OTC Derivatives Verification of Valuations

Mandate

To draft best practice recommendations for the process by which the valuations of OTC derivative instruments held in regulated investment funds are validated.

Working Group Co-Chairs

Markus H. Ruetimann (2010 Status update)

Details

The “Alpha” investment returns required by pension funds are achieved to a large extent with the help of derivatives. Over-the-counter derivative instruments, however, are a major challenge to the back office in many respects.

One particular problem zone is the lack of pricing transparency. The value of OTC derivatives is based on complex algorithms and methodologies, as opposed to the price discovery mechanism through a stock exchange. Verification of OTC derivative valuations by custodians is a regulatory requirement. The pertinent regulations, however, differ by market and they leave room for interpretation. They are a challenge in itself.

The ISSA OTC Derivatives Valuation Working Group has drafted a best practice recommendation for the process by which the valuation of OTC derivatives held in regulated investment funds is validated. The group’s findings were presented to the symposium and have been published in the:

2010 Update: Status review PDF (119 kB)
2008 report on the verification of valuations of OTC derivatives PDF (168 kB)