1.                  We can already obtain corporate curve information from alternate sources. How does your solution differ from what is available?

The corporate curves used in competing sources are produced from a limited number of bonds. The exact sector of the underlying bonds may differ from the normal definition of an industry sector, e.g. BMW Finance may be found under Automotive even though it is not strictly speaking an automotive company.

A lot of time and effort goes into producing credit curves that are curves rather than a number of unreconciled points.

Producing the data in the form of a matrix may also be problematical. We suggest you look at the alternatives and their results and compare them to our sample matrices.

 

2.                  There are other suppliers who are providing price information on illiquid bonds and loans. How does your solution differ from these alternatives?

These suppliers should be seen as complementary services. They will supply price information on a regular, although not necessarily daily, basis to users. If you supply a list of positions in your bond or loan portfolio, together with a list of your internal prices then the data suppliers will produce price information where it can be found that other asset holders have similar positions in the same instruments and have supplied prices. If you are the only one holding a position in a certain bond (among the database of clients) then you will not get confirmation of the price. In many cases it is necessary to have two, three or more institutions holding positions in the same instrument.

Our service enables the user to discover or confirm the prices of all those positions which have not been covered by this alternative service.

3.                  Why would we want to use this information to revalue all our bond positions?

The information we provide is not designed to be a trading tool for the Front Office. Neither is it the intention to use the matrices for revaluing all bond positions but to augment your pricing sources. If you are able to obtain accurate daily pricing information on most of your bonds then you will only need to refer to the matrices to re-price those positions for which no accurate alternative price can be obtained.

4.                  Are the derived prices from applying this spread information sufficiently accurate for us to know that we will obtain these prices in the market?

That would depend upon the ‘market’ and the conditions under which you would be selling the bonds. We are supplying a mid-market fair value not a Forced Sale Value. However, by adjusting and applying the “Liquidity Factor” you will be able to produce a reasonable assessment of what you could expect to obtain under reasonable market conditions.

5.                  How quickly can new matrices for other sectors/currencies be made available?

That is dependent upon the availability of accurate pricing for liquid instruments in the same sector/currency. Even where there is little information available we are usually able to produce matrices based on correlated data from other sectors/currencies. Obviously, this information is less accurate than where we are able to obtain data from an actively traded sector/currency.

6.                  How do you apply the “Liquidity Factor”?

The spreads in the matrices reflect a ‘liquid’ market and could be applied without adjustment if it was believed that the illiquid, complex or un-priced bonds could be traded as if they were liquid instruments. In a perfect world this might be so. However, it is known that illiquid bonds do trade at higher margins and the more complex the issue the higher the spread. We apply a factor, issue-by-issue which reflects an estimate of the variance from the plain vanilla liquid market. Liquidity Factors may be applied by the user or we can supply our estimates.

7.                  How do you verify your Liquidity Factors?

The Liquidity Factors usually cannot be verified on an individual basis simply because they are, by definition, ‘illiquid’ and therefore do not often trade. Therefore, back-testing can only be done on a sporadic basis. However, when we see illiquid instruments traded we take the price traded and compare to our estimate for that particular bond (adjusted for liquidity). If necessary, adjustments are made to the current “Liquidity Factor” for that particular bond and any others which might fall within the same classification of complexity or illiquidity.

8.                  How do you adjust the matrix or matrices to take into account re-ratings and other breaking market sensitive information?

We are constantly checking for upgrading/downgrading movements and are always monitoring issuers put onto Credit Watch. Using the averaging techniques for credit ratings referred to above we move ratings that are changed during the normal course of the daily updates.

9.                  This solution is for us a new departure, how will our auditors view this new methodology?

We are happy to discuss this solution with your auditors if you so require. We can show them a mechanism and process for obtaining price information that is reliable and as accurate as possible in the market.

10.              If we adopt this solution how can M2M guarantee the timely provision of the matrices we have specified?

We prepare the matrices during the course of the day for distribution prior to 5pm (London time) so that the information is available prior to running end-of-day processes. In the event of a failure of the internet or networks we are able to fax or telephone the information. We are also able to use alternative means to communicate the daily matrices via systems in other locations.

11.              We do not have the pricing tools necessary to apply the credit spread information you are supplying. Do you have a solution which enables us to apply the credit curves to exotic or complex bonds?

We are able to supply pricing models for the re-pricing of exotic instruments either on a one-off basis or by generic models. These models will enable you to apply the credit spreads to derive the prices. However, in most cases it will be necessary for the client to create more data, for example, volatility surfaces incorporating smiles, correlation tables. We can also supply this information on a daily or regular basis.