Why the ECB ABS data warehouse should fail to restore investor confidence

The test of the ECB's ABS data warehouse is whether it restores investor confidence in their ability to monitor, analyze and value structured finance securities.

Your humble blogger has taken the position that as the ECB's ABS data warehouse is being rolled out under the guidance of the Market Group it will fail this test.  There are three reasons to know in advance that it will fail.

• The data warehouse does not provide investors with all the useful, relevant data fields for each asset backing a structured finance security.  

• The firms involved in originating and servicing the assets track additional non-borrower privacy protected data fields.  Why do they track these data fields?  Because their expertise and experience has shown that the additional data fields are relevant for valuing the assets.  What investor would buy structured finance securities in the absence of all the useful, relevant data when there are alternative investments that do offer all the useful, relevant data?

• The data warehouse does not provide investors with all the useful, relevant data fields for each asset backing a structured finance security in an appropriate, timely manner.  The plan is to provide updated data once per month.

• The firms involved in originating and servicing the assets track the assets on an observable event basis.  An observable event includes a payment is made, a payment is missed, the obligor defaults or the obligor files for bankruptcy.  When data is only disclosed to investors once per month, owning a servicer lets a trading desk see tomorrow's news today.  What investor is going to buy structured finance securities knowing that Wall Street has this informational advantage through its ownership of servicers and that Wall Street will use this informational advantage to the detriment of investors (see Abacus)?

• The data warehouse does not pass the European Commission's test for conflicts of interest for financial information vendors spelled out in its investigation of Markit.

• The firms involved in the Market Group and all the finalists, except Sapient, for building the ABS data warehouse have conflicts of interest between their involvement in the data warehouse and their other involvements in the structured finance industry.  What investor is going to buy structured finance securities knowing that each of these conflicts of interest works against the investor?

For those readers who do not know what a conflict of interest is, let me provide a definition.

A conflict of interest exists if a firm that is involved in the ABS data warehouse has a) a related business that could gain a competitive advantage from its role or b) an investment that could benefit from its role.

According to a press release by the Market Group, the following are the finalists for building the ABS data warehouse [while each finalist may have many conflicts of interest, a sample conflict of interest is presented below the finalist]:

• Bank of New York Mellon
• [related business:  hired as a trustee and master servicer by issuers]
• Experian
• [related business:  trying to sell credit bureau data linked to structured finance securities]
• Sapient
• [does not cure either the related business or investment conflicts of interest that the owners of the Market Group have and can act on through the Market Group's control of the ABS data warehouse]
• Thomson Reuters
• [related business:  gain a competitive advantage over other financial information data vendors like Bloomberg] 
• Bloomberg consortium comprising: Trepp, Markit, Intex, CoreLogic Solutions and Lewtan Technologies
• [related business:  gain a competitive advantage over other financial information data vendors like Thomson Reuters; gain a competitive advantage over other analytic and valuation vendors]
• Moody's consortium comprising: PECDC and OSIS
• [related business:  gain a competitive advantage over other rating services as no market participant will believe the other rating services have access to the same amount of data]

Ultimately, given that there are many alternative fixed income investments that do not have problems with what is disclosed, when is it disclosed and who controls the mechanism for transmitting the disclosure, it is hard to imagine why the Market Group's version of the ECB's ABS data warehouse would restore investor confidence.

This is particularly true given that there is an alternative ABS data warehouse that the ECB could endorse instead of the Market Group's that is free of conflicts of interest and would provide investors with all the useful, relevant data fields in an appropriate, timely manner for free.