Fitch Ratings is moving closer to unveiling its new market risk valuation tool aimed at structured finance investors. The service, which is expected to launch in three months, offers buyers a market risk analysis of synthetic CDOs.
"We have done a lot in the area of surveillance but our products focus on credit risk, with this tool we aim to give more transparency on market risk," said Kimberly Slawek at Fitch. Slawek said that the market is so inundated with different credit risk products that investors now typically shift most of their attention to analyzing the market risk or the mark-to-market risk volatility in a trade.
Slawek said that Fitch has spent the past nine months developing its new product and the aim was to start with one of the more opaque sectors of the market - synthetic CDOs. "Understanding market risk is critical for investment analysis of synthetic CDOs," she said.
New risk analysis
The analysis will be distributed in a mark-to model price market report, much like the format used for Fitch's presale reports. Slawek said that Fitch worked with its sister company Algorithmics in developing the new format. Additionally, Fitch worked with two other third-party CDO pricing model firms that Slawek was reluctant to name because the deal was not yet finalized.
The information will be distributed on a largely industry-wide basis via a Web-based portal that will incorporate a security and access function where issuers can post private libraries for particular investors. Slawek said that there will be a separate database for wrapped credit default swaps.
"Once investors understand the impact of correlation and spreads then they can begin to understand the future price volatility," said Slawek. "We aim to bring as much transparency as there is on the credit risk side into the market risk side."
Slawek said that Fitch's aim was not to create an innovative or industry changing product. "It's a standard product, similar to what's being used at derivative desks," she said. "It's the same methodology but we plan to be very transparent about it."
While Fitch is aiming to cover synthetic CDOs, Standard & Poor's began actively promoting its own brand of market risk product that focuses on European ABS and MBS. The market pricing service was launched at the end of March and heavily marketed at last month's European securitization industry conference in Venice, Italy.
A spokesperson for the rating agency said that it was the first product of its kind to be unveiled in Europe. The S&P Evaluated Pricing Service initially covers European asset-backed and mortgage-backed bonds, providing fund managers and securities firms with daily and intraday evaluations of securities prices based on an analysis of their underlying collateral and cashflows and latest market data.
"We have prioritized markets by size, client and prospect requests during our discussion with market participants over the past year," said Peter Jones, director of S&P's securities evaluations team. "The largest held universes and requested assets fell into the RMBS sector, then ABS and CMBS. Content coverage expansion will be ongoing on a client request basis and as deal cashflows are modeled."
Jones said that S&P is looking to work with internal and external partners to expand asset class coverage to other complex and structured instruments during the year.
S&P's Securities Evaluations has been in business for over 30 years, it was previously known as JJ Kenny prior to S&P. The European ABS/MBS evaluation offering is the result of over nine months of internal work within S&P's securities evaluations group and a culmination of several years work on the collection, standardization and modeling of the European deals by S&P, Crisil and ABSxchange, said Jones.
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