Transcription:
Lynne Funk: (
Hello everyone. And welcome to another Bond Buyer podcast. I'm Lynne Funk, Executive Editor at The Bond Buyer. And with me today is Stephanie Sparvero, global head of BVAL evaluated pricing at Bloomberg. Welcome Stephanie.
Stephanie Sparvero: (
Hi Lynne. Great to be with you again.
Lynne Funk: (
Yes. Great. Thank you. I think we chatted about probably a little more than a year ago and wow, quite a different market than we last chatted. You know this market has been pretty rough this year, a dramatic difference from the rather stated environment of 2021. So I guess just to start out, would you wanna maybe talk about how, how has, how have things changed? How has Bloomberg, you know, adapted to this more volatile market so far in 2022?
Stephanie Sparvero: (
Of course, this is definitely not 2020. As the fixed income markets are coming out of these historic lows in both rates and volatility, you now are basically engaged in a marathon of volatility on a daily basis. Whereas back in 2020, there was that initial four month period, but then things kind of quieted down. So this macro environment is definitely not doing us any favors, unfortunately, uh, from the political turmoil, inflation and rate height concerns, we're all having a pretty bumpy ride, but bringing it back to BVAL I would say this, pricing providers can look pretty similar when there's low volatility, but in a volatile market. My goal has really been to position us to be even better. So that since 2020 we've really been working on scaling, um, both our quality and our client experience. So when we think about the client experience, how quickly can we turn around pricing challenges, even when there's a spike.
Stephanie Sparvero: (
And also we definitely wanna be responsive to all the market data that we're seeing with respect to our pricing. And so that's really what we've been focusing on. And I think it goes without saying that the focus on transparency when markets are becoming more volatile is really key for our clients. So we are keeping high that standard of detail and, and explaining every step in evaluation process so that we're providing insight into all the inputs and the methodologies that we use so that firms can justify how the valuations they're using are derived. And then of course, people on the call might know about our proprietary metric, the BVAL score. It's still there showing the relative amount in consistency of market data used to generate each of our pricing. So I guess to sum it up when there's uncertainty, we want to be able to respond quickly to our clients and allow our clients to clearly understand and explain to their own stakeholders what's behind our prices. And when clients demand more from us, we just wanna meet them where they're at. And so, so far we're doing a good job through April. I think we've seen really good progress and delivery for clients.
Lynne Funk: (
So Stephanie, you took over BVAL I believe just before COVID hit and I know you, you touched on like what a difference 2020 is to now. So do you have any particular lessons or insights that you took away from the time in 2020 to how you're addressing this sort of, I think you called it a marathon market that the changes that are going
Stephanie Sparvero: (
Sure. So definitely in 2020, we, as well as all pricing providers faced a really hard challenge with respect to both the increased amounts of incoming data on the front end of pricing, and then the significant uptick in challenges and on the back end of pricing. So following that kind of four month period, when things were, were very tight, we invested in our platforms to ensure that we could handle really large scale swings and volatility, both in data demands and also challenged demands. And so, as a result of these months, we've been able to navigate this pretty seamlessly. I'm big on talking about order of magnitude. So when we think about the normal pricing business pre-COVID, that March to July period was really like a 30 times multiple of, of normal. So since then we've been building ways to navigate big swings.
Stephanie Sparvero: (
And just to contrast, two years later, what did March look like? It was really like a two times multiple. So one of the things that I'm really excited about is that our quality measures all stayed really high for our clients and our turnaround time and challenges was unchanged. So for people who had had some experiences with delays during 2020, we now get probably 80% of our challenge answers out in about 15 business hours. And that was true, even in that two times uptick for the Russia crisis. So I guess to sum it up, we were basically in lab mode with just some thoughts on how to transform that experience back in 2020, and the investments we've made since then are showing us that we're on track to do that the right way.
Lynne Funk: (
Interesting. So are you hearing in terms of sort of client request, what are you getting it's have things changed over the, you know, from 2021 to now?
