Preparing for MiFID II. Product governance. Online pricing and stress testing toolApril 11, 2017 - 10:55
MiFID II will impact us all from January 2018. We are already working with several manufacturers and distributors, helping them to develop their capability in the following areas:
- Defining the target market
- Product governance; product design, testing and approval
- Demonstrating that products are suitable and appropriate for the target market
- Communicating with distributors and investors
- Best Execution
- Monitoring products over time
There is a significantly greater emphasis placed on product development and governance with MiFID II. Manufacturers and distributors need to develop products to meet the needs of specific target clients, and crucially, to show that they have done this. MiFID II requires that there are policies and procedures, and that there is overt management oversight.
In our opinion this means that the minimum requirement is that manufacturers and distributors need to show that the risk and return of each product matches the attitude to risk and investment objective of the target client. There are other characteristics of the product that need to considered as well, such as complexity, duration, market exposure and so on. But the starting point is risk and return.
To comply with MiFID II manufacturers need to be able to calculate the return that investors may get and the risks that they face in a way that is compatible with the way that distributors define the investment objective and attitude to risk of investors. For most distributors, this is expected return and volatility.
ONLINE PRODUCT PRICING AND TESTING
We have developed an online product pricing and stress testing facility that is available to professional investors through Investment Product Research (IPR). This facility has been designed for product manufacturers and distributors.
- Users can upload most of the commonly used product shapes quickly and easily.
- Attach term sheets or other product material to the product in IPR.
- Indicative pricing based on a broad range of different issuers.
- Instant multi scenario stress-test
- Historic back-test
- UK SPA bear / neutral / bull
- IPR Market risk
- IPR Market and issuer risk
- Users can determine the immediate output and download a PDF summary
- Return: CAGR, Arithmetic Return, IRR, chance and scale of a positive return, VaR 10 and VaR 50
- Risk: volatility, chance and scale of loss, worst case return, VaR 90
- Value for money: fair value, chance of return above benchmark, Sharpe.
- Users can view the product on the main IPR listing to see more detailed analysis
- Back test chart
- Chance of each event on each scenario
- Download IPR Product Report for an example
- Download product analysis via an API
- Full PRIIPS KID analysis
Manufacturing distributors may think that they can rely on the stress tests done by the issuing banks. This approach may be difficult in practice. Different banks have different stress test processes and may calculate risk and return in different ways. The manufacturing distributor will then have to develop a process to normalise the results. Issuing banks may be reluctant to allow manufacturing distributors unfettered access to the pricing and stress testing tools that are required pre-trade. The manufacturing distributor will be reliant on the issuer providing on-going analysis to enable the product to be monitored over time.
PRIIPS / MiFID
There is some overlap between MiFID II and the PRIPPS requirement. MiFID II is much broader and sell specific. The PRIIPS regulations are very focused and prescriptive, but in our view result in a document that will be of little use for investors or distributors. The risk numbers are not granular enough. The lend of market and issuer risk in the SRRI is unhelpful for investors that want to have an independent assessment of both. It's difficult to know how to calculate the intermediate period valuations, or what they mean.
PLEASE CONTACT CUBE TO ARRANGE A FREE TRIAL AND DEMONSTRATION
If you would like to have a demonstration and free trial of the product pricing and stress testing facility please contact David, Simon or Matthew.
David has been involved in equity derivatives, equity structuring and the structured product market for over 25 years. Before setting up CUBE in 2013 David worked at J.P. Morgan, Barclays and RBS. David has worked with and for retail product providers, discretionary managers and institutional investors.