Given that trading of OTC products (e.g. bonds, interest rate swap) are conducted bi-laterally (between two parties) rather than on a centralized exchange, receiving real-time pricing information poses a challenge. To a large extent for liquid instruments, the data is available and the pricing is fairly transparent and is largely influenced by the trader’s position in the underlying trading book. However, for illiquid instruments traders have to rely on relational prices and apply their experience to determine the quotable price which is executable and also provides a margin to cover the position risk. Having very few real-time prices available in the market for this illiquid OTC product, the trader will be forced to calculate a hypothetical price based off combining the prices of comparable products and some benchmark data points. These illiquid instruments can be a part of products like mortgage-backed securities, corporate bonds, government bonds, U.S. federal funds, emerging-market debt, bank loans, broken dated swaps and many other derivatives, private equity, and real estate, that tend to get traded in OTC market.
Using Cognitive Machine Learning, historical data for this illiquid OTC instrument, and real-time data available for comparable instruments, Synechron’s Cognitive Machine Learning solution for OTC Price Automation derives a theoretical OTC price. Over time the OTC Price Automation can yield a predictable real-time OTC price for traders to use in their models or use for auto-quoting. This serves as an important step towards comprehensive integrated valuation for illiquid OTC products, moving away from an environment where the price is estimated by the trader and toward a predictive model where the price is determined by various real-time & historical factors: benchmark swap curve, benchmark futures curve, benchmark economic indicators, comparable OTC products etc.
Key features and benefits include:
To learn more about our Artificial Intelligence solutions for Cognitive Machine Learning and the work we’re doing email us at firstname.lastname@example.org
How we are innovating
Forecast values for the current day and computing the liquidity coverage ratio using historical, high-quality liquid assets, inflow, outflow and net cash flows.Read More