Stephanie Sparvero: (
Sure. So we think job one is to really be on top of the market pricing and provide a very high quality, uh, output in evaluated pricing. Then if we're able to handle that and the challenge flow, then we can think about the next steps in product development for our clients. So some things that we're hearing right now are that clients are really looking for further customization to make their lives easier, ranging from something more kind of day to day of. Can you standardize the periodic due diligence that we do with your team of through, how can I get more customized data on what is affecting my portfolio? And we're just really excited to engage with our clients about their whole process, because it means that we're not just another pricing provider to them, but one that's really providing essential information is they navigate these tough markets.
Stephanie Sparvero: (
And as far as industry themes, I think everyone's on the lookout for greens, and we want to be able to pick up on end pricing differentials as they occur at the end of April. We were seeing probably a small premium there, maybe a few basis points. So we're really monitoring the situation and developing our thoughts on the best approach there with only about 3% of muni funds dedicated to that space. There's definitely a supply demand imbalance right now, as ESG issuance has outpaced that allocation. The one thing you can count on is change in that space with fundamentals as they are right now. And in addition, again, the overall macro environment has become really challenging for our clients and they want to be able to combine not only our bond pricing information, but also our curve information. So I think that move to, yes, you are always going to need the underlying bond, but can you get some shorthand ways of thinking about investment and risk management work through our curves?
Stephanie Sparvero: (
Luckily it looks like in the markets, the pandemic effects on issuers have been muted to date and cash looks okay for those guys, but investors are now looking at spread widening, reflecting broader economy's health. So munis are providing less volatility than other asset classes right now, but definitely the rise in treasury rates than the lack of sentiment from tax exempt, investors are dominating returns. And we just wanna make sure that we are taking all of these factors into account in our pricing to provide the best quality product through this period. And it's not easy. That's why we have such a great team, across our product, our evaluators, our engineering, and our quantitative folks. We really dig in and, uh, make sure that we're just top of market across all those metrics.
Lynne Funk: (
Yeah. It's, it's, it's funny. Every, I feel as though every week we're, we're, you know, here's some strategist saying there there's a corner it's coming, turning it and it just hasn't appeared to have happened yet.
Stephanie Sparvero: (
I think we start, I think we started talking about doing this a couple weeks ago and definitely things are changing on a weekly basis.
Lynne Funk: (
Right, right. That's why, you know, that's why I had to get some questions to, you know, sort of last minute to prepare for this I'm like, cuz it's you can't, you can't prepare a week ahead.
Stephanie Sparvero: (
No, I don't think anybody can, not us for the podcast, but not people in seats either who try to get through this.
Lynne Funk: (
Right. So what kind of new features does, does BVAL have? I mean, I know that that this been over a year, so can you kind of give us an update on what what's new since we last spoke?
Stephanie Sparvero: (
Sure. So one exciting thing for us is as some of your listeners might have seen just today, we announced that PFM, the nation's largest independent financial advisor has actually selected our pricing service as the primary source to guide their bond advisory model. So PFM is going to be using our AAA municipal curves for transparent and objective market information to streamline the financing process for clients. So this move from really the secondary markets to the issuance side is really exciting for us. And that's something else that we've been hearing from clients that people are really looking to, uh, move to triple A on that side. So that that's a great development. And then more on the product focused side, people are probably aware of this Reg two, a five, it's been a pretty interesting regulatory year. So BVAL by virtue of our transparency has really been able to create some new products out of that to support fair value leveling of assets.
Stephanie Sparvero: (
So they're instrumental in meeting that SEC Rule 2a5 requirements that go into effect later this year, I believe in September. So we're always looking out to help our clients who don't see really a division in those regulatory and transparency requirements and what BVAL is providing. We have kind of in response to that scale question that I was talking about, we now have the facility to allow our clients who are really challenging in high numbers on a daily or weekly or monthly basis, a direct AI tie in. So if you are a client who wants to hit computer to computer, instead of creating spreadsheets, we allow you to do that. And back to that point of client customization, we've made it as easy as a few hours of work to just take our off the shelf solution. But also we are willing to work with clients who want to do a bigger integration across their entire enterprise, so we're excited about that. We think it provides a lot of value to them and to us, and then really on the muni specific pricing quality side, we provide option adjusted bid yield. We are compatible with market adoption of new risk free rates. And we've definitely been working on enhancing quality measures with respect to new issues forward rates and swap curves. So we've been pretty busy.
