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Standard & Poor’s Launches Evaluations for Euro ABS/MBSs

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Standard & Poor’s has unveiled a new bond evaluations pricing service catering to the European structured finance marketplace. The move is aimed at filling a gap in the marketplace, which is plagued by lack of transparency particularly for illiquid asset- and mortgage-backed securities.

The move marks Standard & Poor’s entrance to the European bond evaluations marketplace, a segment currently dominated by Interactive Data Corp.’s FT Interactive Data and recently targeted by newcomer Reuters. Standard & Poor’s chosen specialist target marketplace, bond evaluations for structures finance, was a key area of concern identified by
A-Team Group’s Fixed Income Pricing: Are Evaluations Gaining Value? survey, which was published last autumn and sponsored by Reuters.

Standard & Poor’s reckons its new Evaluated Pricing Service is the first of its kind to use cash-flow analysis and modeling to evaluate prices for European asset-backed and mortgage-backed securities. As such, the service bases its pricing on the analysis of these securities’ underlying collateral and cash flows, as well as on current market data.

This approach marks a departure from the traditional valuations method among portfolio managers of calling traders, brokers and originating banks for pricing. This can cause problems, resulting in stale prices and patchy coverage for illiquid securities.

According to Peter Jones, director of European securities evaluations at Standard & Poor’s, despite the rapid growth in popularity of structured finance products in Europe in recent years, there remains a relatively illiquid secondary market, which creates problems for transparency and consistency of valuation for many structured bonds for institutions seeking to mark to market.

A range of regulatory initiatives is set to impact requirements in this area. These include Basel II, MiFID, IAS39 and UCITS III, which require holdings to be marked to market on a regular basis. Standard & Poor’s also cites the U.K. Financial Services Authority’s Financial Risk Outlook 2006, published in January, which high-lighted operational risks arising from opaque pricing of illiquid securities.

Jones says that until now Europe has lacked a models-based source for pricing illiquid structured finance deals. In the U.S., Intex Solutions provides a model-based approach for valuing asset-backed, mortgage-backed and collateralized mortgage obligations. By capitalizing on the lack of an Intex equivalent in Europe, Standard & Poor’s hopes to be able to seize a market segment that many acknowledge is seriously underserved. As well as pricing for fixed-income derivative instruments, the A-Team survey identified the lack of a standard pricing mechanism for structured finance deals as an obstacle to liquidity for that market in Europe.
For Standard & Poor’s, the new service represents an opportunity for it to exploit the assets of its various operating units. The Standard & Poor’s Evaluated Pricing Service will make use of terms and conditions data collected by the Standard & Poor’s ratings agency in the course of its research with respect to bond issues. The new service will also benefit from data normalization and standardization functions performed by an Indian affiliate.

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