Thursday, May 5, 2011

How the ECB's ABS Data Warehouse can Avoid European Commission's Concern

As discussed in a previous post, the ABS Data Warehouse is likely to become the global structured finance market's 'go-to' source for ABS loan-level data.  It will effectively become a global monopoly due to the ECB's endorsement.

This will put the ABS Data Warehouse directly in the crosshairs of the European Commission.  According to an article in the Wall Street Journal,
[T]he [European] Commission spokeswoman said, "the Commission does not look into all agreements and at the behavior of all companies; only those that may contain practices that are restrictive of competition and at companies that may have a dominant position and be abusing it."
Knowing that the ABS Data Warehouse will be in the European Commission's crosshairs, before it is even created, the European Central Bank should take steps to ensure that it is free from any potential conflicts of interest that might attract the European Commission's attention.

This is actually quite simple for the ECB to do.

The ECB has to require that any firm involved in selecting, designing, constructing or operating the ABS Data Warehouse be verifiably free of conflicts of interest with existing structured finance market participants.  

Enforcing this requirement involves two steps.

First, having any firm that would like to be involved in selecting, designing, constructing or operating the ABS Data Warehouse make a full public disclosure of all competitive and financial interests in the design of the database, the presentation of the data, the analysis of the data, and the use of the data, including:

  • Is the firm engaged in a related business that could gain a competitive advantage from its role? Examples of such related businesses include data distribution, pricing services, trustee services, monitoring, analytic solutions, loan servicing, collection services, consulting, ratings services, investment as a principal or agent or portfolio manager, and underwriting.
  • Does the firm have investments that could benefit from its role, such as long or short positions in ABS transactions?
Second, excluding those firms with related business or investments that could gain an advantage from any involvement in the selection, design, construction or operation of the ABS Data Warehouse.

There are no benefits to be gained from tilting an otherwise level playing field by letting firms with conflicts of interest participate in the ABS Data Warehouse.

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