Finance:ABS Loan Level Initiative

The ABS Loan-Level Initiative was a Eurozone initiative from 2012 to standardise asset-backed securities (ABSs) information accepted as collateral in Eurosystem credit operations. It was put forward in response to the 2008 financial crisis as the ECB wanted to restore confidence in the securitisations market.

The initiative began after support for the idea was recognised at a European Central Bank (ECB) public consultation. It establishes specific information requirements for asset-backed securities (ABSs) accepted as collateral in Eurosystem credit operations. The aim was to allow market participants access to standardised timely information on loans and their performance. Access to this information should allow market actors to make more informed assessments of asset backed securities. The Eurosystem believed that the new data requirements would help both investors and third-party assessment providers with their due diligence. It was hoped that the loan level initiative would help instil transparency and ultimately confidence back into the securitisation market.

Following the ECB initiative, the Bank of England made Loan Level information one of their extended eligibility criteria for ABS collateral, but without a costly central Data Warehouse and with free access to market participants.

Background

Following the 2008 financial crisis the ECB wanted to restore confidence in the securitisations market. The perceived problems were a lack of transparency and the absence of a standardised system across asset classes. These made it difficult to make accurate risk assessments of the securities. Enabling better risk assessment would then have the effect of encouraging investors and reducing the current levels of reliance on the Eurosystem.

Objectives

The officially stated European Central Bank aims of the initiative are

1. To improve transparency in ABS markets by requiring loan-by-loan information to be available and accessible to market participants on an ongoing basis. This is considered necessary to revive the ABS markets
2. To facilitate the risk assessment of ABSs as collateral used by Eurosystem counterparties in monetary policy operations.

Technical Working Group ABS

Technical Working Group structure

The Technical Working Group (TWG) was introduced to provide expert advice on the ABS Loan Level Initiative The TWG is broken up into 6 asset class groups:

• Residential mortgage-backed securities (RMBS)
• Commercial mortgage-backed securities (CMBS)
• Small and Medium Sized Enterprise Securitisation Transactions (SMES)
• Auto Loan ABS
• Consumer Finance ABS
• Leasing ABS

Technical Working Group permanent members

In addition there is a group of permanent members of the TWG – this group includes representation from:

• European Central Bank
• Central Banks of Spain, France, Ireland, Italy, Germany,
• LCM Partners (a member of the Link Financial Group)
• Clifford Chance
• Ratings Agencies Fitch Ratings, Moody’s Investors Service and Standard & Poor’s

The current chairman of the TWG is Fernando Gonzalez Miranda a representative of the European Central Bank

Development

Stage 1 – ABS Loan Level Data Templates

In 2009 the ECB began the project to introduce Loan-Level data reporting for ABS. The ECB’s Executive Board and Governing Council worked together so that the €2,084 Billion ABS market in Europe could be promptly restarted. LCM Partners was appointed as the senior advisor from the project’s inception.

In December 2010 the ECB the Governing Council of the ECB announced its decision to establish loan level data (LLD) requirements (referred to as the ABS initiative). As of the summer of 2012 the published data requirements will have to be complied with before a financial institution can pledge ABS as collateral with the ECB.

These data templates were decided upon following consultation with the Technical Working Groups. The individual asset class requirements were further deliberated by more specialist Technical Working Groups.

The ECB decided that in order for the data requirements to work effectively there must be a data-handling infrastructure. In April 2011 in a letter to President Trichet the ECB detailed its plan to develop a European Data Warehouse which would allow for the collection and transmission of the loan level data.

Stage 2 – Creation of Data-Handling Infrastructure With Market Group

LCM Partners carried out surveys with investors and issuers in order to determine the most efficient way of structuring the data-handling infrastructure.

Following LCM Partners’ consultations it was decided that the European DataWarehouse would receive the loan-level data from the originators and would then check it for compliance against the ECB templates.

Stage 3 – RfI and RfP

An independent Market Group was established to oversee the Request for Interest and the Request for Proposals. The Market Group is composed of nine of the largest originators and purchasers of ABS in the market.

The Market Group oversaw the RfI and RfP and will continue to oversee the development of the European DataWarehouse by working closely with investors and the Technical Working Group.

Stage 4 – Selection

Following the RfI and RfP the Market Group selected the following companies to advise and provide services for the European DataWarehouse:

• Sapient Corporation – Constructor of the data handling infrastructure
• Morrison Foerster – Legal counsel for ED
• Deloitte – Tax and accounting advisor
• Perella Weinberg Partners – Financial and private placement advisor
• Egon Zehnder International – Recruitment
• LCM Partners – Senior Advisor and Project Manager

European DataWarehouse

File:European Data Warehouse Logo.png

Logo of the European DataWarehouse GmbH

The result of this development work is the European DataWarehouse GmbH.

The European DataWarehouse (ED) is an ambitious market led solution to the problems the ECB identified in the ABS market. ED’s responsibilities include ensuring that ABS market data is openly accessible and that all transactions are recorded. A key aim of ED to instil trust back into the ABS market which been a problem in recent times. The ECB is set to make compliance with Loan Level Data disclosure compulsory before it will accept ABS securities as collateral for financing.

In July 2012 ED announced that it had placed all 15 of the investors it was seeking. This investor group consists largely of global banks and institutions

Bank of England

The Bank of England has published similar data templates as those published by the ECB. In contrast to the ECB, the ABS Loan Level information is also applicable to covered bonds. While the ECB eligibility criteria on Loan Level data will phase in starting from March 2013 (for RMBS), it has been mandatory for the Bank of England since December 2011. Further to Loan Level disclosure, eligibility criteria extend to a standardized transaction overview template and an open source cash flow model to be provided freely to investors and other market participants.

External links

• https://eurodw.eu/ = European Data DataWarehouse GmbH, the European central data warehouse for collecting loan level data (LLD) for Asset-backed securities transactions. It was developed by the market, and endorsed by the Eurosystem, to facilitate risk assessment and to improve transparency standards for European ABS deals.