The goal of the FISD's closing price project is transparency and full disclosure of how closing prices are created and calculated by equity exchanges -- and processed and displayed by end-of-day pricing vendors -- on a global basis.

To address the issue, FISD is in the process of surveying exchanges to identify the price types disseminated by exchanges, define all the attributes of closing price in a consistent manner, describe the local pricing conventions used for portfolio valuation and identify any special characteristics used in computing value. The result of the project is a web-based reference database searchable by exchange and category.

Note: Stock exchanges wishing to be included in the database should download and complete the Securities Exchange Closing Price Data Questionnaire (Rich Text Format). Your participation in this project will help the industry accurately interpret your closing price rules and processing requirements.     

FISD's Issue Statement

Closing price data is used for portfolio valuation, index calculation and benchmarking throughout the industry. Portfolio valuation is a complex process that requires precise definitions and consistent pricing. However, today’s environment is one where each local marketplace has its own set of rules, processing requirements and special conditions for determining closing price -- many of which are neither widely known nor well understood. In addition, the terminology used to describe closing prices is not consistent. For example, terms such as "end-of-day, last traded, indicative price, derived price, valuation price, settlement price, etc." are loosely used to reflect a variety of different prices and each marketplace does not use the same term in the same way.

The lack of standard price definitions (and inconsistencies in how terms are used) mean that vendors are required to understand all the attributes of different price types on a consistent basis, interpret the complex rules of multiple exchanges in the same way, and be intimately familiar with the intricacies of pricing conventions used to compute value within each local market.

The reality is that interpretations lead to discrepancies in the way the vendor’s process and calculate prices, which in turn creates problems with the accuracy and consistency of data. Differences in interpretation among vendors ultimately leads to uncertainties and inconsistent valuation results among mutual fund managers, global custodians, and securities administrators who are looking to evaluate current holdings against other portfolios and benchmarks that are sourced from different vendors.

FISD Transparency Approach

FISD members are now engaged in a research initiative to define all of the components of closing price on a global basis. The benefit of transparency is to offer investment managers the tools to enable them to make rational decisions on which price to use based on the requirement of their specific application.

The issue being addressed is one of valuation. The context of all questions being asked by FISD is as it relates to the determination of closing price. For example -- if the closing is based on trades, the industry needs to know whether all trades are included. If it includes more than trades, they need to know what else is included. If there are a variety of prices available, they need to know the hierarchy of use for valuation. If an instrument doesn’t trade, they need to know how the closing price is determined. If trades occur after the official close is recognized, they need to know how they impact the close. If there are multiple sessions and distinct market segments within an exchange, they need to know how they affect the official close.

Three factors are making the need for standard price definitions more important. First, firms are increasing their reliance on automation to deal with the growing volume of data from an increasing number of marketplaces. Second, users are becoming more sophisticated in their applications. They are no longer able to just accept a price -- but rather need to know how it was derived and how it relates to their specific application. Portfolio valuation is a global process, and complex analytics need precise definitions. Third, users evaluate current holdings against other portfolios and benchmarks that are sourced differently. Our early findings indicate:

• There is a general and widespread lack of awareness about what information is available and the appropriate ways in which it should be used.
   
• There is a lack of understanding in the U.S. about how the markets abroad operate. Local marketplaces have unique approaches based on regulations and conventions for their specific markets. Those rules/guidelines for portfolio valuation are not widely known or well understood.
   
• There are inconsistencies in the ways vendors process and calculate end-of-day pricing, which creates confusion among customers in trying to reconcile why one vendor does its calculation one way and why another vendor does it another way. The problem is compounded by database structure limitations as vendors attempt to adapt local pricing conventions into pre-defined fields within their databases.
   
• Pricing values are not subject to standardization because each market has the prerogative of making judgments about the closing price (e.g., rapid price run-up at close, where closing price is vastly different from the last "set of prices," and where marketplaces want to exercise judgment by averaging the last prices).
   
• Definitions, interpretations and conventions all need to be understood within the context of the local market. (e.g., last trade does not always mean the same thing in all marketplaces). Terms must be defined at the individual market level. Then there is an interpretative layer that describes the makeup of the official price. Finally, that leads to the local convention for portfolio valuation.

FISD members conclude that the problem with comparative portfolio valuation is due to differences in interpretations and the lack of consistency among vendors -- rather than the complexity of approaches and regulations within the local marketplaces. We suggest that investment managers don’t always necessarily need to understand how closing prices are derived, the methods of calculation, or how exchange officials handle exceptions -- as long as the official closing price is consistently defined and based on a viable and substantive use.

The goal of this initiative is to move towards consistency and uniformity in terms of identifying how a price was derived and establishing guidelines on making the components known by participants. The objective is not to establish the "right price," not to attempt to have all vendors display the same closing price, and not to establish standard operating procedures for exchanges. Simply stated, the objective of the project is to define the components of pricing valuation and to provide users with the tools they need to make rational decisions based on their specific needs.