Thursday, September 20, 2012

Dutch RMBS issuers gear up for structured finance transparency

Reuters reports that Dutch RMBS issuers are about to launch their version of transparency for structured finance securities.

Regular readers know that a recent White Paper by the US National Association of Insurance Commissioners (NAIC) set the global standard for transparency for structured finance securities.

Specifically, it set the standard as observable event based reporting combined with all non-borrower privacy protected data fields.

Observable event based reporting requires that before the beginning of the next business day all activities like a payment or default involving the underlying collateral are reported.

The question is:  Does the Dutch RMBS issuers version of transparency meet this global standard?
 Dutch RMBS issuers are close to launching the Dutch Securitisation Association (DSA), which will see all the major Dutch RMBS originators sign up to standardised reporting, standard definitions of 200 terms, and prospectus structure. 
By using 200 terms with standard definitions, the Dutch RMBS issuers are depriving investors of the other non-borrower privacy protected data fields that they track.  Presumably, there is valuable information in these data fields, otherwise the Dutch RMBS issuers would not track them.
The Dutch initiative comes at the end of a two-year process which has run alongside the ECB's loan-level data project and the Prime Collateralized Securities labelling initiative....
I assume that if a Dutch RMBS security does not provide observable event based reporting it will carry a PCS label that says "Sub-prime" to indicate that it does not provide the global standard for transparency.
Dutch issuers declined to fund the ED project during its fundraising phase early on, and are concerned that the ECB-sponsored scheme is being overseen by a private company, rather than a membership association.... 
In theory, if the private company had no conflicts of interest there would be a benefit to having it overseeing the data warehouse.  The benefit being that it would have an incentive to make sure the data was both trusted and useful.

In fact, this is precisely what your humble blogger recommended (full disclosure:  my firm was suppose to have been the private company as it has both the expertise and a patent that covers observable event based reporting for structured finance securities).

In practice, ED has a private company where its shareholders have a conflict of interest.  The results of this conflict of interest were readily apparent in its initial proposal to charge investors to access data that should be made available to them for free.
The aims of the Dutch project are more modest than the ECB or PCS initiative. The idea has come from the Dutch issuer community, with the objective of safeguarding access to securitisation funding and improving the image of the product, rather than being an initiative led by a central bank. 
Dutch RMBS meeting the DSA standards will not be formally certified, monitored or verified - instead, issuers will represent in their prospectuses that their deal information is correct and compliant with DSA standards, and post their data in the correct format to the website.
Enforcement is based on a "comply or explain" model, and it is hoped that market discipine will help to bring issuers into line. Deficiencies will be more obvious once issuers have their investor reports in standard format and directly comparable.
Specifically, if the issuer is deficient and does not provide observable event based reporting.
The information should also be more accessible than other transparency initiatives - rather than requesting a password from the issuer, as with the Bank of England loan-level data, the DSA will publish its information on a publicly available website. 
This will collate new, more detailed investor reports, alongside the standardised prospectuses and definitions. Anyone, regardless of accreditation, should be able to access the information, which will be in a user-friendly format for databases and cashflow modelling.
As I initially proposed in a Total Securitization column at the beginning of the financial crisis, for a data warehouse to bring transparency to structured finance securities, it must make the data accessible for free to all market participants.

I look forward to hearing from Dutch Securitization Association about overseeing the operation of this data warehouse.


Dimitri said...

Very good summary about the opposition of the Durch guys against European Datawarehouse.

One of the reasons for such opposition is missing transparency of decisions around ED GmbH. It is the private company, having 15 investors, which will charge fees from the issuers plus the profit margin of 5% to 10% for their services. The contracts for ED implementation have been tendered by a group calling itself “the Market Group”. It is unclear who has nominated this “Group of Wise Men” consisting of following institutions, where NL is represented only by APG All Pensions Grou.

Richard Field said...

The path to control of ED goes through the ECB's advisory committee on its ABS loan-level initiative.

You will notice that the Market Group managed to get a mandate from the ECB to create the data warehouse to support this initiative.

The mandate was simply extended to individuals/firms on the advisory committee.

If you look carefully at the advisory committee, you will see that it is dominated by sell-side firms.

The question you might ask is why was I not invited to a) be on the committee (I expressed interest) and b) given the mandate to build the data warehouse (at that time, my firm was the only firm that had been known to successfully build the related information system?