Tuesday, December 21, 2010

Thanks to AFME, Mark-to-Market Returns to Structured Finance Securities on February 1, 2011

Thanks to the work of the Association for Financial Markets in Europe (AFME), all of the major credit institutions in Europe will be able to begin marking-to-market their structured finance portfolios by February 1, 2011. 

Thanks to AFME, by the end of the first quarter of 2011, investors will be able to find out which major European credit institutions are solvent and which are insolvent based on their holdings of structured finance securities.

Why does your humble blogger make these statements?  According to an article in Global Financial Strategy,

An influential European industry group has backed proposals by the European Central Bank to implement new requirements for providing loan-level information for asset-backed securities.
The Association for Financial Markets in Europe said in a statement that the move should "enhance transparency" of underlying assets in securitisation pools.
Richard Hopkin, AFME managing director and a member of the ECB's technical working group, said: "AFME supports measures which have the potential to improve investor confidence in securitisation."
The ECB guidelines are designed to make information on underlying loans and their performance more timely, widely available and produced in a standardised format.
"In addition, the industry appreciates the ECB's introduction of an operational phase-in period of 18 months, which is an important factor given the systems changes required of members," added Hopkin.
Your humble blogger would like to help the reader understand why Mr. Hopkin's comments mean that mark-to-market accounting for structured finance securities will return by February 1, 2011.

First, Mr. Hopkin would have you believe that it will take 18 months to make all the systems changes required.  As one of the world's leading experts on loan-level disclosure for structured finance securities (I have developed patented information technology in this area), what the ECB is asking the large credit institutions to do can easily be done in a month.  It is a simple data mapping exercise.

Given that current disclosure practice is to release RMBS loan-level data on a once per month basis, with little effort, the large credit institutions can comply and make the data the ECB is requesting available by February 1, 2011. 

The failure by any institution to deliver the data by that date can only be attributed to the fact that they have something to hide, namely they are insolvent based on their holdings of structured finance securities that they service.

Delivering loan-level data is only half the problem.  The second half of the problem is that the data being delivered must also restore "investor confidence".  Without investor confidence, the investors who have gone on a buyers' strike will not return to the securitisation market.

Clearly, Mr. Hopkin and AFME would have done everything possible to assure that what is being disclosed and when it is being disclosed would restore investor confidence.  Restoring investor confidence means that investors can use this data in the analytic and valuation models of their choice to independently value the securities and then make buy, hold and sell decisions based on the prices shown to them by Wall Street.  

After all, why would the managing director of a sell-side lobbying firm (it is an affiliate of SIFMA - the sell-side's main lobbying arm) not do everything possible to insure the return of investor confidence and the restarting of the securitisation market?

Given the intent of all the participants on the ECB technical committee was to restart securitisation by providing the buy-side with the information they want and need on a timely basis, I can only assume that after this information is made available by the end of January, the investors will return to the market.

Bottom line, if the investors return to the market under the ECB requirement it means the return of mark-to-market accounting for all European credit institutions.

If the market is not very actively trading with many new offerings being placed with private investors by the end of February, it would suggest that investors were not looking for a perpetuation of current once-per-month or less frequent disclosure practices.  It would also suggest that the focus on standardizing loan-level data, while helpful, is a distraction from the real issue.  It would prove that investors really want to eliminate the "insider information advantage" that Wall Street has because of its role in servicing on a daily basis the underlying collateral.

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