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What is Independent Price Verification and Why is it Important?

Reading time: 5 min   |  By Sonia Chopra   |  Published in Articles,

Risk professionals and asset managers are responsible for correctly assessing the values of the OTC derivative assets that the bank holds. The increasingly complex, evolving markets coupled with stringent regulatory requirements have further complicated this process. EMIR, Dodd-Frank, and Solvency II are a few regulations that have recently honed in on both transparency and accuracy within the verification process. Inaccurate pricing affects compliance and can cause operational inefficiencies and reputational damage.

Today, firms are looking for a transparent, streamlined, and high-quality independent price verification solution to achieve their business, operational, and regulatory goals.

What is Independent Price Verification (IPV)?

Accurate and transparent Independent Price Verification (IPV) has become increasingly important to financial firms, especially when it comes to mitigating risk and meeting regulatory compliance.

According to Basel II Prudent Valuation Guidance, independent price valuation is “the process by which market prices or model inputs are regularly verified for accuracy. While daily marking-to-market may be performed by dealers, valuation of market prices or model inputs should be performed by a unit independent of the dealing room, at least monthly (or, depending on the nature of the market/trading activity, more frequently)”. The actual IPV process requires firms to verify their internal prices against authoritative, external third-party sources.

Why is Independent Price Verification so Important?

Robust, timely, and transparent IPV is crucial because it helps build the foundation of financial risk at an institution. Asset managers must access multiple independent sources to analyze and compare their pricing methods for accuracy, market alignment, and completeness to mitigate risk, avoid regulatory fines, improve operational efficiencies, and avoid poor business decision-making.

Traditionally, firms utilize opaque and resource-intensive processes for IPV. These efforts don’t always provide the quality, transparency, and auditability that regulators and stakeholders require. IPV executives need a powerful, automated, and transparent solution that helps them with their position justifications.

One of the factors that can help ensure a more transparent and enriched consensus result is the automatic inclusion of authoritative and third-party trade data sources. Today, firms may independently use authoritative data sources to evaluate their consensus results further. However, the process is manual and does not fundamentally address the issue upstream. The inclusion of additional post-consensus data through the challenge process isn’t guaranteed.

With an effective independent price verification solution, financial firms can confidently assert and manage their risk and improve capital allocation, resulting in new revenue opportunities.

Solution: Cuneiform® for Valuation Risk

PeerNova® solves these current challenges with independent price verification through Cuneiform® for Valuation Risk. As an intuitive risk platform, backed by a decision-science framework, it enables financial institutions to improve their fair-value estimation using scenario and trend analysis, continuous price backtesting, and contextual understanding of their OTC instrument prices using various datasets.

Firms will have confidence in their business resilience and regulatory response, while also improving capital optimization and reducing the operational cost-of-ownership. With easy integration and ease-of-use, the solution can quickly adapt, as business and regulatory needs evolve in the future. As the solution incorporates market observable trade data, it simplifies existing operational and IPV workflows, thereby reducing total cost of ownership for the IPV and risk teams.

Cuneiform for Valuation Risk offers the following: 

  • Fair-Value Estimation and Continuous Price Backtesting
    Fair-value estimation using Level 1, 2, 3 evidence and client specific policy-driven methodology.
  • Scenario Analysis
    Perform decision-science based scenario analysis to improve regulatory-driven risk measurements and model alternate outcomes.
  • Concentration Risk Analysis
    Liquidity trends and heatmaps that enable concentration risk analysis.
  • Exception Notification & Alerts
    Define notification criteria based upon variances from Fair-Value Estimation.
  • Contextual Views
    Unified, contextualized views of instrument prices, 3rd party pricing datasets – overlaid with client-specific trade, liquidity, and market data.
  • Audit Documentation
    Create documentation for audit and regulatory needs using contextual data and collaboratively share and annotate with group members.

Cuneiform for Valuation Risk empowers organizations to make confident and timely decisions using contextual insights for improved decision-making and risk management.

Contact Us

For more information, please contact us or request a no-commitment demo today.

Sources:
https://www.bis.org/basel_framework/chapter/CAP/50.htm?tldate=20221231&inforce=20191215


By Sonia Chopra

Sonia Chopra is PeerNova's Product Marketing Manager for the Valuation Risk product line. She has nearly a decade of marketing experience and has been with PeerNova for eight years. She specializes in crafting content and campaigns that address the complexities of product and valuation control, such as market volatility, asset pricing discrepancies, and regulatory compliance issues. Her ability to articulate the intricacies of these challenges, enables her to develop highly effective product marketing strategies that meet the evolving needs of the industry.

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