Varun Pawar is Global Head of Bloomberg’s Evaluated Pricing Service, BVAL.
The IVSC caught up with Varun Pawar, Global Head of Bloomberg’s Evaluated Pricing Service (BVAL) to find out what trends are shaping the fixed income valuation space and how Bloomberg is supporting efforts to enhance global standards.
Can you tell us a little about your role at Bloomberg and the history of the BVAL service?
I joined Bloomberg a little over ten years ago at a time when we had a fledging BVAL service. At that time we recognised the growing importance of reliable and integrated pricing data and we wanted to develop tools which could navigate the fast-changing regulatory environment – a landscape that was evolving rapidly in the context of an unfolding global financial crisis.
Our aim, ultimately, was to be less assumption oriented and instead more data driven. We wanted to give our clients the ability, when they received a valuation on a specific bond, to interrogate the underlying data; to question the information rather than just getting a price and being satisfied. This has been a guiding principle for me ever since.
Over the last ten years we’ve been working to develop and refine BVAL. We’re heading in the right direction for sure. BVAL won the Inside Reference Data “Best Evaluated Prices Service Provider” for the second consecutive year in 2018 and today our data is integral to the Bloomberg Barclays Indices - which means there are essentially a few trillion dollars which are benchmarked by our data.
You mentioned the changing regulatory landscape and the emergence of new business models; are these trends having an impact on the types of clients that you are working with today?
Since the credit crisis, there has been a consistent push to have stricter controls around mark to market practices. In particular with sell side entities, we have seen a strong shift away from internally marked books to using third party vendor prices to verify marks. The regulations around liquidity have also had an influence on the way our clients look at valuations. Whilst the focus was previously only around the price, nowadays due to regulatory requirements, clients are also looking to contextualise that price data.
Over the past few years, we have also seen a sizable increase in the number of risk management professionals wanting to look at third party valuation data, as well as research desks looking to integrate valuations within their assessment of risk and return.
In addition to some rather sophisticated algorithms, what does the BVAL setup look like in terms of size and scale?
The BVAL service is broken down by asset classes. The first is fixed income securities which I am responsible for, the second is for over-the-counter derivatives which are handled by another group in Bloomberg. The fixed income space is further broken down by three pillars: 1. GSAC – Government, Supranational, Agency and Corporates; 2. US municipal bonds; and 3. all securitised bonds which covers Asset-backed securities, Mortgage-backed securities and Commercial mortgage backed securities. Taking these three broad areas collectively we are talking about roughly 2.5 million securities that BVAL prices – our aim is to price the entire fixed income asset universe, not just the bonds that clients might really care about. By capturing prices for the entire universe of fixed income assets we are able to collect and hold a vast catalogue of historical data that is valuable to our clients.
We have a global team with members in Tokyo, Hong Kong, London and New York. In terms of their backgrounds, a large portion of the team has come from the market and have first-hand experience of understanding relative value within the specific market nuances for fixed income assets – and there are plenty around the world!
We are also lucky to have a sizable and dedicated team of programmers and analysts that we can work with who are focused exclusively on BVAL. This gives us enormous strength and the ability to prioritise work and mobilise expert teams quickly when necessary.
One area that the IVSC is focused on is the development of globally consistent standards which underpin valuation work. Can you talk about the challenges that Bloomberg faces in relation to inconsistent valuation data standards?
The best way to answer this is first to step back and look at the problem we are trying to solve:
Our clients have choices in terms of the asset classes they can invest in – equities for example. A given issuer can issue equity stock. The same issuer can also have 200 bonds outstanding and every one of those could have a different set of permutations and combinations. You could have short, medium or long-term unsecured debt; you could have ordinary debt or secured debt; you could have convertible bonds with a mix of equity and fixed income.
