Searching for transparency and liquidity

The twin themes of transparency and liquidity were reflected upon in many of the panels at this year's IMN Global ABS conference. However, interpretations of what the terms actually represent varied.

Jim Irvine, head of structured products & advisory at Henderson Global Investors, observed: "I would say that, aside from certain transactions in Italy and perhaps Spain, data is available to investors and further initiatives will add to this. I do not believe that there is a general lack of transparency in terms of information availability. For the most part, the information is there."

But another panellist suggested that there's too much focus on transparency at present. "I believe that increasing transparency is a red herring in terms of drawing investors back to the ABS markets," he remarked. "The information is there, but pre-crisis investors did not perform the due diligence necessary and bought based only on the opinion of rating agencies. I believe that the real problem is a lack of confidence and, as a result, a reluctance to make general ABS allocations, aside from credit card and auto ABS."

Paul Colonna, president and cio, fixed income, at GE Asset Management, pointed out that many questions still surround residential mortgages, for example. "While markets have performed as expected with regards to auto and credit card ABS, there is a lot of uncertainty about mortgage-backed bonds. I think this will continue for the next few years."

Massimo Ruggieri, md at Deutsche Bank, agreed that investors need to become comfortable with the underlying risks in order to come back to the market and see that the market has proven to be robust. He stressed that the way to ensure investor confidence is to increase the focus on transparency.

However, Peter Nowell, head of ABS & ILS trading at BNP Paribas, noted: "What investors want is a longer lead-time, not a return back to the days when deals were announced on a Monday and had priced by the Tuesday or Wednesday. Investors need one to two weeks to perform the proper credit work that in the past they had left to the rating agencies to do."

He added: "In terms of transparency, I think that in Europe banking confidentiality laws need to be harmonised by the EU so that information is accessible."

But another panellist warned about the potential for information overload. "If the lead-time is too long, then this will result in less liquidity in the market. While we take longer to analyse loan-level data of primary issuance, what is important in terms of transparency for the secondary market is the standardisation of data. This will enable investors to process information quickly and maintain market liquidity."

In terms of liquidity, one reason given for the current lack of market depth is because few want to sell at present. It was suggested that the dealer community has absorbed what sell-side activity there has been and so has provided enough liquidity.

Alex Lazanas, director and co-head of ABS sales & trading at Evolution Securities, commented that it's just as difficult now to find a bid as it was to find an offer six months ago. "Speed of execution, market depth and the bid/offer spread are what define liquidity. The only thing that has changed recently is the bid/offer spread," he said.

But Craig Tipping, md and co-head of Jefferies International's mortgage & ABS group, suggested that while the European market has traditionally been buy-and-hold, investors' mindset and mandates need to change in order to facilitate liquidity. "They need to adopt more of a trading mentality, like in the US, where end accounts switch positions and actively manage their portfolios. The valuations required by buy-and-hold investors ultimately constrain liquidity because the valuations typically lag the market," he said.

Tipping pointed out that a grey area is developing around whether a trading desk is focused on prop or flow trading. Dealers should shoulder some of the volatility because they are often guilty of front-running a rally, which results in a larger correction than was necessary, he noted.

There was agreement that the rise of agency brokers over the last few years has facilitated liquidity in the securitisation market, serving to drive the bid/offer spread tighter because of their low cost base. In addition, there is no conflict of interest because they don't take positions.

"The agency broker model is here to stay: the bid/offer remains wide, so we can add value here. Dealers are doing a good job providing liquidity in benchmark names, but not necessarily in esoteric names, which is another area where we can add value," Lazanas observed.

Tipping agreed that the agency broker model will evolve, as consolidation in the sector occurs and their focus on illiquid/bespoke assets increases.

CS & JA