By the end of this year, RMBS issuers keen on obtaining funding from the European Central Bank, as well as those already using these securities as collateral in sale and repurchase agreements, will need to input data on the underlying mortgages into the newly created European DataWarehouse, known pithily as ED.
Deadlines for securitizations backed by other kinds of assets are further down the road, and there is a grace period for all asset classes, but the point is clear: As it now stands, if you want to use ABS you've either issued or hold as collateral in ECB funding, be prepared to lodge loan-level information with ED.
This may not be a big enough incentive to ensure the participation of the entire European securitization market, particularly in ED's early stages. Dutch originators have expressed reservations about how the project has been organized, and U.K. banks are not as beholden to the ECB for funding as are their peers on the continent.
ED's champions, though, say that it will bring a major boost in transparency, which should help lure investors back into a Europe that in the days before the crisis provided scant information about collateral, especially as compared to certain segments of the U.S. securitization market.
The most visible booster is the ECB itself. By dangling the carrot of its repo window in front of issuers and anyone else holding ABS deals, the bank is sending a loud signal to the marketplace. But the ECB will also be a customer of the warehouse. Having already taken shiploads of collateral from ABS issuers in Europe, it would naturally like to know itself what's in there.
"To be fair, organizations like the European Central Bank, as well as most central banks today, were not designed to do the things that the market is asking them to do currently," said Paul Burdell, director of the European DataWarehouse. "However, the European Central Bank saw an absolute need for transparency in ABS, and from this came the loan-level data initiative."
The loan-level data initiative was essentially the precursor to ED. The process of establishing loan-level data requirements for European securitizations began in 2009 as an effort to correct what many saw as major deficits in market transparency.
"In [European] securitizations until now, most of the data that came was at the aggregate level," said Usman Ismail, executive vice president at Lewtan Technologies. "And for matters of transparency, to be able to do a true analysis and understand the risk of the transaction, you need data at the loan level." Beyond combined stats such as weighted average coupon and average maturity, individual loans in a typical pool remained largely a mystery.
These deficiencies came to the attention of the European Central Bank, especially, as Burdell noted, when a closer relationship with the sector fed the need for a more meticulous understanding of the collateral underpinning transactions.
"During the crisis in 2007-2008, with the collapse of Lehman and some of the Icelandic banks, we were seeing transparency failings in the European ABS market," said Fernando Gonzalez, chairman of the ECB technical working group on the ABS loan-level initiative and head of the risk strategy section at the ECB.
Soon after, the ECB started to receive large amounts of ABS collateral from banks with few options for funding. "We launched the loan-level initiative to improve this situation," Gonzalez added. "It's not only a risk management issue for us to even better understand the ABS securities we've taken as collateral, but it's a transparency initiative for the market. It should also, quite naturally, give investors that have left the market confidence to re-look at ABS as an investible asset class and in turn help it to reactivate itself."
As investors in Europe have largely stayed away from ABS, originators continue to retain a sizable portion of their deals. (See graph at right.)
The loan-level initiative involved six technical working groups, each focusing on a different asset class: RMBS, CMBS, SME securitizations, auto loan deals, leasing ABS and transactions backed by consumer finance assets.
Some views of what should be in ED have been shaped by experience with loan-level data in the U.S.
An investor familiar with the European DataWarehouse said U.S. structured finance investors are accustomed to the sort of loan-level data that will be available in ED largely because of non-agency RMBS and the level of detail typically disclosed in that sector. The information flow there did not come from an ED-style warehouse with participation from a variety of market participants, but rather was harvested, standardized and supplied by data providers CoreLogic and Lender Processing Services, according to market sources.
ED is the culmination of a more directed approach.
"To better achieve the objectives, what the Eurosystem thought was that you bring confidence to the market by having a single platform for the market, so that all the information of the European ABS market is contained in one place with the same standards for everyone," said Gonzalez. "We didn't want to have a balkanization of the ABS market."
Also, the ECB itself wanted to have a single counterparty for such a platform, he added.
Nuts & Bolts
ED is open to the 27 countries that make up the European Union in addition to non-EU countries that are part of the European Economic Area, namely Iceland, Liechtenstein and Norway. This goes well beyond the 17 EU states that share the euro as their currency.
The warehouse had its first issuance of shares earlier this summer, with 15 investors buying in, consisting "largely of global banks and institutions," according to a press release distributed July 9. The statement added that "proceeds from the placement will be used to finalize the build-out of ED as well as to provide the business with ongoing working capital." Sapient Global Markets is building the software, while NTT Europe will provide the hardware and backup service for ED. Morrison & Foerster and Noerr have both been legal advisors to the project.
The names of the present shareholders have not been disclosed yet, but Burdell said ED expected to make an announcement in this area shortly.
He added that the European DataWarehouse is essentially a utility: "It's open to anyone; anyone can become a shareholder or a user."
Its profit margin is based on costs plus 5%-10%. "The profit that it's making is not only to cover itself but to reinvest in itself so that technology is continually enhanced to keep up with market developments," Burdell said.
