Like it or not, it will soon be possible to see the prices at which many kinds of asset-backed securities change hands in the secondary market. The Financial Industry Regulatory Authority (FINRA) will begin disseminating prices through TRACE beginning in April 2015.
Some participants at the ABS East conference sponsored by Information Management Network are not so sure they like the idea.
While increased transparency tends to narrow the difference between bid and offer prices, some people are concerned that the information will instead create price distortion, thereby making the market less liquid. Will Zak, a director of trading at Barclays worries that the last print on TRACE would impact pricing, whereas now dealers are able to control how pricing is disseminated. "If a seller is looking to sell off a bulk of paper, in a rocky market this could create a bad situation, because the seller would have to sell at the level the last print left off," said Zak. In a less liquid market the pricing might seem too high for borrowers, he said.
On the other hand traders, also lose the ability to sell a product cheaply, according to Bob Behal principal and co-head of ABS investments at Vanguard Group. "Dealers could also have made it cheaper than the last print of TRACE, so there are two sides," he said.
FINRA originally proposed to disseminate price information on a broad range of asset-backed securities, but it scaled back its proposal after receiving a comment letter from the Securities Industry and Financial Markets Association. Collateralized debt obligations and non-agency commercial mortgage bonds are now excluded. Private label mortgage bonds were excluded from the original proposal.
Firms began reporting to Trace on most asset-backed and mortgage backed transactions starting in May 2011, but to date the information has not been publicly disseminated.
