Wednesday, June 29, 2011

ECB's ABS Data Warehouse and Why issuers always pay for disclosure

To date, I have documented two strikes against the Market Group's version of the ECB data warehouse and why it is unlikely to restore investor confidence in the structured finance market.  They are:

  • It is riddled with conflicts of interest that most likely will not be acceptable to investors or the European Union's Competition Committee based on that committee's preference that financial information data vendors be free of all conflicts of interest; and
  • It is based on providing data on a once-per-month basis that the rating agencies have already testified before the US Congress is inadequate for timely updates to ratings (a form of valuation) so by definition, this data is not adequate for financial institution investors to know what they own under Article 122a of the European Capital Requirements Directive.  Furthermore, the SEC is investigating the rating agencies for potential fraud from publishing ratings based on out of date information.  
Today, I would like to add strike three.  The Market Group is moving forward with a plan to a) collect the data for free from the issuers and b) charge the investors and data distributors for accessing the data in the data warehouse.  Unless the issuers also provide the data for free at the same time to all market participants, this plan is likely to violate existing disclosure regulations in the US and Europe.

In the US, the relevant disclosure regulation is Regulation Fair Disclosure (Reg FD for short).  This regulation is the global gold standard for fair disclosure and is very explicit in the requirements it places on issuers.
  • It requires that all material items in the investment mosaic be disclosed.  When it comes to the loans underlying a structured finance security, it would suggest that all the borrower privacy protected data fields track by the originator as well as the firm engaged in the daily billing and collecting be disclosed because there is reason to believe that these fields are part of the investment mosaic for valuing the loans and hence the security.  Please note that this definition excludes price and trading data;
  • It requires that all market participants have equal access to the information used in analyzing and valuing a security at the same time.  This rules out the business model where issuers only release the information to a distributor that charges for access to the information because not all market participants can afford the access charge.
Please note that Reg FD and the European disclosure regulations do not say that a data distributor cannot collect publicly available information, package this information and sell it to investors.  There are several companies that already do this for structured finance including LoanPerformance, Lewtan, Bloomberg and ThomsonReuters.

What Reg FD and the European disclosure regulations do say is the model of collecting, packaging and selling cannot be applied to non-public performance data that is used for analyzing and valuing a security as a means for making the non-public data public.

Like baseball, with three strikes the Market Group should be out as far as any involvement in the ECB's ABS data warehouse.

The ABS data warehouse I proposed several years ago does not suffer from the problems plaguing the Market Group's version of the ECB's ABS data warehouse.  It has no conflicts of interest.  It offers current loan-level performance data so that financial institution investors can always know what they own.  It provides the data for free to all market participants at the same time.

I look forward to hearing from the ECB and being given the mandate to create their ABS data warehouse.

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