It certainly has been a busy month for Standard & Poor’s and it seems that some parts of the business have had a better January than others. S&P’s Cusip Service Bureau (CSB) has not had a good start to the year with the European Commission’s announcement on 12 January that it will be investigating the vendor’s pricing practices concerning International Securities Identification Numbers (ISINs). The vendor’s Fixed Income Risk Management Services (FIRMS) business on the other hand, has been industriously adding two new services to its portfolio.
The Commission launched its inquiry this month, and many will see the outcome as a precedent for numbering agencies’ future ability to charge consumers and redistributors for the identification codes it administers. It believes that S&P may be abusing its monopoly position as the US national numbering agency, by forcing European financial institutions to pay licensing fees for the use of US ISIN codes in their own databases. The vendor has been charging these European firms for this service since 2003. Specifically, the Commission believes this practice may be in breach of Article 82 of the European Commission Treaty’s rules on abuse of a dominant market position.
An S&P spokesperson confirms that the investigation relates to CSB’s ISINs rather than S&P’s own Cusips numbering system. S&P runs the CSB on behalf of the American Bankers Association (ABA). Although the 12 digit ISINs are under investigation, S&P’s nine character Cusip codes are not under the same scrutiny, according to the spokesperson.
While describing the original complaint that prompted the EC’s inquiry as “without merit,” S&P further asserts that the complaint “misrepresents the activities of the CSB and ignores the fact that CSB’s licensing practices and charges are wholly transparent, in line with industry practices, and based on fair, reasonable and non-discriminatory terms”.
The S&P spokesperson says: “We are cooperating with the European’s Commission’s inquiry and look forward to explaining CSB’s role and business practices.”
As part of its investigation, announced on 12 January, the Commission is therefore examining the license fees for the use of ISINs, as well as certain descriptive elements attached to them, each time a code is used to access information provided by data services providers like Bloomberg and Thomson Reuters. Annual license fee costs for a typical asset management operation run out to US$25,000-US$30,000 on average.
These practices could also involve financial institutions being forced to pay for services they do not need, in the form of the ISIN database, which the Commission describes as “a service that they are not interested in and do not actually use”.
“Moreover, it is alleged that S&P forces its contractual partners, the information services providers, to cut off financial institutions from data feeds on US securities unless the latter enter into licensing agreements with S&P for the use of US ISINs,” the Commission states.
According to the Commission, the proceedings were prompted by official complaints made by “several” associations representing investors. However, complaints regarding S&P’s pricing practices around ISINs in Europe are not a new development. S&P has been battling against negative perception of its pricing policies for securities identifiers for some time.
The recently launched FIRMS business, which is headed by ex-Thomson Financial and Bloomberg heavyweight Lou Ecclestone, has been experiencing a rather different start to the year. Not only has it launched a new RatingsDirect Global Credit Portal, the vendor has also added a new valuations service for structured assets and complex securities. The RatingsDirect portal upgrade includes expanded content and added market views and seeks to integrate more seamlessly into the workflow of market participants, according to Philipa Stoneham, product manager of the RatingsDirect service.
It is hoped that the new solution will provide sector, sub-sector, industry and entity views to help conduct surveillance, monitor counterparty risk and perform credit analysis. Accordingly, a new feature of the solution is that it aggregates information at the sector, sub-sector and industry level combined with data such as recent developments, ratings migrations and distributions, biggest movers by credit default swap (CDS) spreads, and industry snapshots.
“Every page is customisable and has more features than before – users can determine what data they want to see when they log in to the service,” explains Stoneham. “We have introduced a number of new features throughout the product, including RSS feeds and the option to access news from numerous external sources.”
The new Valuation Scenario Services for Structured Asset Portfolios, on the other hand, pits S&P against the competition in the already rather crowded valuations market. However, Peter Jones, global head of Valuation and Scenario Services at S&P FIRMS, reckons the service is more than capable of taking on the competition.
Jones explains the background behind the launch: “We have launched this service now because FIRMS possesses a unique suite of capabilities within the division. A year and a half ago (in summer 2007) S&P acquired a structured finance platform (Imake) that provides analytic modelling for structured finance cash flows, data and valuation. FIRMS has been building out that platform in terms of coverage and functionality.”
According to Ecclestone, who was appointed executive managing director of FIRMS at the start of last year, the service is aimed at providing a much clearer picture of the real value of the paper financial institutions are holding in order for them to more accurately analyse their portfolios. “Market uncertainty, a lack of liquidity and an overall crisis sentiment are combining to create a disrupted relationship between market observed pricing and the intrinsic value of structured assets on investors’ balance sheets,” he says.
Jones also reckons the launch is timely with regards to market conditions: “The issues around valuations and valuation scenarios are very obvious in the marketplace right now. Over the last year and a half we have seen what has been going on in the markets and the issues firms are having with the valuation of toxic assets, as well as the general requirement for greater transparency around the valuation process.”
