Perceived to be Accurate
Improving disclosure standards requires providing accurate and unbiased current loan-level data to market participants on an observable event basis in such a manner that, like stock price data from the NYSE, trusting the data is not a question.
An “observable event” means, with respect to a loan or a receivable that is collateral for a securitization, any of the following:
- payment (and the amount thereof) by the obligor on such loan or receivable;
- failure by the obligor to make payment in full on such loan or receivable on the due date for such payment;
- amendment or other modification with respect to such loan or receivable;
- the billing and collecting party becomes aware that such obligor has become subject to a bankruptcy or insolvency proceeding; or
- a repurchase request is asserted, fulfilled or denied.
The current reporting infrastructure has actual conflicts of interest, as participants such as Goldman Sachs and Morgan Stanley receive data on the loans backing structured finance securities on an observable event basis and trade on this information before other market participants receive this data.
In order to provide deal specific loan-level information to all market participants, a new data-handling infrastructure will be needed to collect, store and distribute the information to the market.
The ABS Data Warehouse would establish all of the various processes and systems necessary for the firms handling the daily billing and collecting to electronically submit the loan-level data. This data will be checked for accuracy and consistency and entered into a database. The data will then be made available to all market participants including investors, rating services, data providers, central banks and other regulators.
No Conflicts of Interest Allowed
The new infrastructure for collecting, storing and distributing loan-level data should be free of actual or perceived conflicts of interest. All market participants need to know that they can trust the data to credibly value, price and trade structured finance and covered bond securities. This is necessary if the new infrastructure is going to help restore confidence in the structured finance market.
The new data-handling infrastructure and the loan-level deal specific data should also be perceived as free of the types of structural conflicts of interest that would be present if the infrastructure was controlled by and the data offered by a single existing market participant.
Each existing market participant would be perceived as being able to gain a competitive advantage if it controlled the new data-handling infrastructure. This is what is driving the European Commission's investigation of Markit with regards to credit default swaps information.
The involvement of existing market participants in the new data-handling infrastructure would tilt an otherwise level playing field without clear value added.
The ideal conflict free data-handling solution is an ABS Data Warehouse coordinated and operated by two independent third parties. This data warehouse would combine the global resources of the firm handling the data on a day-to-day basis with the subject matter expertise of the firm coordinating the data-handling infrastructure.
Full Disclosure Requirement
Any firm that is involved in either the day-to-day operation of the ABS Data Warehouse or the Coordinator role should be required to make a full 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?
The new data handling infrastructure should also provide an audit trail. Market participants should know that the data they are receiving from the ABS Data Warehouse is the same as the data submitted by the servicers or sub-servicers to the ABS Data Warehouse.