If you look at valuations relatively speaking, it’s fairly straight forward from an equity perspective – most equities trade on exchanges and it is easy to understand market debt and where the equity last traded etcetera. However, if you look at it from a fixed income perspective, the challenge is enormous. The universe for fixed income bonds – in the region of 2.5 million – is vast. What’s more, these bonds are not homogenous, they all have their own quirks and structures which need to be taken into consideration when determining price. So from the perspective of valuation, it is challenging. To try and price this universe we must have robust approaches and back-tested models which can prove that we are doing a good job. This challenge is big but it’s also incredibly important when you consider the size of the market for fixed income assets and the bearing it has on the financial system as a whole.
This challenge is one that both the IVSC and Bloomberg – along with more than two dozen global banks, prudential regulators and service providers – are trying to tackle through a ‘financial instrument valuation standards’ initiative. What can you tell us about the significance of this work?
Overcoming the challenge of inconsistency in valuation standards is one of the primary reasons we are partnering with the IVSC. We want to work together, and with others across the financial sector, to understand and define what common standards for valuation of fixed income assets looks like. What is really beneficial about the partnership is that Bloomberg gets a sense of what the IVSC is thinking in terms of standards and, just as importantly, we can highlight to the IVSC some of the challenges that we are seeing in order to go about trying to value some of these complex securities.
We are part of a number of working groups which are feeding into this project and it is something that we see as being strategically beneficial to both Bloomberg and the IVSC. As a vendor we have been in the valuation space for quite some time now and we understand the shortcomings of the market; the problems that we are dealing with, especially around fixed income valuations. We know the different types of markets and the variance in levels of transparency around the world. As a result, Bloomberg can speak with confidence on the subject and make sure that from a standards perspective we are part of the dialogue. It ensures that we understand where the industry and standards are headed and that we can develop and offer clients products which are in tune with the latest standards and which support their effective risk management processes.
What are the challenges and hurdles that an initiative such as this must overcome if it is to be successful?
One example of an initiative which made a meaningful impact in the valuation space was FINRA starting the TRACE reporting product – making trades available for corporate bonds within 15 minutes of the trade taking place. Those kinds of initiatives are game-changers because all of a sudden you go from not having a gold standard to compare valuations against, to having that gold standard. We’ve seen this with MiFID II as well, which has added data for European bonds. From my perspective, the more of this information which is disseminated in the public space, the better and more transparent the markets are and the greater confidence clients can have in their ability to make sound investment decisions.
What other trends are you seeing which are fundamentally changing the valuation world?
There is definitely a trend towards a need for additional data. When we started BVAL it was very focused on a limited number of fields. That fields list has grown considerably over the last ten years in terms of what our clients want. The price is still the primary data being used to value the NAVs and to do the risk calculations, but all the metadata which sits around the price is the information that the market is now asking for. This data is helping to construct better prophecies around bonds, especially bonds that are very illiquid.
What’s driving the appetite for this metadata, is it the change in the types of stakeholders you are working with - a shift towards risk and compliance managers - or is it a wider understanding of the macro environment in the years after the financial crisis, for example issues surrounding liquidity?
I think it’s both actually. I would definitely say the due diligence process has stepped up a few notches and clients are asking more probing questions than they previously were, which is great. I would also say that our clients previously were unaware, or never knew to ask for this kind of data. Today, when we present this information you can almost see them turning it over in their mind, contemplating the ways in which it can support their business and decision-making processes. Certainly the risk managers getting involved has helped, but I do think this evolution is just as much about traditional clients expanding their frame of reference as part of the due diligence process.
How do you think the valuation profession is likely to change over the coming decade?
Technology is undoubtedly the most disruptive of all the trends which will shape the future of this profession, certainly within fixed income. You can already see the growth of electronic trading; the shift from actively managed funds to passively managed funds; the growth of the Exchange-Traded Fund (ETF) business. The underlying theme that I see behind all of these emerging trends is the need for more data and the electronification of markets that have historically been very relationship driven. The direct result is that, with more data to work with, markets will become more transparent and business and investment decisions will become better informed.