Both those downloading from and those uploading to ED will pay a fee.
"The fee structure or the fees paid by data providers and users of ED still need to be agreed, but the premise is that they will be set by the pricing committee," Burdell added.
The committee will be made up of originators, investors, rating agencies and other ABS market players and will be overseen by the European Central Bank and several other national central banks.
"Investors will likely pay less than originators, similarly for current shareholders," Burdell said. "Everyone was invited to be a shareholder, and when we set the pricing on the equity we tried to price it at such a level that incentivized buyers by offering large discounts on services that ED will provide in the future."
He added that the larger the number of participants, the lower the cost of the fees - a characteristic feature of how a utility is run.
The templates for each asset class were created with the help of the technical working groups. All are available on the ECB's Web site. The one for RMBS, for instance, contains approximately 157 fields for details on the underlying mortgage loans. But not all fields are mandatory.
Many fields are applicable only to specific jurisdictions. For instance, the last field in the RMBS template reflects an idiosyncrasy of Spanish RMBS - asking whether a borrower is contencioso. This denotes a status in which legal proceedings have begun against the homeowner, typically when the borrower is in arrears for more than a few months.
"Originators have had a year participating in the development of the RMBS loan-level template and some more time for providing input to the consumer loan and auto loan TWGs," said Steve Gandy, head of securitization at Banco Santander and a member of the RMBS, auto loan and consumer finance working groups. "In that process, the ECB has given plenty of time to the market to understand the template requirements and figure out if there were any gaps in the system. We did a gap analysis ourselves among our various units to determine if there were any information elements that were missing."
Gandy declined to say whether Santander was a shareholder in ED.
The deadlines for deals to remain eligible to be used as collateral in ECB repos vary by asset class: for RMBS, loan-level data must be provided by December 1, 2012; for ABS backed by loans to small and medium enterprises and for commercial mortgage-backed securities, it is January 1, 2013; and for consumer finance ABS, leasing ABS and auto loan ABS, the deadline is January 1, 2014.
There is a nine-month phasing-in period from the dates above. Where loan-level data are incomplete on that date, they must gradually be completed in the course of that transition period.
If a deal isn't fully compliant but remains in the system, there is a way for investors to immediately gauge whether all the required data is in there and submitted on time.
Burdell said there will be a scoring system that will reflect whether the originator or other data provider on a transaction submitted comprehensive information, with the right kind of data in its corresponding field in accordance with the ECB eligibility criteria. The higher the score, the more complete the information. "This will be a quality assurance score," he added. "It will let investors know that a quality assurance process has been applied to the data."
As it currently stands, scores are combinations of A-D and 1-4, with A1 denoting full compliance and D4 slapped on a deal where a good number of the fields are noncompliant for any number of reasons, according to the ECB Web site. For purposes of the scoring system, the nine month grace period for completing the template is divvied into three phases of three months each.
Gonzalez said that the score will not determine the haircut that the ECB applies to a deal for collateralized funding, but he added that the Eurosystem reserves the right to change or modify its haircut schedule when it deems that doing so is necessary.
Mixed Get Nixed
Barred from ED - and by extension the repo window - is any transaction backed by pools of different kinds of assets. Heterogeneous ABS will remain eligible until March 31, 2014.
In an early July report, Bank of America Merrill Lynch said this policy shift will weigh on the Italian market, where mixed collateral is more common, particularly in lease ABS. "The use-by date of these deals from the Eurosystem collateral point of view is limited by the end of March 2014," said BofA Merrill analysts.
For deals that are eligible and entered into the warehouse, the data will still not be clean enough for immediate use by some investors, sources said.
"If investors don't use it directly, they'll use it indirectly," an investor familiar with the European DataWarehouse said. "You can imagine cottage industries developing around this - people offering services to analyze the data, process it, clean it up."
Ismail said that Lewtan - which was part of a group of companies that had lost the bid to Sapient to build the warehouse's software - is prepared to collect, scrub and normalize the data from the warehouse and put it into a format that people can use.
"If there's any experience we've learned over the years it's that people will conform to a particular template, but it still won't be normalized against issuers and services," Ismail said. "Someone has got to take the trouble to normalize it; otherwise it will be useless."
Burdell said that ED will "check the validity of data to make sure everything is in the right order according to the ECB templates, but it's not an auditor."
Basically, it is a matter of ensuring that the right information goes in the proper field.
"ED is not designed to do anything intelligent with the data," he added. "[But] as part of maintaining exceptional service, ED will have an external firm come in regularly to review and report on its operations, methods and processes against agreed and contracted minimum service levels."
The warehouse's impact has been assured by the ECB's active involvement, sources said. The bank will, after all, be one of its largest customers, given all the ABS it has already taken on as collateral for funding eurozone banks.
"Having a data warehouse like this, and the ECB using its position as one of its largest users, I think will have a very positive effect on the market in terms of standardizing loan-level requests, getting originators who might have been reluctant to provide this detail or to do the necessary investments to provide it," said Santander's Gandy.
The eurozone's monetary authority, however, will not own a piece of ED.
