The Eurosystem ... recognized the need to establish a data warehouse for the processing, verification and transmission of ABS loan-level data (the Data Warehouse). The Eurosystem firmly believes that this initiative should facilitate investment and should support transparency, integrity and restore confidence in the structured finance markets as well as aid the simplification of data processes in the industry by ensuring investor access to comprehensive and standardised information across the European ABS market. Loan-by-loan information will be made readily available to market participants utilising the Data Warehouse.
The Eurosystem expects that a Data Warehouse will be built by an independent constructor external to the Eurosystem. To the extent possible, market participants will have the opportunity to use and invest in the Data Warehouse subject to entering into appropriate legal arrangements.
The Eurosystem fully supports an open, fair and transparent tender process for the selection of a Data Warehouse constructor. The Eurosystem is acting as a catalyst in this initiative. The Eurosystem is fully committed to ensuring an independent, fair, open and market-driven selection process in relation to the warehouse constructor and oversight of the Data Warehouse.Not surprisingly, a self-appointed group of industry participants (the Market Group), has issued a press release discussing the beauty contest they are going to run to select a constructor of the Data Warehouse.
In December 2010 the Governing Council of the European Central Bank (the ECB) announced its intention to establish loan-by-loan data requirements for asset-backed securities (ABSs) in the Eurosystem collateral framework, with the aim of improving transparency and helping to restore investor confidence in the European securitisation markets.
Your humble blogger responded to the ECB's Public Consultation on which this announcement was based. See response.
To make this happen, the ECB is encouraging the creation of a groundbreaking ABS Data Warehouse for the processing, verification and transmission of loan-level data. Earlier this month, ECB President Jean- Claude Trichet invited market participants to lend their support to this innovative project.
Once constructed, the ABS Data Warehouse will ensure that loan-level data is made available to market participants to increase transparency in relation to, and facilitate the risk assessment of, existing and future ABS transactions. Processes and software systems will be put in place that allow ABS originators to submit loan-level data to the ABS Data Warehouse electronically, and the loan-level data will be checked for compliance with the specific requirements for eligibility in the Eurosystem collateral framework as well as for consistency and timeliness.
At this point, I need to make a disclosure. I have an economic interest in what happens with the ABS Data Warehouse. In the 1990s, I designed and patented in the US this groundbreaking ABS Data Warehouse. My patented information architecture combines processes and software systems in the most cost-efficient manner for electronically collecting, verifying and transmitting standardized loan-level data for each ABS security.
Subsequent work on an ABS Data Warehouse has been based on the information I disclosed in the patent, in articles in trade publications, in speeches at industry conferences, in responses to public consultations or in confidential business plans.
Structured finance is global. According to the AFME, the outstanding balance of structured finance securities is approximately 10 trillion euros (8 trillion in the US and 2 trillion in Europe). While structured finance securities are issued worldwide, each deal is designed to attract investors from around the world. For example, think of all the investments made in US originated sub-prime securities by European financial institutions.
Not only is the ECB trying to get the ABS Data Warehouse built, but there is also pressure from the European Union. In May 2009, the European Parliament passed Article 122a to amend the European Capital Requirements Directive. Under Article 122a, European financial institutions are required to know what they own when they purchase or hold a structured finance security. A necessary pre-condition to knowing what you own for structured finance securities is to have access to the underlying loan-level performance data.
Logically, this does not apply just to structured finance securities issued in Europe but also to structured finance securities that European financial institutions purchase that are issued in the US, UK or Asia.
Building a database for European residential mortgage backed securities is just the first step in building a global database for handling all structured finance securities. As a result, the ABS Data Warehouse will need to be based on an information architecture that it has the legal rights to use in all parts of the world.
Back to the Market Group press release...
Specific ABS originators and investors from across Europe have formed an independent group of market participants called the “Market Group” to oversee the tender process and select a constructor of the ABS Data Warehouse.
At approximately the same time as the Market Group was issuing their press release, the European Commission was issuing its own related press release. According to an article in the Telegraph,
London-based Markit, the leading provider of CDS data, is ... being investigated [by the European commission]. The company,..., is already the subject of a separate inquiry by the US Department of Justice.
Joaquin Almunia, European Commission vice-president responsible for competition, announced two investigations into the CDS market....
The first will look at whether dealers at 16 banks [most of whom are shareholders of Markit] colluded by giving "most of the pricing, indices and other essential daily data only to Markit."
The commission believes this "may have [had] the effect of foreclosing the access to the valuable raw data by other information service providers' adding that some of the clauses in Markit's license and distribution agreements 'could be abusive and impede the development of competition."According to a NY Times Dealbook article on the European Commission announcement,
The European officials are looking at whether banks, including Barclays and Goldman Sachs, have harmed rival organizations that could compete in markets for providing information and clearing a form of transaction that had become critical to the smooth functioning of the entire economy.
“Lack of transparency in markets can lead to abusive behavior and facilitate violations of competition rules,” the European Union antitrust commissioner, Joaquin Almunia, said in a statement. “I hope our investigation will contribute to a better functioning of financial markets and, therefore, to more sustainable recovery.”
... The banks are involved in two crucial components of the market for credit default swaps.
Sixteen of the banks are shareholders in Markit, a London-based organization that is the leading provider information on the market for credit default swaps. European Union officials suspect that the banks’ arrangements with Markit could effectively lock out other data providers.
... Amelia Torres, a spokeswoman for Mr. Almunia, said that officials began the investigation without receiving formal complaints from competitors but said wrongdoing would be “obviously harming other players in the market.”
ThomsonReuters, Standard & Poor’s and Bloomberg are among companies that could compete with Markit [to] provide information on trading credit default swaps.
... The Justice Department has also been investigating this market and told The Times in December that its inquiry was focused on “the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries.”Clearly, having firms with a conflict of interest owning or controlling a leading provider of information does not pass the smell test.
If the European Commission and the US Justice Department are concerned about Markit and its credit default swap database, they will be equally concerned with the ABS Data Warehouse and its dominant position in providing loan-by-loan data for structured finance securities.
The European Commission and the US Justice Department's concern effectively eliminates existing structured finance market participants from involvement in the ABS loan-level data warehouse.
Why?
Because each existing structured finance market participant has a conflict of interest. They have another way of making money in the structured finance industry that could benefit from how the ABS Data Warehouse is operated.
Everyone involved in the Market Group is a current participant in the structured finance industry. As a result, their ongoing involvement in selecting the constructor of the ABS Data Warehouse is tainted by their conflicts of interest and should cease.
The ECB is not going to be politically tone deaf to the European Commission's concerns. There is no benefit nor is it a necessity for the ECB to allow a conflict of interest that would concern the European Commission or US Justice Department to exist involving the ABS Data Warehouse.
The ECB wants to be involved in an ABS Data Warehouse that has absolute clarity on its lack of conflicts of interest with other structured finance market participants.
As a result, what is needed is a search and not a beauty contest.
A search for a firm that meets two strict criteria.
- The firm is verifiably free of conflicts of interest with other structured finance market participants. This rules out existing market participants including issuers, investors, trustees, dealers, rating services, collection agencies, financial data vendors and accounting software providers.
- The firm must have the demonstrated domain expertise to design, develop and manage all aspects of the ABS Data Warehouse.
A search based on these criteria will find my firm and possibly others.
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