Managers advised to start building CCP valuations into NAV

Fund Administration
03 Jan, 2013

Hedge funds trading centrally cleared swaps have been advised to start building CCP valuations into their funds’ net asset value (NAV) calculations given the proximity of mandatory OTC clearing.

According to one fund administrator, a minority of hedge funds doing are incorporating CCP valuations into the NAV whereby CCPs’ margin is factored into the calculation. However, the administrator added this phenomenon was not a noticeable trend yet. 

“A minority of the larger managers are incorporating CCP valuations into the NAV although the smaller ones are emphatically resisting doing this,” acknowledged Samuel Ely, founding partner at Gamma Derivatives Solutions, a consultancy.

Mandatory clearing as required under Dodd-Frank and EMIR is likely to take effect from 2013. Managers will therefore be required to obtain an end-of-day valuation from their CCP, which will be factored into their NAV.

 “Managers should start preparing to put CCP valuations into their NAV given the regulatory developments. This can already be done for centrally cleared OTC products such as rates and credit.  Once mandatory clearing comes into effect, they will need to abandon their historic model pricing and instead get valuations from the CCP via their FCM, and factor those numbers into the NAV,” added Ely.

There is a risk, however, that managers might disagree with the valuation offered by the CCP. “If a manager disagreed with the CCPs’ valuation, they could ask their FCM to query how the CCPs’ model gave the disputed price. The CCP might review its model but it is under no obligation to alter the price,” commented Ely.

Incorporating CCP valuations into the NAV could also spell an opportunity for fund administrators. The fund administrator acknowledged it was something they were already offering.  “We can accommodate this as long as it is in accordance with the fund's agreed pricing policy.  It remains good practice to consider more than one source for derivatives pricing and apply an agreed pricing policy on a consistent basis,” said the fund administrator.

It is inevitable that CCP valuations will push up fund administration costs at a time when the industry is facing numerous regulatory challenges. 

Mandatory clearing presents a whole raft of other challenges for buy-side firms. Many buy-side firms have long complained about the ongoing regulatory uncertainty surrounding swaps clearing. Some have even put off their preparations as deadlines have been repeatedly pushed back. The lack of clarity on the final rules has prompted some buy-side firms to delay finding a clearing broker or negotiate the intricately detailed clearing agreements while others fret about the stringent collateral requirements at CCPs.

CCPsmandatory clearingNAVEMIRDodd-Frankvaluationfund administrationGamma Derivatives SolutionsFCMcollateralregulatory uncertainty