Over-the-Counter Derivatives
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Bear Stearns Still Going Strong--on Its Own
May 28, 2007
Unmesh Bhide, senior managing director of Bear Stearns PricingDirect, said that swaptions valuations were introduced at the beginning of May, with data distributed at 3:00 and 4:00 p.m. Eastern time. "We started with U.S. dollar-denominated interest-rate swaptions and will launch euro-denominated in two or three months," Bhide said.
It's the latest new twist for PricingDirect, Bear Stearns' affiliate for the pricing and valuation of over-the-counter, taxable fixed-income and derivative instruments. These evaluations are increasingly important to the investment funds that, in attaching current market values to their portfolios, need accurate readings of less-liquid holdings. The growth in OTC derivatives has fueled demand for prices from others such as Interactive Data Corp. of Bedford, Mass., Reuters Group's global evaluated pricing service, Standard & Poor's Corp. and Markit Group, a London- and New York-based derivatives database, trade processing and valuation specialist. Markit has swaptions coverage, and Reuters is planning to add swaptions sometime this year.
Bear Stearns PricingDirect has its roots in fixed-income valuations about 15 years ago, when the New York investment bank was seeking values of difficult-to-price instruments for its internal purposes. After looking at what third-party services had to offer, the fixed-income department decided to start pricing the securities itself.
The division handed the
project over to the Bear Stearns Financial Analytics &
Structured Transactions group, which does risk analytics and
modeling on anything fixed-income-related, explained Bob Rose,
senior managing director of sales and marketing for PricingDirect.
"Then we thought, as long as we are doing it, we should offer it to
our clients," he added.
Rose said that because PricingDirect is associated with a broker-dealer, it has all of the resources, research and analytics that are needed to trade fixed income. PricingDirect evaluates over 1 million securities by using a combination of traded prices, mathematical models and industry expertise.
"These are not theoretical prices," Rose stressed. "We provide mark-to-market valuations that are finely calibrated to current market conditions. This makes us significantly different from the competition." He noted that there is a "Chinese wall" between PricingDirect clients and traders--the latter don't know who the former are.
As with many things offered by principal banks--trading systems, services, market data--there can be some resistance from customers to using them, but Rose said this has not limited Bear Stearns' audience so far. The firm is holding its own against pitches like that of Markit Group based on the fact that prices come from broad-based marketplace input--more than 75 dealers in Markit's case. "We provide most of the largest mutual funds out there," asserted Rose.
Rose pointed out that Bear Stearns would provide evaluations whether or not it sold them to others. "Our fixed-income team still needs the highest quality evaluations," he said.
Derivatives are valued four times a day: at 11:30 a.m. and 4:30 p.m. Greenwich mean time and 3:00 and 4:00 p.m. New York time. That covers interest-rate swaps, CDS and swaptions. All fixed-income instruments are valued at 3:00 and 4:00; the latter time was added because most mutual funds have a fixed-income component in their portfolios and wanted to value it at the same time as it did their equities final valuations--at the New York Stock Exchange close. "The 4:00 p.m. valuation also suits the regulators, which are pushing for fair pricing and transparency, so the later the better," Bhide said.
