Vendors anticipated hearing May 27, the Friday after ASR's deadline, whether they could bid on the contract to build and operate a repository to collect and make available data for loans backing European RMBS, a project several steps ahead of a similar effort in the U.S.
"Winners and losers in the RFP process are probably going to be notified Friday afternoon," said Paul Burdell, secretary of the Market Group, a consortium of participants in the ABS market established to advise the selection of the data warehouse constructor.
Burdell, CEO of Link Financial Group, a purchaser and servicer of performing and nonperforming receivables, said the Market Group received about 50 responses to its request for information.
"We responded [to the RFI] as an individual company and we said we've spoken with several other firms with whom we've agreed to work with to make this happen," said Usman Ismail, executive vice president at Lewtan Technologies, who is overseeing his firm's participation in the project. All RFI respondents were asked to reply individually and note other firms that have indicated an interest in forming a temporary group to work on the project.
Link Financial was chosen by the European Central Bank (ECB) to advise on developing a market-led solution to create the data warehouse, including organizing the Market Group.
The Governing Council of the ECB decided late last year to establish loan-level information requirements for ABS by summer 2012, starting with RMBS and later including other types of ABS. The data warehouse is slated to be completed by then as well.
Burdell said construction of the data warehouse is expected to be financed through a private placement in the next 12 months, and the vendor constructing the warehouse will receive a 15% stake. The initiative has been designed to ensure that a wide variety of market players participate in the project's various decision-making committees - the pricing committee included - and those committees will change members on a regular basis to ensure a level playing field.
Article 122a of the European Union's (EU) Capital Requirement Directive became effective Jan. 1. One of its requirements is for banks buying the ABS, including an offering's underwriters, to demonstrate that they understand the risk characteristics of the underlying loans, in part by disclosing loan-level data.
The Bank of England's (BofE) new disclosure requirements go beyond the data provision and require disclosure of specific legal documents, investor reports and cash-flow models, in order for them to be eligible for financing under its discount window. The BofE's scheme, with which constituents must comply by November 2011, also differs from the ECB's because it does not encourage a centralized data warehouse.
"The genesis of the ECB's and Bank of England's programs was to introduce loan-level data and more information so they themselves could better assess the collateral posted to them," said Douglas Long, executive vice president of business development and product strategy at Principia Partners, a provider of structured-finance software.
The BofE's new disclosure requirements are more extensive than the ECB's and require disclosures to actual and potential investors of certain legal documents, investor reports and cash flow models, so the banking firms it regulates can post the securities for financing at its discount window.
Instead, it has left market participants to come up with solutions, much like what already occurs in the U.S., where issuers have long provided loan-level data for free. The formats and types of data in the U.S., however, have varied from issuer to issuer, making it difficult to digest and analyze without the help of vendors such as Lewtan, Markit and Bloomberg, which do charge fees.
In fact, the Securities and Exchange Commission (SEC) issued a proposal in April 2010, referred to as Regulation AB-2, that would broadly impact securitizations. One provision would require issuers to provide numerous defined data fields to the SEC for each loan in most ABS pools, and that information would be posted publicly and for free on the Internet. Like the BofE's proposal, it, too, would require issuers to provide a "waterfall" cash flow algorithm to display the flow of repayments between the numerous shareholder classes in an ABS security.
Comments on the proposal, which was mostly favored by the institutional investors and criticized as burdensome by issuers and their underwriters, were due Aug. 2 - just a few days after the Dodd-Frank Act was passed by Congress. Since then, regulators including the SEC have been mired by developing rules mandated by that law.
Some components of Reg AB-2 have been put on the back burner, but others, such as the loan-level data disclosures, were mandated by Section 942 of the new law. The American Securitization Forum (ASF) had developed a data field template as a part of its Project RESTART that the SEC could approve, and upon such approval the ASF should be able to build and begin operating its own loan-level data warehouse within a year, said Tom Deutsch, executive director of the ASF. "We've put the basic parts together, but we're still waiting on what the fields will be," Deutsch said.
It's not certain the SEC will approve the data fields developed by the ASF, and it is unclear when the agency will even address the issue, given the backlog of Dodd-Frank rules it must approve. Deutsch said the SEC could approve a final rule without first issuing a proposal for comment, but that's unlikely given the complicated nature of the issue.
The data-disclosure component of Reg AB-2 was prompted by the perception that more readily available transparency into the assets underlying securitizations would help restore confidence in the ABS market and prompt institutional investors to buy private-label RMBS.
The private RMBS market in the U.S. has been moribund over the past few years, with only one issuer, Redwood Trust, pursuing offerings - one earlier this year and another last year. And with foreclosures and concerns about banks' loan underwriting practices continuing to mount, there's little hope that RMBS without a government guarantee on the underlying loans will stage a revival soon.
Depending on when the SEC eventually takes up the issue of loan-level disclosures, U.S. market participants may find the European initiatives to be instructive precursors. The SEC's and BofE's approaches rely on individual market participants finding their own solutions to digest and analyze loan-level data, typically requiring the purchase of software applications from vendors such as Lewtan and Markit
Burdell noted that the EU's member countries each have different sets of rules for mortgage originations, data protection and other areas, creating a boondoggle of requirements for cross-border issuers and investors alike. So European participants in the ABS market set up several asset-specific technical working groups comprising representatives from major investors and banks, such as BlackRock and Societe Generale, as well as rating agencies and trade groups, to devise a more efficient way to disseminate loan-level data.
"This was done on a consensus basis," Burdell said, adding that the technical working groups essentially found the key common data fields across EU member countries to form a data template. The BofE's template for data it will require to provide financing, for example, is based on the technical working groups', with additional fields specific to the U.K.'s RMBS market.
"It's meant to be a user- and investor- friendly approach," Burdell said. "The goal is to bring those peripheral investors and new investors back to the market. This initiative is meant to help restore confidence in the ABS market."
The data warehouse, Burdell said, will be run privately, and that while vendors such as Lewtan and Markit will not normalize loan-level data stemming from different issuers like they currently do in the U.S., they will still play an important role by providing software to help investors analyze the data. "If a firm needs a vendor to run the cash- flow models, that's fine; but if you have the ability to do that, the warehouse will provide access to the data at a fair price."
Burdell compared the data warehouse to a utility such as the Depository Trust Corp., which is owned by its members and returns excess profits to them. He added that the warehouse data will be available to any interested parties. Likewise, ownership of the warehouse stemming from the private placement is anticipated to be spread among a wide range of organizations, which likely will be paid a small dividend while most of the profits will be reinvested back into the warehouse.