"The ECB itself will not be a shareholder, but it will be an active observer [as well as] a client. Our position is one of support and a catalyzer of change so as to equip the ABS market with the necessary tools to develop and reactivate itself," Gonzalez said.
But the project may not have the impact it could have, given that, for now, a significant portion of the market is being kept alive by lenders in the Netherlands and the U.K. (See pie chart on the next page.) The former group is reticent to participate, while the latter is not as dependent on ECB funding as eurozone banks and therefore may not feel as compelled to participate.
For instance, there have been reports that Dutch banks/issuers are staying out of the warehouse because of how ED was set up and the charging of fees. The truth is more nuanced, though this area of the market - and not a negligible one in the past year or so - is not exactly embracing the warehouse either.
"Dutch issuers at this point in time don't want to participate in funding the warehouse, but they haven't said that they wouldn't upload their data to the warehouse," said Ferdinand Veenman, a partner at the corporate finance group at KPMG and advisor to the soon-to-be-launched Dutch Securitisation Association.
In a joint statement on the matter, 10 Dutch issuers of ABS - among them ABN AMRO, ING and Rabobank - as well as the Holland Financial Centre said they sent a letter to the ECB conveying that they "fully subscribe to the objectives of the European Central Bank of restoring confidence and facilitating investment in the structured finance markets across Europe and that they agree that requiring loan-level data being made available to investors will contribute to meeting these objectives."
But, at the same time, the signatories were still discussing their participation in the warehouse with the ECB. "The Dutch issuers have raised their concerns regarding the information that was provided in respect of the funding, functioning and objectives of the European DataWarehouse," they said.
Veenman said that Dutch originators - which are overwhelmingly RMBS issuers - have come together to come up with a single standard for mortgage-backeds. The goal is to have investor reports issued on a monthly basis for RMBS and to have the same table of contents and main definitions in the prospectuses and transaction documents. Veenman said that Dutch banks should be compliant on this front potentially by the end of October.
The Dutch are also launching a Web site with this information, stats on the Dutch housing and mortgage markets and possibly more. "It is currently being investigated whether loan-level data can be made available to investors (including the ECB) through the portal as well," according to the statement signed by the Dutch ABS participants.
The ECB, on the other hand, is trying to steer the Dutch toward ED.
"We'd like to see the Dutch participate - this is a shared message from the Dutch Central Bank, the European Central Bank and all members of the governing council," Gonzalez said.
If they stay aloof, as it now stands the Dutch will lose the ability to repo their transactions with the Central Bank at some point. Sources believe some kind of rapprochement is the most likely scenario.
U.K. Reigns over Issuance
For the Brits, however, there is a different dynamic at play. Originators there can rely on the Bank of England's new Funding for Lending Scheme, which if successful would presumably reduce any reliance they might have had on ECB funding. U.K. issuers have also been more successful of late in placing their deals with market investors, notably U.S. buyers hungry for the kind of yields that are a rare thing at home.
This does not mean that the Brits have not or will not use the ECB's repo facility. Many of the largest among them have been issuing euro tranches and, with their branches in the continent, fulfill all the criteria for ECB funding, said a source at a British originator.
The eurozone mess and regulatory uncertainty are at the root of inactivity in the rest of the region. Proponents of ED say that the warehouse will not fix everything but that it should help bring investors back to these more embattled segments of the market.
"The warehouse will work not just because [ECB] funding is critical for a very significant number of banks in the moment, but also because investors have also told us they now want a central and independent point to access their data," Gonzalez said. "That being said, this is a crisis that is not going to disappear in the next few years, and therefore it's doubly important that the warehouse gets up and running and loan-level information starts flowing to the market as soon as possible."
But BofA Merrill analysts said in a report that ED could inadvertently bump up the costs of doing RMBS vis-Ã -vis covered bonds, given that the former now have even more extensive disclosure requirements.
"We suspect that this will be one more nail in the coffin of peripheral RMBS," the analysts said. "Yet peripheral countries need SME and consumer ABS as a way to access liquidity through ECB, hence the need to comply with loan-by-loan disclosure requirements."
Ironically, the analysts see U.K. and Dutch issuers as the best equipped to comply.
At any rate, the Bank of England already makes loan-level data mandatory for receiving collateralized funding and uses templates modeled after the ECB's. Lewtan runs a Web site called the Global ABS Portal that collects the loan-level data in the U.K. and makes it available to anyone.
Burdell said that ED would certainly like to see everyone who's eligible to participate. "We're trying to get as many people as possible to participate in our workshops, webinars and even through the press so hopefully no one's surprised come December," he added.
Whatever the actual percentage of the European marketplace that decides to use ED, the warehouse inarguably represents a leap forward in the region's efforts to put collateral under the microscope. This will create an unprecedented opportunity to compare deals across the countries and collateral.
"It'll be a standardized pan-European database, and as a result it will allow us to build standardized pan-European models," said the investor. "So we'll be able to compare a Spanish deal to a Dutch deal and what is truly cheap and what's dear."