Totem widens equity derivative valuation service

Despite being commonly traded, dealers’ pricing of cliquets can prove contentious. Cliquets are equivalent to a series of forward-starting, at-the-money options, but with a single premium determined up front. Cliquets are embedded in several popular retail structures such as accumulators - capital protected structured notes with embedded options.

Totem’s service seeks to bring greater price transparency to the market by generating consensus prices for a variety of OTC contracts. “A number of clients were very keen for us to extend our service to include cliquets, so we began to do so in March this year,” said London-based Edward Barlow, co-founder of Totem Market Valuations.

Capital-protection is on investors’ minds at the moment, so products where clients sell capped cliquet puts to dealers, or purchase floored cliquet call spreads from dealers are relatively popular, said Herman Schoenmakers, a Paris-based equity derivatives trader at BNP Paribas.

The broad idea behind Totem's service is straightforward: dealers that are signed-up to its service submit price data on specified derivatives. The information is analysed and, after two rounds of sifting, any outliers queried or thrown-out. An average is then calculated and sent to the dealers. This information is useful because it allows dealers to see how their view of correlation, volatility and the smile – the variation of an option’s implied volatility with its strike price - compares with the market’s view.