Current Topics in Valuation. Market volatility, trading suspensions and liquidity

Transcription

1 Current Topics in Valuation Market volatility, trading suspensions and liquidity

2 Speaking with you Today Jim Weber Parsippany, NJ William Fellows New York, NY Jim is a Director focusing on brokerage, investment bank and exchange clients. He has over 30 years of experience including electronic trading solutions, global markets access, brokerage operations, product management, systems development, risk management and regulatory controls. He focuses on operational risk management, trading and clearing solutions and regulatory compliance and has managed global broker dealer high performance market access and algorithmic trading businesses. In the course of his career, Jim has directed clients through several significant industry transitions in the US, Europe and Asia William Fellows is a partner in Financial Transactions. He co-leads Deloitte s Valuation Audit Support Practice and leads Deloitte s Derivatives and Hedging Advisory Services (DHAS). Recently, Bill has been providing his investment management clients with insights regarding valuation governance and oversight. In that capacity, he has helped them with the re-design of valuation procedures and assessing the structure and function of valuation committees of investment managers. Bill was also a trader at a major investment bank, where he traded and structured a variety of credit products. As a trader, Bill gained significant experience in the valuation and risk management of complex financial instruments. Bill holds an MBA from the MIT Sloan School of Management focused on Financial Engineering and Strategy, and a BS in Finance, Accounting and Economics. Bill is a certified public accountant licensed to practice in California and New York, Accredited in Business Valuation, a CFA Charterholder, and is a Certified Financial Risk Manager. 2 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

3 Speaking with you Today Paul Kraft Boston, MA Paul is a Partner in Deloitte s Financial Services Industries practice, the U.S. Mutual Fund and Investment Adviser Practice Leader and has nearly 29 years of experience providing audit and related services to some of Deloitte s largest asset management, insurance and bank clients, including reports to the SEC, regulatory compliance reviews, organizational and control consulting, and implementation of and ongoing compliance with Sarbanes-Oxley Section 404. Paul has led Deloitte s annual Fair Valuation Survey since inception and is a frequent speaker and writer on the topic of fair valuation as well as other financial services issues. Before joining Deloitte & Touche, Paul spent over two years as assistant chief accountant in the SEC s Division of Investment Management in Washington, D.C. In that role, he worked on accounting, compliance, and financial reporting matters affecting SEC registrants, including fair-valuation initiatives, the introduction of the euro, the implications of Y2K, and the implementation of new reporting and disclosure guidelines for asset managers. 3 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

4 Today s Agenda NYSE Trading Suspension US Market Volatility Greek Market Trading Suspension China Market Volatility Recent SEC Valuation Guidance Liquidity Considerations Private Company Valuation Other Valuation Trends Q&A 4 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

5 NYSE Trading Suspension July 8, 2015 Trading halted on the floor of the New York Stock Exchange for more than 3 hours at approximately 11:30 AM, with trading resuming at 3:10 PM that day As a result of the disruption in trading, volume levels were approximately half of a typical day s volume for the NYSE Across all platforms, NYSE trading is only a fraction of trading in a given security Trading for NYSE listed securities still occurred on other platforms, including NYSE Arca, as well as private exchanges / dark pools Funds may wish to consider sources of information for pricing, as well as the contractual requirements for where those funds take their prices, considering prospectuses or other governing documents 5 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

6 US Market Volatility back: Volatility is : Source 6 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

7 US Market Volatility Increased volatility has a number of impacts: Increased execution risk timing critical when entering and exiting positions Valuation what does volatility mean for hard-to-value and private positions? How does it get reflected in derivative and other positions that may have embedded optionality? IPO market Companies tend to delay going public during volatile markets, could have knock-on effect valuation of investments in private companies 7 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

8 Greek Market Trading Suspension 2. Athens Stock Exchange was closed from June 29 through August : Source 8 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

9 Greek Market Trading Suspension When the market reopened on August 2 nd, it dropped around 16%, banking stocks dropped further, approximately 30% Prices after suspension on June 29 th become stale quickly the act of suspending trading itself may have had an impact on all shares traded on the ASE : Considerations What policies does the Fund have in place for stale pricing what sort of adjustments should be made to calculate a fair value of the position? Do stocks that trade on the ASE trade on alternative platforms, like we see for NYSE-traded stocks? How available is that data? How do the pricing vendors the fund uses deal with extended halts like this? 9 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

10 China Market Volatility Significant volatility in China s stock markets adding to the overall levels of volatility: Shanghai Composite down 43% during this period : Source 10 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

11 Liquidity Considerations SEC proposed rules to enhance effective liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (but not money market funds) on September 22, 2015 Mutual funds and ETFs would be required to implement liquidity risk management programs that include: Classification of the liquidity of fund portfolio assets Assessment, periodic review and management of a fund s liquidity risk Establishment of a three-day liquid asset minimum Board approval and review Enhance disclosure regarding fund liquidity and redemption practices 11 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

12 Liquidity Considerations Another case of the law of unintended consequences amid mounting evidence that certain regulatory actions taken in the shadow of the credit crisis has reduced the overall liquidity of the market: Anecdotal evidence of absence of markets for less liquid instruments where there used to be good coverage and larger bid/offer spreads than before Vendors Most vendors are offering different tools to respond to liquidity reporting needs Functionality for most is still in various levels of development, but may warrant consideration during next due diligence meeting Expect changes in response to the SEC proposal 12 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

13 Recent SEC Valuation Guidance Amortized Cost We generally believe that a fund may only use the amortized cost method to value a portfolio security with a remaining maturity of 60 days or less when it can reasonably conclude, at each time it makes a valuation determination, that the amortized costs value is approximately the same as the fair value of the security as determined without the use of amortized cost valuation. Existing credit, liquidity, or interest rate conditions in the relevant markets and issuer specific circumstances at each such time should be taken into account in making such an evaluation. Illiquid Securities We generally believe that the current sale standard appropriately reflects the fair value of securities and other assets for which market quotations are not readily available. The price that an unrelated willing buyer would pay for a security or other asset under current market conditions is indicative of the value of the security or asset. 13 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

14 Recent SEC Valuation Guidance Use of Pricing Services Before deciding to use evaluated prices from a pricing service to assist it in determining the fair values of a fund s portfolio securities, the fund s board of directors may want to consider the inputs, methods, models, and assumptions used by the pricing service to determine its evaluated prices, and how those inputs, methods, models, and assumptions are affected (if at all) as market conditions change. In choosing a particular pricing service, a fund s board may want to assess, among other things, the quality of the evaluated prices provided by the service and the extent to which the service determines its evaluated prices as close as possible to the time as of which the fund calculates its net asset value. 14 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

15 Private Company Valuation Market participants have been asking how recent developments in the market place impact their valuation of private positions How frequently does the company revalue their positions? How do the developments in the market impact comps and the relationship between the subject company and those comparable companies? Many investment managers have been considering bringing in external, third parties to provide input on the governance and processes over private company valuation 15 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

16 Other Valuation Trends Price transparency TRACE reporting has been gradually expanding its reach: Added Agency MBS in A Corporate Bonds in 2014 ABS (autos, credit card and student loans) in 2015 Appear poised to expand to CMBS, CDOs and other securitized products in 2016 Data getting integrated into vendor pricing data PCAOB getting in on the act 2014 Staff Consultation Paper: Auditing Accounting Estimates and Fair Value Measurements 2015 Staff Consultation Paper: The Auditor's Use of the Work of Specialists 16 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

17 Q&A

18 This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. 18 Footer Copyright 2014 Deloitte Development LLC. All rights reserved.

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