"The process has not been clear or transparent. It has all been done with closed shop meetings in foreign countries," one London-based ABS market participant said.
The central bank announced last December that it would require loan level data on all ABS presented for repo once all the infrastructure was available to deliver this. It set a provisional timeline of 18 months for the work, which meant creating data submission templates for the various asset classes, and building the data handling infrastructure.
Technical working groups, including a wide variety of market participants, drafted disclosure templates for the various structured finance asset classes between December and April, when the governing council of the Eurosystem started pushing for construction of the data warehouse.
The central bank said it "fully supports and encourages an open, fair and transparent tender process for the selection of a data warehouse constructor", and added that it was "acting as a catalyst in this initiative".
A tender process followed, whittling down more than 50 initial expressions of interest to a shortlist of six, including Sapient, BNY Mellon, Experian, Thomson Reuters, and a consortia led by Bloomberg and Moody’s. Thomson Reuters and Sapient made it to the final two.
The tender process ended up in the hands of the Market Group, a committee of nine buy and sell side institutions, plus distressed debt purchaser Link Financial. Buy side firms involved are Allianz/Pimco, Amundi, AP and M&G, while sell side firms are BBVA, Commerzbank, Société Générale and UniCredit.
"The nine firms making up the Market Group were chosen for their leadership in the sector, their common sense and experience in ABS and because they were willing to contribute their time and knowledge to help a project which should benefit the ABS market as a whole," said Paul Burdell, CEO of Link Financial and group secretary.
"The ECB did not commission the Market Group but they have acted as observers at its meetings and during the process to select the European data warehouse’s constructor — it was a market-led initiative with input from a broad cross-section of the European ABS market," he added.
Fernando González Miranda, head of risk strategy at the ECB, affirmed that the group was a market-led initiative, explaining that the participants came forward after Eurosystem encouragement to establish a data-handling infrastructure to allow the processing, verification and transmission of ABS loan level data.
"This aims to facilitate the application of the loan-by-loan information requirements and contribute to further improving the transparency in the ABS market," he said. "The Market Group represents a balance between the two sides of the market, originators and investors, as well as a balance of institutions across Europe."
Pay to play
One of the more controversial aspects of the data warehouse plan is how it will be funded. Market participants and other interested parties will be invited to buy a stake in the warehouse when complete, Burdell explained.
"The more people that subscribe, the cheaper the subscription price will be for each shareholder," he said. "The pricing structure is not yet sorted, but it will be on that principle. Everyone wants access to the data for free, but there is a finite amount of money that the European data warehouse needs to raise to cover its initial build costs and running costs."
The infrastructure seeks to create an entry point for loan level data processing, verification and transmission, ECB’s González Miranda explained. "Originators, if they so wish, would need to submit their data to the European data warehouse to make their bonds repo-eligible, but originators retain ownership of the data — it can be sent anywhere else," he said.
Originators could therefore bypass the official warehouse, making information available for free. This is likely for UK originators, who will need to publish their loan-level information on a password-protected website to meet the Bank of England’s requirements.
The Bank’s disclosure requirement for RMBS goes live on December 1 this year and uses a similar template to the ECB’s requirements. As a result, UK issuers are largely prepared for the switch to loan level data.
If issuers do not pay to submit data, this would imply that investors and data vendors pay to access it. Rating agencies would also have an interest in access, but in many cases originators already supply agencies with monthly loan-level data.
Data vendors and software firms would be the warehouse’s main users, along with occasional investors that wanted to build their own models, said Doug Long of technology firm Principia. "The data will just be the data. The added value will be on top of it."
Ultimate beneficiaries
Despite the controversy, the ECB’s backing for the project gives what many players see as an important regulatory endorsement to securitisation. "Once constructed, the European data warehouse will represent a key part of the ECB’s effort to restart the ABS markets — the other part being the ECB development of standardised reporting templates for the different classes of ABS," said Burdell.
"We think implementation of these transparency measures could have a positive effect on the market, helping to reactivate the ABS market," González Miranda said.
If investor interest in the asset class increases, boosting liquidity, this could prompt a rethink of the ECB’s regime for ABS. All ABS is placed in liquidity category five when presented for ECB repo — meaning a 16% haircut irrespective of quality, maturity or rating. Reducing the haircut on ABS collateral could add up to €120bn extra contingent liquidity for the European banking system, according to numbers from Royal Bank of Scotland analysts (see EuroWeek 1228).
The ECB loan level initiative will have no immediate impact on repo haircuts, however — it will be a minimum eligibility requirement for repo collateral, not something to be exchanged for regulatory leniency.
Market participants are placing their hopes for regulatory forbearance on the Prime Collateralized Securities initiative, which aims to certify ABS that meets a certain quality standard. This should be a politically palatable way to distinguish top quality European ABS from US subprime and may lead to a relaxation of some of the regulatory pressures on securitisation. The biggest hope of the market is that ABS bearing this label will be allowed into bank liquidity buffers under CRD IV, restoring the traditional role of bank buyers in the European ABS market.
PCS is being negotiated under the auspices of AFME and the European Securitisation Forum, bringing a far wider range of participants than the Market Group. The initiative is likely to embrace the ECB’s loan-level data requirement — if an originator cannot provide loan-level data up to standard and present this to the warehouse, it is unlikely that their bonds will be able to bear the PCS label.
González Miranda declined to comment on PCS and how it might affect the ECB’s policy in future.