More than 40 organisations have expressed an interest in building the European Central Bank-endorsed, market-led ABS loan level data warehouse, according to officials at the Market Group overseeing the project.Of the 40 organizations, only your humble blogger's firm has actually built and patented an ABS loan-level data warehouse and the information infrastructure to support it.
While the general consensus among market participants is that the creation of a centralised ABS data warehouse will restore confidence in the European structured finance markets by ensuring investor access to comprehensive, standardised and timely information, there are growing concerns that the endorsement from the ECB will create an uneven playing field.As discussed in an earlier post, unless the ABS data warehouse offers current loan-level performance information it will not restore confidence. Offering loan-level performance data on a once per month basis would just be a continuation of the status quo that failed disastrously leading up the credit crisis.
Other sources, meanwhile, have said that the process is 'hopelessly complicated' and that the Market Group could have made the plan more straightforward.Actually, as discussed in an earlier post, the process for selecting BlackRock is very straightforward.
What makes the selection process appear complicated is the lengthy request for information that is irrelevant to answering the questions "do you have proven domain expertise in designing an ABS data warehouse and its related information infrastructure" and "what conflicts of interest do you have in the design, construction and ongoing operation of the ABS data warehouse?"
The information requested is highly relevant to answering the question "are you BlackRock?"
A formal Request for Information was sent out last Friday to the interested parties - including specialist data providers, exchanges and IT firms from Europe and the US - and is open for 10 days, after which the Market Group will shortlist suitable candidates for the Request for Proposal stage.
Following the construction of the data warehouse, a private placement of shares in the warehouse is expected to take place, anticipated to be similar to the formation of Euroclear, with the constructor of the warehouse limited to 15 pct of the shares.It is understandable why BlackRock, with its overwhelmingly large number of conflicts of interest, should be restricted to 15 percent ownership of the data warehouse.
But why should there be any limit on the ownership of the data warehouse by a constructor with no conflicts of interest? In fact, why should that constructor not own 100% of the data warehouse?
Royal Bank of Scotland analyst Ganesh Rajendra expressed concern that a central bank-endorsed initiative, under which the cost of available collateral data would be passed through to end-users, was creating a market monopoly through a 'utility-like' pricing service.
This approach is in contrast to the US Securities & Exchange Commission and the Bank of England's data reporting requirements, where issuers absorb the cost of compliance and make their collateral data publicly and freely available to the market.
'How that data is aggregated and distributed is then usually left to the market,' said Rajendra.
'The ECB's spearheading role in this regard still confounds us, considering the many private sector data vendors that exist and compete in the European securitisation credit market today.'Rajendra, stop confusing the issue with the facts. You are missing the large number of firms which are investors in Markit and have been able to make a substantial return on their investment. Everyone sitting on the ECB's technical working group would like to repeat this with the ABS data warehouse.
It is a minor inconvenience that last week the European Commission announced its investigation of Markit and expressed its strong concern over potential conflicts of interest when it comes to financial data providers with a monopoly.
However, supporters of the initiative argue that third-party data providers will still be able to analyse and model the raw data available in the warehouse for the investors that require it.This response does not mean that the ABS data warehouse is not a monopolist. With the ECB endorsement, it will be.
At best, this response suggests that the ABS data warehouse's business model will stop with providing a snapshot of the performance of the structured finance security at one point in time and it will leave value added analysis to others.
In addition, originators will maintain the ability to circulate their data to anyone that requests it.
'The data warehouse is not an exclusive or closed user group but is an open platform that seeks to promote data consistency and transparency in the ABS market,' said Paul Burdell, CEO at Link Financial, a receivables management company and one of the members of the RMBS technical working group for the initiative.Hello! What European originator is going to provide their data somewhere else given that the ECB looks to the ABS data warehouse for information on securities that are eligible to be pledged to the ECB?
The price of access to the warehouse's information will be key to the initiative's success, according to Gareth Davies, head of ABS research at JP Morgan, also one of the members of the RMBS technical working group for the initiative.
He acknowledged the concerns related to the cost of information, noting that a pricing committee will be established, made up of a representative sub-group of the investing community in the warehouse initiative. Clearly, the more participants involved in the private placement, the more successful the pricing process will be.
'On the assumption that these investors will have an eye to making this initiative successful to ensure a return on their initial investment, we would expect pricing power to be relatively constrained by market forces,' he said. 'If not priced correctly, the initiative will fail.'
The fact that investors have to pay to subscribe to services such as Loan Performance to get data on collateral underlying asset-backed securities they are offered and may already hold is outrageous in light of the no-cost extensive public disclosure required for corporate securities.
... The ECB has released its loan-by-loan information requirements for CMBS and SME transactions, which will be introduced for transactions accepted in the Eurosystem collateral framework within the next 18 months.
This follows the release of requirements for RMBS at the end of last year. All three templates have mandatory and non-mandatory fields and will operate under a 'comply or explain' principle: thus if a counterparty is unable to complete a mandatory field, the transaction may still be eligible, provided that a satisfactory rationale is given.
'While there is a risk certain smaller non-securitisation dependent lenders will simply opt not to use securitisation as a funding tool, generally the regulations should lead to further commoditisation of data provision and ultimately result in overall improved transparency,' said Conor O'Toole, analyst at Deutsche Bank.
ABS is now the most common collateral group posted at the ECB's repo window for the first time, according to the central bank's 2010 annual report. ABS represented 24 pct of total collateral, up from 23 pct in 2009, followed by covered bonds at 21 pct.
This is significant, particularly given that the ECB has made eligibility criteria for repo transactions far more stringent over the past year, such as tougher rating haircuts.This is the explanation for why the ECB is pushing so hard to get the ABS data warehouse built.