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Markit Expands Reach of Credit Derivatives Data

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Markit, with the weight of its 13 bank sponsors behind it, has been expanding rapidly – both its coverage of the credit markets driven by acquisitions, and its distribution through deals with data vendors and software providers.

Its RED product – reference entity database – has recently been made available via risk management software provider Sophis, and Asset Control. With the latter, Markit is making its credit prices and counterparty reference data available via AC CompanyMaster, which is Asset Control’s consolidated company data module of its AC Plus data management framework. On the data vendor side, Bloomberg last year integrated RED internally into its credit default swaps and related markets databases, and Markit is in discussions with several other vendors, according to Nicola von Schroeter, director, sales and marketing.

The credit derivatives market has been growing significantly in volume, but until more recently, there had been no way to identify an issuer of guarantor from a legal documentation point of view, says von Schroeter. She cites an incident of a few years back when confusion over whether a name change took place from Armstrong Holdings to Armstrong World Industries led to financial institutions taking out legal contracts for protection with the wrong name. The result was when the company went into default and some dealers examined their contracts, they realised their default swaps contracts were invalid, leaving them exposed.

Realizing the value of contributing data with other market participants, JP Morgan, Deutsche Bank and Goldman Sachs jointly founded RED to enhance liquidity, transparency and standardization in the credit derivatives market, reducing the cost per transaction. They sold RED to Markit in 2003 in return for a stake, for Markit to act as an independent entity to manage ongoing development. RED’s development comes against the backdrop of the International Swaps & Derivatives Assocation (ISDA)’s drive to reduce settlement times.

RED’s role is to confirm references for issuers and guarantors, and it now covers around 2,600 entities, essentially most of the primary dealer market, which will soon extend into the secondary market. The identifiers are based on the nine-digit alpha-numeric CLIPS, assigned by Standard & Poor’s Cusip Service Bureau. This information is essential for ensuring accurate risk management and getting pricing right. Says von Schroeter, “Our aim is to increase coverage, credit by credit, to encompass the full universe of traded credit derivatives entities.”

Another initiative has been the simplification of document packs that go with index transactions, specifically by providing constituent IDs for entities, which helps to automate the trade matching process and reducing the settlement time required. Markit is currently discussing extending RED to cover the deliverability aspect of the entities in its database.

As well as RED, Markit also provides Markit Data, Dividends (based on DaDD acquisition), Index Management (TIMS acquisition), and Valuations (Totem acquisition). Regarding dividends, John Price, founder of DaDD, says, “Dividends are volatile and irregular, and their impact on the underlying derivative can be significant.” Markit Dividends follows a process for tracking patterns, company board meetings, news and other relevant items to forecast dividends, and provides dividend information with the tax removed. Although mainly focused on the UK market, it has also extended coverage into the U.S. (where dividends have become more prevalent) one year ago – achieving an 85% accuracy rate in its first year there.

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