Lynne Funk: (
Yeah. Well we're gonna take a short break, but we'll be right back. We're gonna talk a little bit about bond, pricing, transparency, machine learning and electronic trading, some of the future. So we were just talking, you know, about some new new products that you have, but can you talk broadly about bond pricing transparency? You know, it's definitely, as we talked, as you mentioned before, it's, it's probably the main, um, top consideration in vendor selection, particularly over, uh, the past few months, you know, how are firms accounting for this differentiating their trading strategies, advancing their workflows and how do you fit into that? What are you seeing?
Stephanie Sparvero: (
Sure. It's, it's really interesting and maybe gratifying for me to see transparency being talked about everywhere. Uh, it's always been very near and dear to the core of BVAL. So we're glad to see that everyone else thinks it's important as well. So as that need for all parts of an organization to understand the price given grows in part due to regulations. But I think also in part just to due to a, a move towards best practices in the industry, our focus on transparency continues to be very valuable for our clients. I think I mentioned before that we detail our valuation process, the inputs, the methodologies, and provide an easily digestible, uh, source of information for our clients. And our aim is really to remain close with our clients in how they want to use that data, uh, when it comes to differentiating trading strategies and advancing workflows technology is really crucial for that.
Stephanie Sparvero: (
So, over the course of my time at Bloomberg, I think our client's view on the role of data and technology has evolved today. Clients really see data and technology as central to delivering actual bottom line results, um, augmenting their markets expertise and building a broader interest rate view and relationships. This is definitely underscored by how common it is for our clients to make large strategic investments in technology. And also similar to us to have dedicated quantitative staff, as well as technically trained individuals in the trading investment functions. It goes without saying something that's cross current in the industry is really understanding data science and using that to best advantage. I think if you had thought about the industry like 10 or 15 years ago, it was much more things would trade on a relationship basis. And now the fundamental analysis is just so much a part of everyone's day.
Stephanie Sparvero: (
And that really blends well with BVAL and our methodology and a data driven approach. I think that all this is kind of an important future path for the industry because approaching data and technology as a driver of innovation, not just efficiency is likely to differentiate, market participants for some time to come. And just overall, we've seen this question about real time observations. We've definitely seen an uptick in the usage of our triple a curve, which I think is reflecting really well, that trend of wanting more real time information in the market.
Lynne Funk: (
So let's take it a little step further, machine learning, the rise of that in the muni industry, you know, how are firms are using more machine learning technologies and pricing applications to sort of capture the full spectrum of what could impact bond pricing. And I guess, how is BVAL testing any new processes? Have you incorporated any so far in 2022?
Stephanie Sparvero: (
I think it goes without saying that you need to always be researching new ways of pricing for clients and BVAL has always had advanced quantitative progressions and other approaches and our philosophies that any experimentation in machine learning needs to be rooted in observable market data. So when we think about machine learning or AI and fixed income valuations, it comes back to three core principles. Is it explainable? Is it transparent? And does it actually deliver better results than a rules based approach? So some complications that we see as we research these topics is that a fully black box technique kind of lacks the transparency that our clients really would prefer. And also from a pricing quality standpoint, you can potentially lose precision in the tails of your pricing distribution. So we're really sensitive to that, cuz we as a pricing service price all bonds every day.
Stephanie Sparvero: (
So any complication that our clients would experience in quality or transparency would we think be a step back from what we're putting out there today? That said, we always wanna be at the forefront of technology and experimentation, but at this point we really prefer to think incrementally about how to incorporate these techniques into what we're doing. I think on the client side, definitely what's driving some ML based pricing demand is that urge to process information more quickly and be able to find alpha when profitability is waning, which it kind of is right now due to the macro factors that need for us just has to be weighed against the valuation and capital need. That's satisfied by observable data. So we have clients across the full spectrum of fixed income and while you can't be all things to all people, different clients are going to wanna have different things and different appetites for optimization across these different levers.
