Russel Parentela, md for BNY Mellon Structured Credit, answers SCI's questions

Q: How and when did BNY Mellon become involved with Structured Credit Connection?
A: Structured Credit Connection is a real-time auction marketplace, which allows us to act as agent in the structured credit trading area. We got involved based on the lessons learned from the financial crisis, a strong desire on the part of market participants for transparency and feedback we received helping the US government with its TARP, TALF and PPIP programmes.

We were involved in the early stages when the different government programmes were being created. At first, the initial concept was to have an auction system to auction securities, but while there were benefits to that approach there were also problems, particularly anonymity. Structured Credit Connection allows us to act as an agent in trying to bring back the securitisation market by providing an anonymous marketplace for securities and, in particular, illiquid securities.

Q: What are your key areas of focus today?
A: The initial area of focus is illiquid securities. The first rollout of the system is going to be US dollar-denominated RMBS securities, in which we include prime, subprime and alt-A. We will also handle ABS, CLOs and CDOs.

We eventually plan to expand into Islamic finance and energy receivables, such as carbon credits by early next year and perhaps sooner. We are working with partners at the moment and we are still in the development stages.

One of the key aspects of our system which is unique is that, as assets are put up for sale, we have custody of the asset. For example, as a company, we have a custody business for carbon credits. We are one of the few places with the capability to act not only as agent but to also have custody of the asset.

Q: Which market constituent is your main client base?
A: There is a target audience for traders and there is a non-trading audience.

Our clients are qualified institutional buyers (QIBs) and being a QIB is our first eligibility qualification. We are trying to target everybody from investment banks and broker-dealers to asset managers, hedge funds, insurance companies and pension plans.

The goal is to allow the information to be widely disseminated to allow people to make knowledgeable decisions about the market. That is the target market for people who will be trading with the system.

But we also have a target market including people such as regulators. We think rating agencies, risk officers and evaluation officers will want to see what is going on in the marketplace and use that for valuation purposes. These are people who want to know what is going on in the market.

Q: How do you differentiate yourself from your competitors?
A: BNY Mellon is a triple-A rated US bank counterparty, which is rare. Our large custody book of nearly US$23trn, the robustness of our institution, the strength of our balance sheet and breadth of our capabilities is how we differentiate ourselves.

Our auction system for most asset classes requires that we have custody of the asset while it is available for sale. Also, buyers and sellers remain totally anonymous. That is how we differentiate our product.

We have a specific exemption from the US SEC to make sure our buyers and sellers remain absolutely anonymous. Normally, even with an agent, the buyer or seller has the right to legally ask the identity of other party. We have true anonymity.

Other than that, the largest distinguishing feature is that for assets available for sale we are going to provide a free, detailed data and analytics tool to allow people to form their own opinions about these assets. It is a loan-level, drill-down data analytical system built in direct response to a Bank of England requirement.

The system has all the loan-level information and it also has all the documents associated with each transaction and a public waterfall model. All of this is available to the purchaser to help them make their decision.

It would take people years to build a comparable data and analytics system. We let people have free access to the system for anything available for sale, while it is available for sale and then for 30 days thereafter.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
A: To get rolling! The largest challenge is whether the market is willing to embrace this level of price transparency.

Right now the regulators are discussing including the concept of TRACE - putting the price of an ABS trade onto a database. This system does that and much more, because in this system every time someone bids they get a bidder number and everyone can see the size of the bid they submitted. You can see the depth of people bidding and you can see at what level they bid.

I can put an asset for sale with a reserve price of 70. Normally, if nobody shows up there is no news and no data which can be taken from that.

In our system you can see, for example, if five people put in bids at 60. Not only do you see what level it was offered at, but you can see the market's level of interest.

You can see how many people were interested and what level they were interested at. It is very transparent.

We are hearing overwhelmingly positive feedback about our transparency. Investment banks are very interested because they like that this is proof that what they are doing is very transparent and that they are adhering to regulations and acting appropriately.

Purchasers like it because it will allow them to have more information before they make their investment decision. Sellers like it because they have no downside; the seller does not pay anything.

If sellers own something on their books at 80 and know they can sell it at 85, they can put it up for 85. If they get 85 then they sell it, but if nobody shows up then that is OK also.

The key is that it is very revolutionary. We think it answers all the criticisms in the system about people lacking information, about not having an easy enough format, about people trying to bid pennies on the dollar if they know the seller is in distress. We have tried to address the system to maximise the execution for the seller.

We will know more in the months ahead when we see how many people sign up.

Q: What major developments do you need/expect from the market in the future?
A: The major development that needs to continue to happen is the development of relationships and communication between buyers and sellers, while at the same time keeping other interested parties informed. It is important to have increased reporting and usefulness of data.

A lot of the initiatives already put forward by the EU, Bank of England and the SEC are on-point. I expect that there will be greater loan-level transparency and publication of waterfall models, so that people can truly assess the risks inherent in what they are buying.

JL