Bank of New York Mellon Corp. has developed an automated tool that it says can put a dollar value on hard-to-value investments, such as the exotic financial derivatives based on subprime mortgages.
To date, so-called fair-value accounting for such holdings has proven both difficult and controversial, and some observers have said that accounting rules requiring companies to come up with a price has aggravated the credit crunch by forcing companies to determine the value of investments nobody is willing to buy.
BNY Mellon said its FAS 157 Reporting Package is the industry's first automated system for fair-value measurements rules, and uses rigorous pricing processes to improve the quality of the reporting.
"With the turmoil in the marketplace these days, there is not a lot of transparency or comparability of pricing standards," Kerry White, the first vice president of global product development at BNY Mellon's Asset Servicing unit, said in an interview Wednesday.
At its heart, the FAS 157 Reporting Package is a warehouse of pricing data, which BNY Mellon's clients can use to evaluate their financial portfolios in accordance with the standard introduced in November by the Financial Accounting Standards Board.
BNY Mellon began rolling out the system in March for clients' first-quarter reports, through the company's online Workbench portal for asset managers, Ms. White said. "We felt it was important to use the technology to bring that information to the fingertips of the client whenever they want, not just at the end of the year."
Denise Valentine, an analyst at the research and advisory firm Aite Group LLC in Boston, said the industry needs a standardized approach for valuing portfolios.
"You can't just have a black-box model. You need to be able to articulate what's in it," Ms. Valentine said. "A lot of these custodian banks are addressing it."
In a market where assets have been frozen because of hedge fund failures and heightened perception of risk, fair-value pricing has been blamed for making the problem worse: If no one is willing to buy an asset, regardless of its underlying worth, the value is zero.
Providing more insight into the nature of the riskier assets could calm the market's uneasiness and restore confidence, Ms. Valentine said. "That's the intention of 157, it's about bringing order and discipline to the process and making it more revealing to the end client."
FAS 157 divides portfolio holdings into three categories. Most publicly traded companies began using the standard this year, and most investors started seeing disclosures related to the new rules in 2008 first-quarter reports.
The valuing of Level 1 assets, such as publicly traded stocks, is fairly straightforward. But Level 2 assets such as corporate bonds may have a range of values, and managers may have preferences about how to model those observable inputs, using yield curves, pricing matrixes, or other indices. At Level 3 the values may be unobservable, including not only private-equity and hedge fund investments but also bank debt holdings, which simply do not trade.
BNY Mellon need not have custody of the assets being valued, Ms. White said, "as long as we're doing the administration for those portfolios."
BNY Mellon has more than $23 trillion of assets under custody and administration, and not all clients — a money manager investing only in stocks would be an example — will require such sophisticated reporting tools.
But the tax-exempt segment of its customer base has $2.5 trillion of assets, and pension fund managers have shown a greater willingness to take risks in search of better returns, Ms. White said. "More esoteric investments are really mainstream now."
