Tuesday, May 10, 2011

Why the ABS Data Warehouse Must be Free of Conflicts of Interest

It is common sense that there are no benefits to be gained from tilting an otherwise level playing field by letting firms with conflicts of interest participate in selecting, designing, constructing or operating the ABS Data Warehouse.

All firms involved with the ABS data warehouse should be verifiably free of conflicts of interest with existing structured finance market participants.  These firms should make and keep updated 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?

If the ABS Data Warehouse is to be valuable in restoring trust in the structured finance market, the data must be trusted.  Unfortunately, there are many ways that conflicts of interest might raise doubts about the trustworthiness of the data.

Recently, the European Commission announced an investigation of Markit which shows how conflicts of interest jeopardize the trustworthiness of the information and can lead to potential problems.

Markit is the leading vendor of information on credit default swaps.  It also happens to have a majority of its shares owned by 16 major dealers of credit default swaps.  Because of their ownership interest, these dealers have an incentive to only supply Markit with information.  In addition, since they control Markit, they are in a position to control what data is disclosed and when it is disclosed.  Taken together, all of the conflicts of interest that exist within Markit have drawn the European Commission's attention and call into question the trustworthiness of the data Markit provides.

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