This Rieger Report Spotlight features an in-depth interview with Frank Dos Santos, Managing Director of Fixed Income Pricing and Reference Data at IHS Markit.
Rieger Report (RR) – What was the driver for IHS Markit to broaden its bond pricing offering to include the municipal bond market?
Frank Dos Santos, Managing Director of Fixed Income Pricing and Reference Data (IHS Markit): IHS Markit has been the gold standard for CDS and leveraged loan pricing since 2003 and many of those same clients had expressed concerns that there were only limited number of options for high quality vendor prices for their cash bond holdings. IHS Markit’s municipal bond pricing service was launched in 2010 with the goal of providing accurate prices alongside liquidity and transparency metrics and now provides valuations for some of the largest asset managers and dealers of municipal bonds. IHS Markit had continued to invest in the business since inception, adding coverage to over 100,000 high yield municipal bonds, which made them well positioned to fill the void created by consolidation of the municipal bond pricing industry in 2016.
RR – What types of customers use municipal bond pricing and how do they use them?
IHS Markit: Our municipal bond pricing client base includes some of the largest investment banks, asset managers, and accounting firms. The prices are typically used in the process of creating NAV results for 40 Act Companies and internal pricing verification of in-house valuations of holdings.
RR – Have there been hurdles to achieving a complete municipal bond pricing service and if so, how did you overcome them?
i.e. overcoming or using retail block size trades in bond pricing
IHS Markit: Our technology has been designed to first identify the most accurate and reliable source of market color, so our experienced evaluators can make the final decision on how to price a bond without sifting through noise in the form of certain off-market quotes/trades. This process allows us to collect and process over millions of market data inputs on a daily basis.
RR – With munis being a complex market of tens of thousands of issuers both large and small and the vast majority of those bonds do not see any trading activity, how does IHS Markit determine a price for each bond? (Opportunity to discuss methodology)
IHS Markit: The challenge with municipal bonds is that less than 1% of the tradable universe is quoted/traded on a given day, which is a challenge also encountered by investors. Our core methodology is designed to mirror the same thought process that a trader or portfolio manager applies to providing an actionable bid/offer to their counterparties. Our methodology includes using ground truth market color to extrapolate the prices for comparable securities with little-to-no trading/quote activity. Evaluators are trained to determine any changes in comparability across issues to arrive at an accurate market price.
RR – How does IHS Markit track the accuracy of its bond pricing? Do you publish accuracy statistics?
IHS Markit: We are constantly testing our prices on both a proactive and reactive basis versus intraday trades. In addition, we provide customized back testing analyses based on a clients’ holdings with the ability to choose the trade size threshold for the known trades.
RR – What checks and balances does IHS Markit employ to help ensure its municipal bond pricing is reflective of the current market place?
IHS Markit: Unchanged price/staleness checks, price movements (tolerance), new issuance monitoring, override reviews, data completeness checks, price challenge data review and all evaluator changes/comments centrally stored for audit purposes.
RR – Independence of any bond pricing provider is critical for integrity of the prices. How does IHS Markit ensure the independence of it’s bond pricing?
IHS Markit: Every aspect of the pricing and price challenge process is auditable. Every change that can affect a price is stored with a username and timestamp to enable management to monitor independence. In addition, all IHS Markit employees are required to pass an online examination on insider trading, anti-bribery, and various other legal/ethical modules.
RR – If a market participant has a question about a bond price or simply thinks it may be too high or too low relative to the market how do they interact with IHS Markit’s bond pricing professionals? (referring to the challenge process, independence and documentation of those inquiries)
IHS Markit: All price challenges must be submitted electronically via email or our web portal. The inquiry then flows into our Data Challenge System (DCS), where each step of the process is timestamped and correspondences are stored in the system. We provide unfettered access to our global evaluation and management teams and offer “deep dives” on individual bonds to explain our pricing approach for a given security.
RR – What information about your pricing service is available for fund board of directors, pricing committees or compliance teams?
IHS Markit: We offer full support for every stage of a client’s due diligence process with in-person presentations to pricing and valuation committees, boards of directors, controllers, risk management and compliance groups. We provide customized responses on hundreds of client due diligence questionnaires every year. In addition, we share our pricing methodology and excepts from our annual SSAE-18 certifications, as well as back-testing reports for sectors with available trade prices.
RR – Where can I find IHS Markit’s municipal bond pricing?
IHS Markit: We are accessible on major portfolio/risk management platforms and the largest fund administrators, this includes platforms such as Investortools, for example our curves are available on EMMA. Contact firstname.lastname@example.org if you’d like to learn more.
Frank Dos Santos, Managing Director of Fixed Income Pricing and Reference Data
Frank Dos Santos is Managing Director, Fixed Income Pricing and Reference Data at IHS Markit. Frank has over 30 years of financial industry experience and has held multiple roles in pricing fixed income instruments. He joined Markit in 2016 after 13 years at S&P Global, most recently as Global Head of Oversight, Methodologies and Analytical Excellence in the Securities Evaluations division.
Prior to S&P, Frank was Senior Vice President in the Pricing Policy and Control group at Citigroup, responsible for assessing bond trading inventory and valuations. From 1998 to 2002, he was Vice President and Head of the Taxable Fixed Income Pricing Group at Merrill Lynch, responsible for pricing global corporate bonds and structured products. He began his career in 1987 as a structured products pricing analyst at S&P. He received his BBA and MBA from Iona College.