Product Corner

• Valuation challenges in today's market
• JPMorgan extends Compliance Reporting Services to support socially responsible investment restriction monitoring

Valuation challenges in today's market The following is an interview with Peter Donatio, executive director, Fund Accounting and Administration for JPMorgan Investor Services. Recent difficulties in the credit markets have elevated mutual fund clients’ concerns in a number of areas, particularly around fair valuation and pricing. Given recent turbulent market conditions and the dislocation in the credit market, it’s no surprise that valuations have moved to the forefront of the mutual fund industry’s biggest challenges.

With multiple pricing vendors operating in the marketplace against the lack of a single fair value pricing standard, mutual fund clients are demanding greater transparency and more detail from their service providers in regard to the process and data employed in circumstances where fair market values are not readily available.

Add to this backdrop the pricing of derivatives and other nontraditional investment instruments, combined with the absence of readily available market quotations and increased pressure on funds themselves to adhere to tightening corporate-governance standards, and the valuation challenge facing mutual funds becomes even more complex.

A best-practice solution

The most compelling reason in favor of a standardized approach is that when the marketplace operates according to differing and inconsistent pricing procedures, pricing differences can result.

“Because the objective of fair-value pricing is not standardized or clearly delineated, the manner and degree to which funds make fair-value adjustments can vary widely between funds,” says Peter Donatio, senior product manager, Fund Accounting & Administration, JPMorgan Investor Services.

FAS 157: Now in effect

Financial Accounting Standard No. 157, Fair Value Measurement, took effect for calendar-year companies with the start of the 2008 fiscal year, offering fund companies some prospect for consistency. While the single definition of fair value as well as the established framework for measuring fair value that FAS 157 brings should result in increased consistency and comparability in fair-value measurements, FAS 157 remains complex. Compliance experts agree that many companies will need to rely on outside expertise to comply with FAS 157, especially in regard to its more complex valuations. Although groups such as the FASB’s Valuation Resource Group are disseminating guidance on FAS 157, there remains a critical need for particularized direction as fund companies embark on valuations under FAS 157 for the first time.

“Mutual fund boards and chief compliance officers (CCOs) are heavily reliant on service providers’ expertise in delivering accurate security valuations, whether the security has halted trading, broker quotes have dried up on that security or it represents an exotic derivative that is valued only on a monthly basis,” Donatio says.

JPMorgan’s approach: An amalgam of best practices

JPMorgan works in partnership with mutual fund clients to confront these challenges head-on. The firm leverages the multidimensional capabilities of the entire JPMorgan franchise to assist clients in onboarding new processes, procedures and technology platforms and applications in regard to managing and triumphing over the challenge of valuation fund firms face today.

Specifically supporting funds in managing the valuation challenge is a centralized structure. “At JPMorgan, a centralized valuation team controls all aspects of the pricing process,” says Donatio, “which leads to greater seamlessness and tighter controls.”

Greater flexibility is another advantage: “JPMorgan’s centralized pricing team works individually with clients to customize reporting solutions,” says Donatio.

With many of the bank’s competitors offering reporting from a decentralized, manual basis, or, through a one-size-fits-all approach, Donatio explains, “Our structure and our philosophy have enabled us to provide a significantly higher degree of flexibility to our fund clients, through a process in which best-practices are shared and implemented much more rapidly and seamlessly.”

A centralized pricing system:

• allows securities to be priced at the asset type or position level, or, at various intervals
• permits “second-sourcing” of all equity and, where available, fixed income securities
• lends itself to a more structured, valid and reliable process based on verifiable sources
• enhances client communication: “Our structure allows us to work very closely with clients on any halted, suspended or stale-priced security, enabling communication on these events early enough to secure a prompt decision,” says Donatio.

Expertise around FAS 157: Meeting a critical need

With the practical implications and implementation challenges of FAS 157 now at hand, fluency is critical in assisting clients in adjusting to this new regulatory guidance. Fortifying the level of consultation and expertise the bank provides its fund clients on this critical development is JPMorgan’s specific internal committee, which is dedicated to reviewing all aspects of FAS 157 and its potential impact on mutual fund clients.

“We continue to work side-by-side with our technology and auditing partners to align our systems with the new rules,” Donatio says. “Our aim is to offer our fund clients an agility and flexibility unseen elsewhere in the service provider universe.”

The global franchise advantage

The depth and breadth of the JPMorgan global franchise also translates into a competitive advantage in regard to valuation. JPMorgan’s prominent presence in most global markets provides close access to best practices in valuation from a multitude of sources, allowing for innovation and development. And, because the JPMorgan franchise is highly integrated, consistent implementation across the organization is easily facilitated.

“The markets are changing everyday, and JPMorgan’s global reach allows us greater access to assist our clients in the future challenges they face,” says Donatio. “Our ability to customize solutions for clients is a tactical way of leveraging our global reach, every day.”

JPMorgan extends Compliance Reporting Services to support socially responsible investment restriction monitoring

Through Web-based technology, JPMorgan institutional and asset manager clients will now be alerted when their portfolios are nearing or have breached limits that they have set themselves according to Environmental, Social and Governance (ESG) criteria.

The new criteria cover some 50 categories, including adult entertainment, gambling, tobacco, weapons, country ties, board diversity, corporate governance, climate change and faith values. The service can be applied to clients’ custody or accounting records, with online reporting available through JPMorgan’s existing Web-based compliance reporting application.

“We have partnered with leading institutional and asset manager clients to further advance our investment compliance reporting application to support the growing interest in socially responsible investing,” said Rajesh Kumar, executive director for Compliance Reporting Services, JPMorgan Investor Services. “The recent innovations enable us to provide market-leading compliance reporting services to assist with client-definable socially responsible investment criteria. We are now in a better position to help our clients ensure investment compliance with their funds’ principles, prospectuses and regulatory guidelines.”

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