Attempting to take some of the risk out of long-dated trading so companies don't lose the shirt off their back from being on the wrong side of the market, IntercontinentalExchange Inc. (ICE) announced Wednesday that it has recently expanded its ICE Data Market Price Validation (MPV) service to include more products and data points.
The ICE Data MPV service provides benchmarking and validation of "nonobservable" market prices for long-dated over-the-counter (OTC) swaps, options and exotic derivative products, ranging from five to 20 years. During the May 2007 month-end valuation, the MPV service saw record participation from 34 of the world's leading commodity and energy trading firms including investment banks, utilities and hedge funds, the electronic energy marketplace and soft commodity exchange said.
"The ICE Data MPV service helps our global subscriber base fulfill critical risk management requirements by providing independent, external validation of market prices, where traditionally companies had to rely on stand-alone, independent pricing models that can result in a material mispricing of a portfolio," said Martin Wadhwani, managing director of ICE Data. "The pricing of complex derivatives can be challenging, especially for products where inherent volatility can result in rapid changes in value at risk, or in niche markets with limited liquidity or access to independent valuations. In response to customer demand, we are continuing to add new features to this vital tool for monitoring risk and valuing derivative portfolios."
Being blind-sided by unexpected energy market swings is nothing new. From the hefty losses last year that collapsed hedge funds MotherRock and Amaranth (see Daily GPI, Aug. 4, 2006; Sept. 19, 2006; Sept. 27, 2006), to the Bank of Montreal's difficulties this spring in wrong-way options deals (see Daily GPI, April 30; May 21), companies have recently been finding out that their trading books are not adequately risk managed.
In response to the increasing demand for independent verification of portfolio valuations, ICE Data said it recently enhanced the monthly MPV service by adding a twice-monthly valuation service and by expanding coverage to include an extensive list of swaptions, crack and spark spread options. ICE Data MPV participant companies submit their forward curve and option prices on a monthly basis for more than 200 widely held global contracts such as natural gas, crude oil and refined oil products, electric power, ethanol, corn, sugar, base and precious metals, freight, natural gas liquids and commodity index contracts.
The exchange said ICE Data then follows an audit process and averages these submissions to create consensus forward curves and option values that are provided to MPV participants. Participants then use these consensus forward curve and option values to verify internal valuations and mark their month-end portfolios in accordance with the Financial Accounting Standards Board and International Accounting Standards recommendations with respect to the treatment and valuation of derivatives.
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