Data Commoditization in the Securitization Markets (Part 1)

July 7th, 2010

Written by Jack S. Broad

© 2010 Thetica Systems, LLC

Introduction

As has occurred within many industries throughout history, the data vendors that provide various information about securitization have been undergoing huge changes causing large price decreases and company consolidation. Additionally, we are seeing many new partnerships springing up concurrent with the increasing need for coherent complete systems to manage all information relating to securitized deals. Without a complete picture of your ABS bonds, how can you accurately assess risks and price volatility?

In this article, we will be reviewing what the key components of a securitization system should be and take a look at some of the vendors participating in each of those components and then describe some of the market forces which we think are creating more and more of a “commoditization” of securitization information.

This trend, we believe, is leading to substantial price compression for securitization data products, causing data to become cheaper and more accessible. This trend is continuing into the future and will result in better deals for industry participants.

In this paper, we describe all the major components of an RMBS information system so as to provide a broad overview of the data industry and how it relates to trading activities. We then go on to talk about some new initiatives in the industry and what their potential impacts will be on the various players in the market place and what this means for your firm.

Data Components of an ABS System

There are five primary components making up the key data needs relating to securitizations. Without these, a firm engaged in trading bonds backed by mortgages is going to be “picked off” by other firms and might as well not be trading as it’ll be just too risky.

These five components are:

1. Deal Information Data
2. Loan Data
3. Enhanced Loan Data
4. Predictive Model
5. Bond Analytics

Historically, trading firms have emphasized one or more of the above components, mostly due to lack of investment in technology and data. It is no longer enough to be “two guys and a Bloomberg” in this industry. What is needed are comprehensive yet flexible systems.

*Our next blog posts will describe these components in some detail *