Download Better portfolio evaluations – quantitative analysis to improve

Financial Accounting
Advisory Services
Finance and accounting
executives are having
to use increasingly
sophisticated techniques
to value their companies’
financial instrument
portfolios. This is a
complex area, and the
risk of error is high.
However, our team of
experts can advise you.
We have tools and
methodologies to make
your valuation models
and procedures more
reliable, improving your
wider control environ­
ment and helping you
respond to regulatory
and accounting change.
Better portfolio evaluations –
quantitative analysis to improve
accuracy and reliability of your
financial instrument
valuations
New accounting standards and more demanding regulatory requirements are increasing the need for
finance executives to ensure that their use of quantitative and valuation techniques is appropriate
and accurate. EY has created a range of analytical tools and services to help you deal with what is fast
becoming one of the most complex and demanding areas of financial reporting.
Our experienced teams, assisted by financial engineers and quantitative analysts, can
provide support on a range of challenges related to the valuation, classification and
analysis of financial instruments – from straightforward derivatives, through to highly
complex hybrid products. We have developed various techniques to independently analyze
your financial portfolio, and benchmark your prices and their related pricing processes
and controls.
With our proprietary tool – Visual Portfolio – we can verify prices using multiple data
vendors and models. We can classify your financial instruments according to IFRS 9,
based on your data and data from the market, and assess the impact on your balance
sheet of any subsequent reclassification. Our tool will also create the audit documentation
you need and highlight the issues that really matter.
Under IFRS 13 and the Capital Requirement Regulation, companies need to pay closer
attention to exit prices and valuation adjustments. Best-practice finance departments
use techniques such as credit valuation adjustments (CVA), debit valuation adjustments
(DVA) and multi-curve valuations, including the consideration of overnight index swaps
(OIS), to value their portfolios. We can help you to find and adopt the best valuation
solutions for your business, reflecting its size, the complexity of your portfolio and the
impact change would have on your existing processes.
Visual Portfolio database
Market data
Vendor 1
Vendor 2
Check of
quality,
consistency
and
completeness
Client data
Consolidation,
data enrichment,
processing and
rules engines
Ready-to-use
analysis
140
Preisanbieter I
Preisanbieter II
120
100
Expert
review,
charts,
tables and
graphs
80
60
40
40 Mio
20
0
0
20
40
60
80
100
120
140
Preis Bloomberg in Prozent
20%
Financials
120
Anzahl
18%
16%
100
Durchschnittspreis
14%
12%
80
10%
60
8%
6%
40
4%
2%
20
0%
0
C
C-
Portfolio data
analytics
modules
DD D
D+
Client data
and
CC BC+
CC
+
CC
Data
warehouse
Output
Preis C-Bank
Input
AA
A
AA
+
AA
AA
A+
Visual Portfolio –
our valuation and
benchmarking tool
Our Visual Portfolio creates robust pricing analytics and risk measures for security
portfolios of any size. Using statistical analysis, we identify outliers within fair values.
The visualization of the resulting valuation risk clearly highlights the portfolio clusters
and single assets that require subsequent analysis and possible follow-up action, such as
a revaluation of individual securities. We can also monitor security portfolios over time in
terms of performance, findings, cash flows and risk distribution.
A
ABB
B+
BB
B
BB
BBB
+
BB
BB
B+
Valuation and benchmarking
Financial
Corporate
Sovereign
Mortgage
Equity
Vendor n
Market data
Workbook and
database format
Our Visual Portfolio provides tabular and visual analytics on the following topics, which
we can use to benchmark your price and risk management processes and assess your risk
models:
•Quality assurance regarding portfolio data, such as whether pricing is consistent
•Identification and quantification of systematic valuation risks, based on pricing ranges
and statistical evaluation
•Fair value deviations on different levels, such as single asset, asset class or rating clusters
•Fair value hierarchy according to IFRS 13
•Risk factor attribution
•Ratings distribution
•Market liquidity
•Country and GIIPS (Greece, Italy, Ireland, Portugal and Spain) exposure
•Concentration of asset-backed securities (ABS) by vintage
Overall benchmark
Coverage nominal EUR 50.9b – 97 % of total portfolio
Sovereigns
Financials
Corporates
ABS
Munis
Visual Portfolio:
flexible, granular
analytics communicate
a clear visual message
Classification according
to IFRS 9
Our Visual Portfolio tool is based on a translation of the principle-based IFRS 9 standard
into a set of criteria. These criteria are incorporated into decision trees, enabling us to use
market data and data from your company to classify instruments.
The tool can also process loans and asset-backed securities (contractually linked
instruments). To perform the look-through tests required by IFRS 9, we use advanced
techniques, such as text data mining, and incorporate the results in our Visual Portfolio
database.
Our approach to understanding your classification under IFRS 9 has three stages:
•Stage 1
Visual Portfolio IFRS 9 classification runs a set of rules on your portfolio, with three
possible outcomes for each security: fair value, not conclusive, no indication of fair
value and amortized cost (NioFV).
•Stage 2
The results generated in stage 1 are reviewed and verified, with any gaps closed.
•Stage 3
The results are consolidated into a final conversion report.
Migration analysis –
impact on balance sheet
Our Visual Portfolio analysis combines a valuation and benchmarking exercise with a
classification of instruments according to IFRS 9, enabling us to look at the impact that
a move from IAS 39 to IFRS 9 has on a portfolio. It also considers volatility risk, yield
and balance stability to optimize the resulting portfolio classification. The results allow
comparative scenario analyses concerning former IAS 39 and new IFRS 9 balance values.
IFRS 13 Fair Value
Measurement –
CVA, DVA and OIS
Changes arising from market practices,
regulatory demands and IFRS 13 require
financial institutions to reconsider how
they value financial assets and liabilities for
regulatory and financial reporting purposes.
Depending on the composition of your
portfolio, this could have a material impact
on business processes and your key financial
metrics, including regulatory capital. We
can assist with modeling, as well as the
calculation and documentation of procedures
based on CVA, DVA and OIS. Besides being
compliant with regulatory and accounting
requirements, our approach puts a high
priority on efficiency and valuation reliability.
We can assist you to:
•Adopt a multi-curve approach and
OIS discounting
•Update risk models to reflect
multi-curve sensitivities, basis risks
and OIS discounting valuations
•Manage LIBOR-OIS spread risk and
EY | Assurance | Tax | Transactions | Advisory
About EY
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and advisory services. The insights and quality
services we deliver help build trust and confidence
in the capital markets and in economies the
world over. We develop outstanding leaders who
team to deliver on our promises to all of our
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for our clients and for our communities.
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Ernst & Young Global Limited, each of which is a
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­Limited, a UK company limited by g
­ uarantee,
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© 2013 EYGM Limited.
All Rights Reserved.
EYG No. AU1742
SRE 0713-145
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cross-currency basis risk
•Overcome collateral management and
optimization challenges
•Consider fair value measurement issues
•Deal with hedge accounting
When complex accounting changes create
sophisticated quantitative challenges, it
is important that finance executives have
confidence in their valuation processes.
Our Visual Portfolio tool gives the finance
function all the benefits of a customizable
solution, while aligning their valuation
approach with the kind of methods
that represent best practice in related
functions, such as risk management,
helping to enhance the internal control
environment more widely.
Contacts
Dr. Karsten Füser
Global/EMEIA FAAS Markets
[email protected]
+ 49 711 9881 14497
Bernd Georgi
Executive Director
[email protected]
+ 49 6196 996 15957
This material has been prepared for general informational
­purposes only and is not intended to be relied upon as
­accounting, tax, or other professional advice. Please refer
to your advisors for ­specific advice.
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