The Full Reveal

By the end of this year, RMBS issuers keen on obtaining funding from the European Central Bank, as well as those already using these securities as collateral in sale and repurchase agreements, will need to input data on the underlying mortgages into the newly created European DataWarehouse, known pithily as ED.

Deadlines for securitizations backed by other kinds of assets are further down the road, and there is a grace period for all asset classes, but the point is clear: As it now stands, if you want to use ABS you've either issued or hold as collateral in ECB funding, be prepared to lodge loan-level information with ED.

This may not be a big enough incentive to ensure the participation of the entire European securitization market, particularly in ED's early stages. Dutch originators have expressed reservations about how the project has been organized, and U.K. banks are not as beholden to the ECB for funding as are their peers on the continent.

ED's champions, though, say that it will bring a major boost in transparency, which should help lure investors back into a Europe that in the days before the crisis provided scant information about collateral, especially as compared to certain segments of the U.S. securitization market.

The most visible booster is the ECB itself. By dangling the carrot of its repo window in front of issuers and anyone else holding ABS deals, the bank is sending a loud signal to the marketplace. But the ECB will also be a customer of the warehouse. Having already taken shiploads of collateral from ABS issuers in Europe, it would naturally like to know itself what's in there.

"To be fair, organizations like the European Central Bank, as well as most central banks today, were not designed to do the things that the market is asking them to do currently," said Paul Burdell, director of the European DataWarehouse. "However, the European Central Bank saw an absolute need for transparency in ABS, and from this came the loan-level data initiative."

The loan-level data initiative was essentially the precursor to ED. The process of establishing loan-level data requirements for European securitizations began in 2009 as an effort to correct what many saw as major deficits in market transparency.

"In [European] securitizations until now, most of the data that came was at the aggregate level," said Usman Ismail, executive vice president at Lewtan Technologies. "And for matters of transparency, to be able to do a true analysis and understand the risk of the transaction, you need data at the loan level." Beyond combined stats such as weighted average coupon and average maturity, individual loans in a typical pool remained largely a mystery.

These deficiencies came to the attention of the European Central Bank, especially, as Burdell noted, when a closer relationship with the sector fed the need for a more meticulous understanding of the collateral underpinning transactions.

"During the crisis in 2007-2008, with the collapse of Lehman and some of the Icelandic banks, we were seeing transparency failings in the European ABS market," said Fernando Gonzalez, chairman of the ECB technical working group on the ABS loan-level initiative and head of the risk strategy section at the ECB.

Soon after, the ECB started to receive large amounts of ABS collateral from banks with few options for funding. "We launched the loan-level initiative to improve this situation," Gonzalez added. "It's not only a risk management issue for us to even better understand the ABS securities we've taken as collateral, but it's a transparency initiative for the market. It should also, quite naturally, give investors that have left the market confidence to re-look at ABS as an investible asset class and in turn help it to reactivate itself."

As investors in Europe have largely stayed away from ABS, originators continue to retain a sizable portion of their deals. (See graph at right.)

The loan-level initiative involved six technical working groups, each focusing on a different asset class: RMBS, CMBS, SME securitizations, auto loan deals, leasing ABS and transactions backed by consumer finance assets.

Some views of what should be in ED have been shaped by experience with loan-level data in the U.S.

An investor familiar with the European DataWarehouse said U.S. structured finance investors are accustomed to the sort of loan-level data that will be available in ED largely because of non-agency RMBS and the level of detail typically disclosed in that sector. The information flow there did not come from an ED-style warehouse with participation from a variety of market participants, but rather was harvested, standardized and supplied by data providers CoreLogic and Lender Processing Services, according to market sources.

ED is the culmination of a more directed approach.