IVSC consults on valuation of derivatives

Many companies and investors use financial derivatives to mitigate risks, but only the more sophisticated are aware of how the value of their holdings in such instruments fluctuates over time. The problem is particularly acute with over the counter (OTC) products which are not traded on exchanges and for which current price information is not available.

The International Valuation Standards Council has recognised that the lack of globally accepted and recognised standards for the valuation of derivatives has led to a lack of trust in the valuations that are produced and has embarked on a project to rectify this. This week it is publishing an Exposure Draft for public comment on the Valuation of Equity Derivatives.

Announcing the start of the consultation, the IVSC Standards Board member leading the project, Ana Castañeda, said:

“All companies that hold any sort of financial instrument need to value these in their accounts, and for banks and other financial institutions these valuations are also critical for regulatory compliance. However, while trillions of dollars of derivative contracts are in existence there is too little understanding of the principles that underpin their value.

“Our project is aimed at identifying generally accepted good practice and bringing greater transparency and trust to the process.”

The paper on equity derivatives is the first of a planned series that will include similar guidance on derivatives for foreign exchange, fixed income and commodities. Comments on the Exposure Draft are invited before 30 September.