Fair Value to the Fore

In late June, Greece closed the Athens Stock Market for two weeks, while the government hammered out a bailout deal with its creditors.

But US regulation doesn't cease to apply even in these extraordinary circumstances, and the closure of the exchange "highlights the need for fair valuation of securities that trade in Athens," said a newsletter released by data vendor Markit to its fair value clients during the closure.

Under US Securities and Exchange Commission rules, certain US-based investors, particularly mutual funds, have to provide accurate daily updates of their net asset value (NAV). In the event that a security's primary market is not functioning, as was the case in Athens, market participants can turn to fair value services for an alternative assessment of the value of their holdings.

Jason Lambert, director of product management at Markit in New York, says his company's clients are primarily concerned with being able to get accurate, daily prices.

"The way we have gone about this is to send daily notices to our customers around the Athens stock market closure and how Markit Fair Value is handling the closure," he says. "Especially in these circumstances, it is critical to provide updates, both from an analytical point of view—discussing what we have seen from a valuation perspective—but also support if their auditors or board has questions about how the particular pricing team is handling the Athens closure."

Mutual funds have to release NAV calculations at 4pm EST every day. However, the prices of securities traded in other parts of the globe might be stale by then, says Lambert. Services such as Markit Fair Value look at historical relationships between the previous close prices of foreign securities and list indicators that are trading in the period observable by the fund.

"There can be a huge disparity between the local close value and the intrinsic value of the security when a mutual fund is calculating its NAV, so this service effectively reduces arbitrage opportunity and can really protect long-term investors in mutual funds," says Lambert.

Accurate and robust models become particularly important in the event of broad market closure.

In such an event, "we rely on our models even more," he says. "Our models work by effectively extending that observation all the way back to the June 26 closure of the stock market," says Lambert. 

Markit Fair Value looks at 27 Greek securities, for which the models look at multiple risk indicators, such as FTSE futures, according to Lambert.

"But we also look at other more granular risk indicators, like the National Bank of Greece ADR (American Depository Risk), which has been incredibly volatile over the past few weeks," he says. "Being able to use those as proxies to come up with fair valuation prices for Greek securities has allowed our customers to get pricing that reflects the true sentiment of the market with respect to their Greek holdings."