Stephanie Sparvero: (
So we wanna be responsive to that, but in a very data driven and transparent way, I think in addition, you need to have exemplary ethics and governance around building these models, especially in light of the regulatory framework, that that's really being enacted across the fixed income space. And so I guess just sum it up. There's definitely a bright future for these sorts of techniques. I think you should always be thinking about innovative ways to incorporate them, but to incorporate them well requires significant data, access, and also just a, a clear knowledge of bond pricing to implement them well so that you don't get caught in those tails or you don't have an optimization that doesn't relate to the real life experience of people investing in the bonds,
Lynne Funk: (
I guess, to, to tack onto that. Can you talk a little bit about, um, the growth of electronic trading and, and perhaps how that fits into you need accurate valuations are, are essential for E trading platforms to perform, um, in terms of, from your perspective, what should traders prioritize when evaluating a platform? And the challenges behind electronification, you know, is particularly as many clients believe it's hard to group bonds in a way that minimize its human intervention. And then, you know, I think that bigger question in overhanging, thisis you need that human element, particularly in Munis. So very long question.
Stephanie Sparvero: (
No, it's okay. There's nothing easy about fixed income. So long questions is where it's at. So definitely in the muni space and I think across fixed income that DEC that final decision to trade is really a culmination of an analytical process. That definitely to your point requires human intervention. So in DVA, when we think about it, we're trying to mirror what our clients are doing, which is how can you have the best of human expertise supplemented by the right tech and data strategy. So that, especially in times like these, the end user is able to understand risk and volatility in a way that makes sense to them. So just more broadly fixed income markets are definitely evolving and continue to evolve with the introduction of streaming quotes, ETFs, etra, and just this ever increasing compliance and regulatory requirement on everyone. But, the pandemic definitely accelerated electronic trading and increased the appetite for innovation.
Stephanie Sparvero: (
So firms definitely want to access liquidity through new trading protocols or expanded integration with solutions providers. We're very happy for that integration point because that is something that we look to provide. Um, and then just looking ahead, there's definitely gonna be increased demand for solutions that effectively use that data and help inform trading decisions and to overlay that intelligence across a more electronic workflow. I think when evaluating a platform, clients should definitely look for that ease of integration with their trading and pricing workflows. Again, you wanna make it easy for someone who understands markets to utilize the best available information to trade in a timely manner, to take advantage of opportunities that they're seeing in the market. And so I guess the best trading platform would be one that makes it easy to cover the spectrum of human intervention from markets that almost have none. And you're just able to electronically punch a ticket versus those where you're able to set up an auto bidder, um, under, you know, a certain risk threshold. And you feel comfortable with that. So depending on these client preferences, the platform should be able to create a space for effectively managing that human data and technology resource.
Lynne Funk: (
Great. Thank you. Thank you, Stephanie. I guess is, is there anything else that perhaps we didn't touch on that did you'd wanna leave with listeners?
Stephanie Sparvero: (
So I think it's a really complex time. And in this situation I would hope that more and more clients would be looking for a provider who is innovating with them and really understands what they're going through. I think the feedback from clients on how we're doing has been really great. And so we just look forward to being able to create new data and new ways of thinking about pricing for our clients.
Lynne Funk: (
Great. Well, thank you very much, Stephanie for your time and thank you to the listeners for tuning in. Thank you very much, Stephanie.
Stephanie Sparvero: (
Thanks, Lynne. Always great to hear from you and talk with you.
Lynne Funk: (
All right. Cheers. Thank you for listening to this bond buyer podcast. I produced this episode with audio production by Kellie Malone. Special thanks this week to Stephanie Sparvero of Bloomberg BVAL. Rate us, review us and subscribe to our content at www.bondbuyer.com/subscribe. From the Bond Buyer, I'm Lynne Funk. And thank you for listening.