Europe Gearing Up for Mark-to-Market

by: Richard Field

Thanks to the work of the Association for Financial Markets in Europe (AFME), all of the major credit institutions in Europe will be able to begin marking-to-market their structured finance portfolios by February 1, 2011.

Due to the work of the AFME, by the end of the first quarter of 2011, investors will be able to find out which major European credit institutions are solvent and which are insolvent based on their holdings of structured finance securities.

Why does your humble blogger make these statements? According to an article in Global Financial Strategy:

An influential European industry group has backed proposals by the European Central Bank to implement new requirements for providing loan-level information for asset-backed securities.

The Association for Financial Markets in Europe said in a statement that the move should "enhance transparency" of underlying assets in securitization pools.

Richard Hopkin, AFME managing director and a member of the ECB's technical working group, said "AFME supports measures which have the potential to improve investor confidence in securitization."

The ECB guidelines are designed to make information on underlying loans and their performance more timely, widely available and produced in a standardized format.

"In addition, the industry appreciates the ECB's introduction of an operational phase-in period of 18 months, which is an important factor given the systems changes required of members," added Hopkin.

Your humble blogger would like to help the reader understand why Mr. Hopkin's comments mean that mark-to-market accounting for structured finance securities will return by February 1, 2011.

First, Mr. Hopkin would have you believe that it will take 18 months to make all the system changes required. As one of the world's leading experts on loan-level disclosure for structured finance securities (I have developed patented information technology in this area), what the ECB is asking the large credit institutions to do can easily be done in a month. It is a simple data mapping exercise.

Hence the reason that I say that the large credit institutions can comply and make the data the ECB is requesting available by February 1, 2011.

The failure by any institution to deliver the data by that date can only be attributed to the fact that they have something to hide, namely they are insolvent based on their holdings of structured finance securities that they service.

Delivering loan-level data is only half the problem. The second half of the problem is that the data being delivered must also restore "investor confidence." Without investor confidence, the investors who have gone on a buyers' strike will not return to the securitization market.

Clearly, Mr. Hopkin and AFME would have done everything possible to assure that what is being disclosed and when it is being disclosed would restore investor confidence. After all, why would the managing director of a sell-side lobbying firm (it is an affiliate of SIFMA - the sell-side's main lobbying arm) not do everything possible to insure the return of investor confidence and the restarting of the securitization market?

Given the intent of all the participants on the ECB technical committee was to restart securitization by providing the buy-side with the information they want and need on a timely basis, I can only assume that after this information is made available by the end of January, the investors will return to the market.

Bottom line, the return of investors to the markets means the return of mark-to-market accounting.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.