The European Central Bank (ECB) confirmed last week that it has opted for Sapient Global Markets to build its new asset backed securities (ABS) warehouse for Europe. Kevin Samborn, who is lead architect on the warehouse project and is a consultant with Sapient Global Markets, and Randall Orbon, vice president with the vendor, explain the details of the project, which is due to be completed in the late summer of next year, to A-Team Insight.
In April this year, the ECB indicated that it would be building a new ABS focused data warehouse in order to restore confidence in this sector. Accordingly, the purpose of the ABS loan level data warehousing initiative is to help kick start the European ABS market by improving transparency and facilitating the risk assessment of ABSs used as collateral by Eurosystem counterparties in monetary policy operations and thereby restoring investor confidence in the ABS markets.
Samborn elaborates on the driving force behind the initiative: “The intent of this warehouse is to give investors the transparency they need to return to the market, and when that happens, ABSs will become popular again, which will drive liquidity into credit markets. It also will tie directly into the ECB’s Eurosystem liquidity systems, because originators are required to use the warehouse if they want their securities to be usable as eligible collateral.”
As for the selection of the vendor, Orbon explains the background of how Sapient Global Markets and a number of other vendors got involved in the process: “Regulatory discussions have been going on for some time, but they became concrete in April this year, when the ECB issued a letter talking about the idea of a data warehouse that would hold loan level data for the underlyings of European ABS and mortgage backed securities (MBS). It also talked about a process of choosing a constructor of the warehouse. Representing the industry in this process was the Market Group, which constituted the 17 largest participants in terms of orignators and investors in the European ABS market.”
The Market Group was therefore charged with assessing the “independent constructors” described by the ECB letter (available to download at the bottom) that could build the warehouse, which would process, verify and transmit the ABS data, beginning with retail MBSs. Orbon explains that the Market Group formed a working group that went through a process of looking at the details of the reporting procedures such as templates for data submission and they also sponsored a process to kick off a request for information (RFI).
He elaborates further: “They drove the process in which 50 different companies or consortiums were whittled down to 15 and then further to five finalists in the request for proposal (RFP) process. When you have that many competitors, the list includes nearly everyone you can name in terms of services firms and infrastructure providers. Towards the end we were competing largely with consortiums and we were selected as the constructor.”
Sapient Global Markets duly responded to the questions the working group posed throughout the period and Orbon reckons it was the vendor’s experience in building these types of systems and in working with organisations such as central banks and regulators that made it stand out. The final negotiation period began two or three weeks ago and last week’s announcement was the culmination of that process.
“We have started the project and have a team that is working on pulling together the detailed requirements and we are due to deliver the warehouse in late summer next year,” he explains.
On the practical side of things, Samborn is leading the team that is working on the project and Orbon indicates that this team is “substantial” in terms of build, but it is not an “overly large effort” for the vendor overall. “It is similar to some of the infrastructure we have built for other central banks in terms of one off projects. It could also build in complexity and scope over time,” continues Orbon.
Samborn explains some of the practical aspects in this initial phase: “Key to making this work is that both originators of the data, which are the issuers of ABS, and the users of the data, which are the investors, understand and have access to the data behind the ABS. The real driving force is that investors have transparency into these markets and can make assessments with regards to the value and risks related to ABSs. We need to communicate very well with the investor and the originator communities in order to ensure that the functionality in the database is compelling for them and they get what they need. The next immediate phase is to ensure that feedback is consolidated and taken into account.”
As for what makes this effort different to the plethora of other data warehousing and repository initiatives out there, Samborn says: “There are a lot of warehouses out there in the market focused on transaction flow but this is different in focus because it captures not transaction level details but data about the securities themselves. There is no real repository at the moment globally where ABS data is being warehoused. This is the first one that will be out there and it is focused on European ABSs.”
Given that this initiative is European in scope, but in terms of global regulatory mandates, there are other regulators looking at implementing a similar level of disclosure for the ABS market, there are other opportunities for Sapient and its rivals in other jurisdictions. It will be interesting to see whether other regulators opt to go down the same route.