Xenomorph’s Independent Price Verification solution is an out-of-the-box module for IPV and price reconciliation requirements. It comes preconfigured for standard Independent Price Verification workflows and can be easily customized to match specific requirements.
What is Independent Price Verification (IPV)?
Independent Price Verification is an increasingly important process requirement to support finance and risk functions across a wide range of financial institutions. The core IPV process demands that internal prices are verified against independent third party sources.
Basel II Prudent Valuation Guidance defines Independent Price Verification as “the process by which market prices or model inputs are regularly verified for accuracy. While daily marking-to-market may be performed by dealers, verification 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)”.
Significant discrepancies between the internal and independent prices above a certain threshold then trigger an investigation. It is important to note that this threshold is typically set in relation to the exposure that a firm has to a given asset (or liability). That means as part of the price verification process, firms need to collect up to date information relating to exposures (delta, vega and cash positions).
Any ensuing price investigation typically requires a controller to research circumstances that might have legitimately caused the discrepancy (for example – a distressed sale in the market causing a temporary blip in the ‘independent source’). The independent nature of price verification refers to more than just the independence of the pricing source. For example, under the EU’s Capital Requirements Regulation (CRR) it also refers to the individual in charge of the process, specifying that the verification process “shall be performed by a person or unit independent from persons or units that benefit from the trading book.”
In order to meet these requirements it is important that firms maintain strict role-based access control over the verification process, as well as process auditability and maker-checker controls to help safeguard and demonstrate compliance.
Xenomorph Independent Price Verification Solution
The Xenomorph Independent Price Verification solution provides an automated framework for managing IPV workflows. It enables a strong governance model with clear rules and centres of competence – enabling straight through processing, the handling of exceptions by the correct experts, and clear oversight of the health of the IPV process.
End of day positions and prices are imported from trading systems and broken down by asset class.
External reference prices are then sourced for comparison with prices used in the front office systems.
Reference prices can be sourced from:
- Multiple sources (e.g. Bloomberg, Reuters, Markit, Super Derivatives, etc.)
- Specialist contributors (e.g. direct exchange,
- Inter-dealer broker, evaluated pricing, etc.)
- Interpolated using Xenomorph curve functionality
- Inputs from internal/customer models
The solution compares and tests the front office prices with the reference prices. Multiple pre-configured checks are available or these can be configured to suit internal requirements.
These results then enter an exception management process that, being rules-based and configurable, can prioritise and automate responses to align with expected business process and internal policy (e.g. exceptions ranked according to the size or sensitivity of the position).
Additionally, process optimisation features enable firms to optimise thresholds and manage the number of exceptions.