Cube Investing has partnered with Fairmat, a Verona-based provider of derivatives pricing solutions for options, derivatives, structured products and OTC instruments specialising in the analysis and assessment of financial contracts, to provide detailed analysis of the entire UK structured product retail market.
Under the agreement, Cube will provide Fairmat with whole-of-market data on all retail structured products in the UK for Fairmat to offer independent fair values and structured product risk analytics services through the firm’s Fairmat Cloud.
“Cube are clearly dedicated to offering investors analytical tools that enhance the transparency of a product,” said Matteo Tesser, founder and CEO of Fairmat. “While they already employ a valuation platform, they are keen on offering a more granular and independent second opinion, and we are very happy to provide that.”
Fairmat Cloud has a web-based interface that works as a search engine and can provide analytics on request on mark to market, back-testing, Greeks, sensitivities and what the Italian firm calls the independent quantitative report (data-driven analyses for pre-strike products inspired by recent Iosco recommendations).
Fairmat has been working over the last few months in preparation for the launch of a host of new services on its web platform, including a tool which allows investors to search for structured products based on their risk/return profile, said Matteo Carradori, director at the firm.
“We have also enhanced our database by mapping out most of the German structured product market as well as teaming up with Italian structured product intelligence service Certificati e Derivati (CED), which will enhance our coverage of the Italian retail market,” said Carradori.
Cube Investments has been working on the development of the risk analysis it already provides on its structured products offering with independent fair value and stress testing analytics, according to Cube’s chief executive, David Stuff (pictured).
“We believe that our independent stress testing offered via InvestmentProductResearch.com (IPR) is one of the best in the market, and we want to add fair value calculations to our products,” said Stuff. “The whole-of-market data we have on the products stored in our system can be now accessed by Fairmat for them to apply their independent fair values and sensitivities for all the products we offer.”
The agreement, said Stuff, shows Cube’s commitment to provide meaningful information to its clients.
According to Stuff, fair value and stress testing run in parallel but are important to differentiate. The fair value assessment, said Stuff, provides information that shows that the end investor is trading at a sensible price, and this addresses one of the UK Financial Conduct Authority’s (FCA) concerns around the trading of structured products in the secondary market.
“The fair value gives you an estimation of what the product is actually worth today based on its exposure to changes in the market level, volatility, correlation and so on, but this has nothing to do with the stress testing of the product,” he said.
Fair value, said Stuff, is the price of the product in a risk-neutral arbitrage pricing world but it does not provide the full value as it is not an assessment or an estimation of where the market will be at a given time. The stress test on the other hand is a real world model and needs to include a number of elements such as equity risk premium, and should include a likely forward looking projection of where the markets could be, according to Stuff.
“There are providers out there providing stress testing based on pricing models, and that doesn’t make sense as it effectively implies that fair value is where the market is going to be,” he said.
At the moment structured products sold via plans have no valuation at all or an indication that the end client is investing at fair value, said Stuff. “The bank (manufacturer) has no fiduciary responsibility to the end investor and generally plan managers don’t have a way of independently validating the price given by the bank,” he said. “With this agreement we meet one of the requirements set up by the FCA to make sure investors can trade their products (especially in the secondary market) at fair value.”
Cube Investments, said Stuff, has done extensive research around providers of fair value calculations and analysis.
“This is a very interesting area as if you are holding derivatives within a Ucits (Undertakings for Collective Investment in Transferable Securities, Directive) fund it’s a mandatory requirement that you provide investors with an independent value of the product; whereas if you are holding derivative instruments in a plan or a discretionary or segregated portfolio there is no requirement to have any independent fair value assessment,” said Stuff.
Before choosing Fairmat, Cube assessed some of the leading players in the pricing and valuation segment such as Thomson Reuters, Bloomberg, Sungard and Numerix.
“They offer a very comprehensive service, but one of the issues we found is that the data is as important as the model and you have to source that data,” said Stuff. “The problem with using these vendors is that you cannot make public the results of that fair value calculation, and can only use those calculations internally.”
At Cube, we believe independent fair value is a very important element of the disclosure around our structured products offering, said Stuff.
“We have been working with Fairmat for some time, and they use independent sources of data as well as very comprehensive and accurate valuation models,” he said. “They also have a very streamlined web delivery system and a derivatives pricing tool. We feel it is the right partner for us.”
The fair value analytics, said Stuff, complements the firm’s performance data which is based on an index of maturing autocalls which investors can also access via the InvestmentProductResearch.com (IPR) website.
Cube Investing was the first UK structured product provider to include in its product literature a series of metrics based on simulated and historic tests including the chance of loss, chance of gain and the expected return of constant reinvestment in the product. Cube also provides a volatility-based score consistent with the Synthetic Risk and Reward Indicator (SRRI) with which regulated collectives must comply as required by European regulators and has been mapped to the popular 1-10 risk scales used by many financial advisers.
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