As the “credit crunch” blame game plays itself out, some hefty criticism is being meted out to various quarters of the industry, not least the regulators and the ratings agencies for their alleged failure to act sooner to stem the tide of fall-out from the sub-prime crisis in the US. A lot of people are having a very bad time of it, vis the poor City and Wall Street traders whose bonuses could suffer, and – lest we forget – the individuals at the start of the chain who were the recipients of the sub-prime lending in the first place and whose lenders have now foreclosed.
But it’s an ill wind that blows no-one any good, and there is surely some positive fall-out for some market players. The pressure is on the financial institutions, and they need help. Some recent remarks from the practitioners with which Reference Data Review publisher A-Team Group is in constant contact serve to illustrate the point well. “It used to be good enough to buy a triple-A asset-backed,” says one. “Now you have to know exactly what’s behind it!” Adds another: “This isn’t business as usual for fixed income managers. Nobody can price the mortgage-backed securities!”
When financial institutions need help, this naturally creates an opportunity for suppliers of data and solutions to the marketplace to come to their rescue. Providers of valuations of hard to price, illiquid securities (and illiquidity doesn’t get much worse than it is today) spring to mind. In truth, since the US sub-prime issue had been bubbling under for some time prior to the recent crisis, a number of these providers had already reported an uptick in interest in their MBS/ABS pricing services in Europe, as fear of contagion from the US took hold. A third-party service, or even several, might not be the silver bullet in the current climate – these are extraordinary times – but at the very least recent experiences should serve to raise the level of interest in looking to outside and – crucially – independent prices. The events of the past few weeks surely represent the final nail in the coffin of the already much frowned-upon practice of firms “marking their own books”.
And other players in the data business are also reporting increased interest in their services in the current climate. DTCC, for example, says there is intense demand for the payment schedules for all DTCC eligible structured securities (CMOs, CDOs, ABSs et cetera) that it is adding to its GCA Validation Service (providing a single source for scrubbed corporate actions data) in Q4.
Volatility in the structured products and derivatives sector is also potentially good news for providers of some of the mechanisms on which the industry is coming to rely for efficient processing of these transactions. As the back offices of financial institutions reportedly buckle under the strain of increased transaction volumes in recent weeks, so the appeal grows of the affirmation services (from the likes of Markit, Swapswire and TZero) designed to clarify and get agreement on the details of trades as early as possible in the cycle, with a view to reducing the number of mismatches spat out at the confirmation stage by mechanisms such as DTCC Deriv/SERV, thus easing the workload of exception management staff and helping to prevent confirmation backlogs.
For more on the data handling and processing associated with derivatives and structured products, look out for the next issue of Reference Data Review’s sister publication, A-Team IQ, next month.