Many market participants perceive the credit risk of margin loans (from the lender’s perspective) to be insignificant or even zero, on the assumption that lenders can always liquidate clients’ pledged assets—such as gold, Bitcoin, or equities—once margin requirements are breached. In reality, this assumption often fails. Sudden and sharp price movements, particularly rapid market downturns, can result in material losses when market liquidity is insufficient to absorb forced selling orders, or when other black-swan events occur.
Leverage is a common tool used by professional investors and speculators. Margin financing can be arranged on most freely traded assets, including equities, virtual assets, commodities, and precious metals. As price volatility in these asset classes increases, the risks embedded in margin financing also rise and must be carefully assessed and measured. The market trend leads to greater importance on Current Expected Credit Loss (CECL) or Expected Credit Loss (ECL) disclosure. CECL is a U.S. accounting standard introduced by the Financial Accounting Standards Board (FASB) that fundamentally changed how financial institutions estimate and recognize credit losses. Under IFRS, similar requirements apply through the ECL framework, requiring forward-looking and probability-weighted credit loss assessments.
CECL or ECL assessment is much more complicated in margin loan exposures. It is more than the common method in estimating credit rating and credit score as the loss is largely dependent on the market risk. Simulation and jump diffusion model are sophisticated techniques to measure the loss. The jump-diffusion process is a quantitative modeling approach used to forecast time-series data when variables may occasionally experience sudden, discontinuous movements. This methodology is particularly relevant in expected credit loss assessment and valuation of margin loan portfolios. While margin loans are typically closely monitored by securities firms and governed by strict margin call and liquidation rules, event-driven shocks can still cause abrupt upward or downward price movements that materially affect credit exposure.
Many smaller brokers offering margin financing, as well as auditors reviewing financial disclosures, may not have sufficient internal resources or expertise to apply simulation-based jump-diffusion techniques when testing or validating CECL and ECL estimates. Valtech, with strong academic foundations and deep expertise in accounting, finance, and quantitative modeling, is well positioned to provide robust valuation and advisory support for complex accounting matters that require advanced quantitative finance knowledge.
Why Appoint Valtech as Valuation Adviser?
Valtech’s team has provided valuation advice to over 200 listed companies in Hong Kong, China, Singapore, Taiwan, Australia, the United Kingdom, the United States and Germany.
Valtech Valuation is a professional valuation firm accredited with ISO-9001 in valuation advisory services. The financial market and valuation requirements are highly dynamic. We are determined to develop and maintain a quality management system to foster an environment which is sustainable and evolving continuously. Our founders stress on development of a system and an environment that our consultants are provided with necessary support and opportunities to thrive.
We are a team of professionals from multiple disciplines including audit, financial modelling, tax, internal control and surveying. Our management adheres professional excellence. Abundant resources are reserved to develop standardized policies and procedures for quality control. We have solid track record in valuation advisory for listed companies, private equity, fund managers and financial institutions. We work closely with big four and other international accounting firms, corporate financial advisors, fund managers and legal advisors.
Valtech Advantages:
Advanced Valuation Techniques: Valtech Valuation can develop and implement advanced valuation techniques that are specifically tailored to the needs of clients. These techniques can go beyond traditional valuation methods and incorporate factors such as market trends, industry benchmarks, and risk analysis to provide more accurate and insightful valuations.
Customized Valuation Models: Valtech Valuation can create customized valuation models that align with the unique investment strategies and asset classes. By understanding the specific requirements and objectives of these entities, Valtech Valuation can develop models that capture the nuances of their portfolios, resulting in more precise and relevant valuations.
Data-driven Insights: Valtech Valuation can leverage its access to comprehensive data sources and analytics tools to provide data-driven insights. By analyzing market data, economic indicators, and performance metrics, Valtech Valuation can offer valuable insights into the valuation of assets, identify emerging trends, and help inform investment decision-making.
Adherence to Compliance and Reporting Standards: Valtech Valuation can ensure that valuation practices adhere to regulatory compliance and reporting standards. By staying updated on relevant regulations, such as accounting standards and industry guidelines, Valtech Valuation can help clients meet their reporting obligations accurately and in a timely manner.