The market has recently seen a lot of activity within the industry and on regulatory side around valuations, adds Jones. “For example, the Bank for International Settlements (BIS), the UK Financial Services Authority (FSA) and Sifma have all issued papers or documents highlighting risk management and oversight of an institution’s valuation processes. These processes require many different types of valuation output from institutions and this service can help institutions to meet those demands,” he claims.
Accordingly, the service offers a range of analytics that aims to give investors greater context around asset pricing and the detailed relationships between counterparties and obligors. The vendor claims that the analytics provided by the service offer investors a step by step, transparent assessment of their structured portfolios under a range of different assumptions and economic scenarios. This information is then reviewed in a collaborative decision support process with clients to help drive an improved understanding of structured credit portfolio value.
Standard & Poor’s Valuation Scenario Services operates independently from the company’s ratings business and it is supported by the newly formed Market, Credit and Risk Strategies (MCRS) team. MCRS has been created as an independent research group that analyses cross market and cross asset class valuations and relationships. The valuations service is also supported by the Standard & Poor’s Structured Finance Platform and modelling team and the Fixed Income Architects team.
The MCRS team is focused on extensive independent macroeconomic and micro-based research across asset classes and markets and this supports the new valuations team, says Jones. “The team is also able to leverage S&P’s publicly available commercial data, analytics, and modelling tools, and the insight and knowledge of deals that come from FIRMS’s expert teams of structured finance professionals. It is this whole suite of capabilities that we are now bringing together and will leverage to offer the market Valuations and Scenario Services,” he claims.
It is differentiated from S&P’s Evaluated Securities business because that provides just a single view of a price or a value, continues Jones. “But this new service allows all sorts of different reports to be run by different parts of a financial institution,” he says.
The vendor began work on the strategy behind the service in the summer of 2008 and finished this development work in the fourth quarter, according to Jones. “The service has been launched and we can produce different types of valuation deliverables to different types of clients. We have the capability to provide valuation tools for asset backed and mortgage backed securities on our structured finance web platform, so institutions can input the information themselves and we can also provide custom reports to meet the needs of senior management, who may be looking to deal with regulatory capital or show oversight of risk management valuation process inputs, for example,” he elaborates.
The development of the solution was not without its challenges, however, as issues common to the European securities market such as transparency of data, particularly with regards to availability of loan level data for certain structured assets, proved to be tricky. But this is what the service has been set up to resolve, says Jones.
“Other issues we are working to help address include the standardisation of assumptions that go into valuations models and this is where we do a lot of work with the market and our clients. We have to engage in a lot of dialogue with the investors in this area about what type of assumptions people are looking to put into these models. The key to much of the scenario valuation business is to look at and understand the impact that small adjustments to inputs have on the valuations output,” he says.
Jones reckons S&P’s new offering will stack up against the competition because of the support from its risk and research teams. He believes S&P has the people that can deliver analytics and the modelling teams and data collection infrastructure to support the service.
“There are a lot of niche players in the market and there are elements of offerings from specialist software providers that can provide IT solutions for this kind of service. What is unique to us is the scale and market expertise that we bring – the scale of the team, the offering and the resource we can draw on to provide market insight to clients. The acquisition of the Imake structured finance platform in 2007 was a statement of intent for us. We are leveraging a large base of infrastructure and resource across IT, data, analytics throughout FIRMS globally to provide the Valuation Scenario Services,” he says.
Although S&P is launching the service into a crowded market, Jones says the vendor is not oblivious to the dynamics of the market and the spectre of consolidation. “The market is ripe for consolidation and some of the niche price consolidation providers and software providers will find it difficult to meet the scale of requirements of some of the projects that are out there at the moment. I think that is why we have to offer multiple offerings to the marketplace – to meet the needs of clients that will be driven by IASB/ IFRS and greater calls for transparent and robust risk management processes around valuations.”
He continues: “The key thing for us is that although competitors offer the software or the data, there are not many capable of providing the data, the analytics and the cash flow models combined with the valuation tools with the deep market expertise we have within FIRMS. The service uses the FIRMS resources in a collaborative environment that helps to drive the clients‘ understanding of their portfolio and, critically in this market, the assumptions that need to go into the valuation models. Our capability to also model deals on a custom basis has ensured we have been capable of winning business.”
Jones says the vendor is seeing a lot of interest in bespoke and custom reports for the sell side institutions, investors, insurance companies and the treasury arms of corporates. In terms of the size of business won over the last six to nine months, the structured and illiquid market spend appears to have increased significantly as institutions look to find solutions for issues around valuation of complex and illiquid assets, he explains.
“We envisage working with many institutions in 2009 to value the illiquid and complex structures the press label ‘toxic’ and are being held on firms’ balance sheets. We will also be looking to work with central banks, regulators and governments to this end and, in particular, we can help with the valuation of European RMBS, ABS, CMBSs and other areas of particular challenge such as CLOs and US subprime RMBS,” Jones says.
In terms of functionality, Valuation Scenario Services will roll out increased functionality on the FIRMS structured finance platform (ABSXchange) to enable clients to carry out portfolio scenario and stress testing themselves, says Jones. The team will also work with clients to create benchmark consensus input assumptions that help with valuation transparency, he concludes.
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