Future Value Consultants to revamp website to focus on return analysis, secondary valuations

By Emma Trincal

New York, March 24 - Future Value Consultants is upgrading its StructuredEdge website, Tim Mortimer, managing director at the independent valuation and research services provider for structured products, told Prospect News.

The main changes will include rolling out a new methodology for product performance analysis; the creation of a new portfolio tool; and a valuation model for secondary market offerings.

A contractual agreement

"It's been a two-month development process. We wanted to make improvements to our offering. The feedback we received showed there are two ways to look at a structured product. You can look at it as a contractual agreement or you can look at it as an investment," said Mortimer.

Mortimer said that his firm's research will focus more on the contractual agreement piece, which involves defining probabilities of losses and returns as a function of the underlying.

"People want to know what probability of outcome to expect, and this will be the basis of our analysis," Mortimer said.

Performance analysis

The research firm will display probabilities based on different assumptions - a standard set; low and high growth sets as well as low and high volatility scenarios, Mortimer said.

Mortimer explained that there will be a standard assumption for the growth of the underlying. From there, a certain percentage in excess or below the standard will define the high and low growth assumptions, he explained.

Another change is the switch from historical volatility to implied volatility in order to conduct product analysis, Mortimer said.

"We're moving toward implied volatility in our models so that the probabilities we show are consistent with the pricing," he said.

Credit risk

Credit risk will be a new variable introduced for the first time for the determination of return outcomes. Return outcomes will be presented with and without the effect of credit defaults from the issuing counterparty, Mortimer added.

"We currently take into account credit risk for the pricing of our products, using credit default swaps. But we are now going to use it also to determine the return probabilities," Mortimer said, adding that the new feature resulted from client's feedback.

"A lot of people have asked for it," he said.

Portfolio tool

Future Value Consultants has also developed a new portfolio tool.

"You have many portfolio tools currently available in the market. But they are set up for mutual funds. This new tool will allow a portfolio manager, an investor or an adviser to see the impact of a structured product on the overall portfolio," said Mortimer.

"We want to be able to see how a structured product affects the risk and the return of the portfolio."

The portfolio tool will comprise three components - cash, the underlying asset and a given structured product.

"On the website, the various proportions of these three components will vary from zero to 100%. So you can actually simulate different allocations to see [what] the effect of the structured product is on the portfolio," said Mortimer.

Secondary pricing

Future Value Consultants has also upgraded its independent valuation services for the secondary market.

"Our main goal is to provide independent transparency in an accessible fashion with key asset classes and to provide things succinctly and consistently," said Mortimer.

"Our approach is to take the market data we already use in the primary service and to integrate it into our pricing model. That would include, for instance, pricing of products and sensitivities to pricing parameters such as underlying asset, volatility and interest rates. Our goal is to offer a major secondary market offering by tracking each product we put out on the system," he said.

Mortimer said that the firm would publish "what we think is a fair value pricing" for secondary offerings.

Regulatory pulse

Mortimer said that recent regulatory developments have pushed forward the announced changes.

"Our StructuredEdge research services have responded to regulatory changes and client feedback to make it more relevant and complete for 2010 and beyond," said Mortimer. "One of our goals was to use a methodology that is consistent with the regulatory market practices going forward.

The upgraded StructuredEdge website is "expected to be fully launched this year," Mortimer said.

The full service primary market is set to debut in May, he added.

"We hope to have the secondary market valuation service available for the fall," he said.

Those launches dates are scheduled to be the same for the United Kingdom and the United States, he added.

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