Euro Data Disclosure More Advance than the U.S.

Vendors anticipated hearing May 27, the Friday after ASR's deadline, whether they could bid on the contract to build and operate a repository to collect and make available data for loans backing European RMBS, a project several steps ahead of a similar effort in the U.S.

"Winners and losers in the RFP process are probably going to be notified Friday afternoon," said Paul Burdell, secretary of the Market Group, a consortium of participants in the ABS market established to advise the selection of the data warehouse constructor.

Burdell, CEO of Link Financial Group, a purchaser and servicer of performing and nonperforming receivables, said the Market Group received about 50 responses to its request for information.

"We responded [to the RFI] as an individual company and we said we've spoken with several other firms with whom we've agreed to work with to make this happen," said Usman Ismail, executive vice president at Lewtan Technologies, who is overseeing his firm's participation in the project. All RFI respondents were asked to reply individually and note other firms that have indicated an interest in forming a temporary group to work on the project.

Link Financial was chosen by the European Central Bank (ECB) to advise on developing a market-led solution to create the data warehouse, including organizing the Market Group.

The Governing Council of the ECB decided late last year to establish loan-level information requirements for ABS by summer 2012, starting with RMBS and later including other types of ABS. The data warehouse is slated to be completed by then as well.

Burdell said construction of the data warehouse is expected to be financed through a private placement in the next 12 months, and the vendor constructing the warehouse will receive a 15% stake. The initiative has been designed to ensure that a wide variety of market players participate in the project's various decision-making committees - the pricing committee included - and those committees will change members on a regular basis to ensure a level playing field.

Article 122a of the European Union's (EU) Capital Requirement Directive became effective Jan. 1. One of its requirements is for banks buying the ABS, including an offering's underwriters, to demonstrate that they understand the risk characteristics of the underlying loans, in part by disclosing loan-level data.

The Bank of England's (BofE) new disclosure requirements go beyond the data provision and require disclosure of specific legal documents, investor reports and cash-flow models, in order for them to be eligible for financing under its discount window. The BofE's scheme, with which constituents must comply by November 2011, also differs from the ECB's because it does not encourage a centralized data warehouse.

"The genesis of the ECB's and Bank of England's programs was to introduce loan-level data and more information so they themselves could better assess the collateral posted to them," said Douglas Long, executive vice president of business development and product strategy at Principia Partners, a provider of structured-finance software.

The BofE's new disclosure requirements are more extensive than the ECB's and require disclosures to actual and potential investors of certain legal documents, investor reports and cash flow models, so the banking firms it regulates can post the securities for financing at its discount window.

Instead, it has left market participants to come up with solutions, much like what already occurs in the U.S., where issuers have long provided loan-level data for free. The formats and types of data in the U.S., however, have varied from issuer to issuer, making it difficult to digest and analyze without the help of vendors such as Lewtan, Markit and Bloomberg, which do charge fees.

In fact, the Securities and Exchange Commission (SEC) issued a proposal in April 2010, referred to as Regulation AB-2, that would broadly impact securitizations. One provision would require issuers to provide numerous defined data fields to the SEC for each loan in most ABS pools, and that information would be posted publicly and for free on the Internet. Like the BofE's proposal, it, too, would require issuers to provide a "waterfall" cash flow algorithm to display the flow of repayments between the numerous shareholder classes in an ABS security.

Comments on the proposal, which was mostly favored by the institutional investors and criticized as burdensome by issuers and their underwriters, were due Aug. 2 - just a few days after the Dodd-Frank Act was passed by Congress. Since then, regulators including the SEC have been mired by developing rules mandated by that law.