This observation would not be surprising if the ECB was an impartial observer. As was recognized in the 1930s, the buy-side has an alternative to fighting with the sell-side over disclosure of all the useful, relevant information in an appropriate, timely manner. The buy-side can effectively go on strike by taking its money and investing in another part of the capital markets that does offer disclosure of all the useful, relevant information in an appropriate, timely manner.
This observation is surprising because the ECB is not an impartial observer. Under the FDR Framework, the ECB has the responsibility for ensuring that market participants have access to all the useful, relevant information in an appropriate, timely manner. The ECB also has an incentive to want this type of disclosure as the ECB accepts structured finance securities as collateral.
Ultimately, the question the ECB's ABS Data Warehouse is answering is "will an ABS data warehouse built to sell-side specifications end the buyers' strike?" Will it provide the buy-side with enough disclosure that the buy-side will return to the ABS market, particularly when the standard for investing in ABS deals has become 'know what you own'?
To make these question more concrete, an examination of the ABS data templates is required. Why are data templates necessary in the first place?
- If there are going to be many data warehouses, data templates reduce the cost of disclosure to the issuer by providing the issuer with one disclosure standard.
- However, if there is only going to be one ABS data warehouse and with the ECB's endorsement there will only be one, there is no need for the ECB to develop a data template as the data warehouse will tell the issuer how it wants the data disclosed.
How is this a sell-side versus buy-side issue? The sell-side favors data templates because it offers the sell-side the opportunity to restrict disclosure of all useful, relevant information by debating what data fields should be disclosed. Clearly the sell-side does this as the ECB has 20+ fewer data fields in its RMBS template than does the BoE.
The buy-side favors disclosure of all the data fields, while preserving borrower privacy, that the issuer tracks. This makes sense because the issuer is an expert in the data needed to value the assets backing the ABS security and monitoring these assets performance. In short, the issuer only tracks data fields that their experience shows them to be relevant.
Having every issuer report all the data fields it tracks to multiple ABS data warehouses would pose significant technical difficulties and costs. However, when there is only one ABS data warehouse, these technical difficulties and costs go away. An ABS data warehouse built to buy-side specifications would include all the data fields the issuer tracks (remember, there is useful information in knowing what data fields an issuer does not track).
The questions of more immediate concern are
- Why is the ECB building an ABS data warehouse to sell-side specifications and not to buy-side specifications in the first place? What happens if an ABS data warehouse built to sell-side specifications does not end the buyers' strike?
- Why is the BoE trying to find some middle ground between the data fields in the ECB's data template and full disclosure of all the data fields the issuers' track? Do regulators win some prize for finding the fewest data fields required to end the buyers' strike?
- Why should the buyers come back knowing that useful, relevant information is being withheld even under the BoE data template? Knowing that useful, relevant information is missing, how do European financial institutions prove that they know what they own?