David Pagliaro, EMEA commercial director, ABSXchange and Peter Jones, global head, Valuation Scenario Services (VSS), Standard & Poor's answer SCI's questions

David Pagliaro

Since then, S&P has improved the product offering to increase the appeal for trading and research functions, buy-side portfolio managers and regulators. Today, ABSXchange continues to evolve into S&P's one-stop structured finance platform, providing three central services to the structured credit markets - data retrieval, cashflow analysis and portfolio monitoring.

PJ: Both the structured finance platform and the valuations business form part of S&P's Fixed Income and Risk Management Services (FIRMS), which launched in 2008. S&P has been offering an evaluations service since the 1970s, covering over 2.9 million daily evaluated prices.

Over the past 10 years more than 1.1 million US structured instruments have subsequently been added and in 2005 European ABS capabilities were added. However, the new valuations service - which we launched in January - adds additional and new capabilities to the FIRMS suite of valuations capabilities.

Valuation Scenario Services, as the new business is called, brings together several offerings from within S&P's FIRMS division to provide a number of different analytic and model-driven valuation solutions for a broad range of illiquid and complex asset classes. We hope that the new valuation service will meet today's significant industry requirements not only for transparent delivery of valuations but also, even more crucially, for the methodologies and assumptions used to produce them.

Q: How do the services distinguish themselves from the credit rating side of the business?
PJ: The two businesses operate independently of each other and address very different analytical issues. The credit ratings business is focused on producing opinions about the probability of default for bonds, including structured finance transactions. The role of VSS is to help investors value illiquid and complex assets.

While the two businesses may often examine the very same deal, it is from entirely different standpoints. We have strict firewalls in place to preserve the independence and objectivity of each analytic process.

In some cases, as with ABSXchange, FIRMS acts as a technology provider to the ratings business as well as to the valuation businesses, while the valuations services and the ratings business themselves operate independently.

Q: How has the service of the two platforms/offerings developed since they were first launched?
DP: Since acquiring the structured finance platform in 2007, S&P has made significant investments in cashflow modelling, data operations and in its IT resources. Consequently, ABSXchange has evolved into a single platform that can be used across the structured finance market - from the structuring phase of a transaction to research and trading, and to portfolio management.

At the moment, users of the structured finance platform have unrestricted access to data and analytical tools for more than 2,500 European structured finance deals. This number continues to grow as we add more deals in Europe and extend the reach of the service to Asia, Australia and the US.

While we have ongoing performance data for most of the European universe, over 80% of European RMBS and CMBS transactions are modelled on the platform, and this coverage is increasing every day as our modelling team continues to build out our library. We are also working with issuers to increase delivery of asset level data via our platform - something we already do for most CMBS deals and a large proportion of RMBS deals.

PJ: The launch of VSS represented a natural development within the FIRMS division by bringing together the core capabilities of the structured finance platform with FIRMS' other structured finance functionalities, content sets and universes. We are now offering our clients customised reporting and bespoke valuation for all their hard-to-value structured finance assets, drawing on many products and services already at our disposal.

Q: Which market constituent is your main client base? Do you expect this to change over the coming year - and why?
DP: ABSXchange is fast becoming a benchmark for the industry, across the buy-side and the sell-side, as well as for regulators. Examples of clients from these segments include Barclays Capital European Securitisation Research, M&G Investments, Credit Foncier and the UK's Financial Services Authority.

For several reasons, demand is increasing most rapidly from buy-side institutions. Investors holding illiquid structured finance assets are using the platform to analyse robust cashflow models that calculate returns given particular anticipated scenarios.

Portfolio managers and analysts also use the application for portfolio surveillance. And recently funds looking to buy up distressed debt and illiquid assets have started using the platform to help inform their trading activity.

PJ: FIRMS is currently working with a number of banks, industry and regulatory bodies, as well as traditional investors, to help them with the valuation of complex and illiquid securities. Indeed, VSS is intended to be an effective support for institutional investors to meet today's new regulatory accounting requirements, and to show transparent operational and risk management processes as delineated by IFRS 7, the Bank for International Settlements and the FSA. As such, VSS's main client base at the moment includes insurance companies, banks and funds.

Q: What are the main drivers behind clients approaching you?
DP: EMEA market participants are concerned about improving their internal systems for risk management. While organisations will likely decrease overall IT spend this year, investments in systems for risk management will take priority as integrated risk becomes increasingly important in today's markets.

Indeed, banks, asset managers, insurance companies and alternative investment managers are all actively looking to improve their risk management systems. ABSXchange directly responds to this need by providing unparalleled transparency through its data and sophisticated analytical tools.

