, as well as usual market practices. This approach is most appropriate when the Bond market is confronted with liquidity problems, as was the case at the heart of the financial crisis of October 2008. The market players experienced enormous difficulties to correctly evaluate assets without market information and therefore had to refer to mark to model pricing, which is very heavy and difficult to apply.

The Valnext proxy method is somewhat ahead of the IAS 39. The new guideline will soon authorize firms to evaluate, in certain cases, their bonds with the cash flow method using an appropriate spread instead of the last market price. This is useful when market prices are very much depreciated, mainly because of a lack of liquidity.

The spread that we find when using the BONDVALUE proxy method is filtered from outmarket spreads by searching for a given class of bonds (maturity, activity sector, rating…) an average spread of the market consensus. The spread is in some way, smoothed from particularities of such and such issue, due to the lack of liquidity. But it takes into account the global credit risk of its class.

The fact of evaluating bonds using the cash flow method should not cancel the credit risk, which for example puts the same bond yield for a AAA Treasury Bond rating as a BBB Bank Bonds rating. The Proxy method allows us to have a just appreciation of the Bond value, taking into account the average spread of its class.
This value which can be different from the market price at a given time, allows us to obtain in certain cases a price more fitting to a middle / long term vision than the observed price. The low observed price having resulted uniquely because of a lack of demand on the day of the evaluation.

The user has all necessary audit trails (graphics and data) that traces the calculation of fair value by proxy method.

BONDVALUE clients also have access to an enriched financial analysis which is entirely auditable.