PJ: At the moment, there is a lot of focus from the industry supervisory bodies and regulators on the issue of valuation and clients are approaching us to help them address such internal and external requirements for transparency around their valuation process. Indeed, the availability of data, analytics, cashflows and valuations are all key to injecting greater transparency into the industry - from meeting supervisory requirements through to aiding the investment process.

The Bank for International Settlements, the UK Financial Services Authority and SIFMA have all recently issued reports highlighting the increased importance of risk management and the oversight of an institution's valuation processes. These processes require many different types of valuation output from institutions and VSS is certainly helping institutions to meet those demands.

Q: Which asset classes do you currently focus on and into which areas are you looking to expand?
DP: The structured finance platform has been used to model US, European and Australian structured transactions. In Europe, we have exceptional coverage of UK prime RMBS master trusts, UK non-conforming RMBS, continental European prime RMBS, CMBS and consumer ABS. Our deal library is the largest in Europe today, and we are currently expanding it to cover European CLOs and asset classes from other regions.

PJ: The VSS business is focused on the delivery of these structured finance assets at the moment, principally in the US and Europe, but we are building out the service and modelling deals on custom request to ultimately cover any illiquid and complex securities that are subject to valuation requirements requested by clients.

Q: Which asset classes are you currently seeing most interest in from your clients and why?
PJ: Most of the interest at the moment is in UK RMBS, including all of the master trusts. There is also, naturally, a lot of attention around US sub-prime RMBS and European CLOs.

The UK RMBS market is one of the largest sectors in terms of the amount of assets outstanding in Europe. And, with recent events with the Granite master trust triggers and focus on the collateral performance in the non-conforming loan sectors, clients are naturally focusing on surveillance of the performance of these assets and the impact of changes that their assumptions are having on valuations.

Q: How do you differentiate yourself from your competitors? Who do you consider to be your competitors?
DP: ABSXchange is positioned at the centre of the structured credit market as the primary provider of deal data and analytics for market professionals of all orientations. As such, the service aims to be the benchmark provider in Europe, meeting the needs of arrangers, issuers, investors, regulators and all other market participants. We try and achieve this by focusing on data integrity and by delivering robust, deal-specific cashflow models and sophisticated analytical tools, such as portfolio monitoring and break-even analysis.

ABSXchange also has a dedicated team of analytical client support resources in the region which works hand in hand with our clients. And, unlike our competitors, ABSXchange is entirely dedicated to the European market.

PJ: There are a number of niche players in the market and elements of offerings from some specialist software providers providing similar IT solutions. But what is unique to us is the depth and breadth of the service we offer - the scale and market expertise that we provide, combined with the fact that our services are already being delivered to clients. Although there are competitors offering the software or the data, there are none capable of providing the data, analytics and cashflow models in combination with the valuation tools and deep market expertise we have within FIRMS.

Q: Which challenges/opportunities does the current financial environment bring to your business and how do you intend to manage them?
PJ: Nearly all financial institutions in today's environment are affected by the requirement to generate new revenues while attempting to control costs and address the risk management issues presented by the current market environment. This presents an opportunity to FIRMS, one we have already started to address with the launch of Valuation Scenario Services.

The current environment has also enabled us to draw on a range of skill-sets already within the business to create new products and drive new revenue streams. It also allows us to better scale our business according to client requirements.

Q: What major developments do you need/expect from the market in the future?
DP: The market is still dealing with a sizeable "hang over" in terms of primary market issuance from 2007, as well as actual and perceived performance issues that surfaced during late 2007 and 2008. Some market participants will continue to exit the market, although at a slower pace than they did last year, while many others will either do nothing or act opportunistically.

Indeed, there remains sufficient existing issuance in the market to satisfy the needs of active participants. However, for any organisation that remains in the market, there is a clear advantage to engaging with services such as ABSXchange and VSS to track and carry out surveillance of their portfolio performance and ensure greater confidence in investment decisions.

PJ: We will certainly see increasing demand for greater transparency of all kinds. For example, for loan level data and cashflows based on greater underlying collateral analysis - exactly the kind of data and functionality sourced from our structured finance platform. It is also clear we will see an ever increasing focus on the input assumptions going into valuations across all illiquid and complex structured finance asset classes.

We believe that one of the major developments taking place today, and for the foreseeable future, will be the creation of a set of standards around valuation. The market needs to form consensus around all the input assumptions, models and processes involved in valuation and the FIRMS structured finance offering has positioned its capabilities to help clients and the market to address these developments.