Technology in the ABS World: Delivering to the Transparency, Investment, and Risk Management Agenda

by Cubillas Ding,  Sreekrishna Sankar, April 18, 2011
Vendor Reviews
Global, Asia-Pacific, EMEA, Latin America, North America

Abstract

Asset-backed securities were one of the most highly impacted segments during the financial crisis. One pertinent lesson learned from the crash is that investors should stay clear of investments they cannot fully understand, monitor, and manage.

Issuers and investors are trickling back to the ABS market, but they should avoid repeating the mistakes of the past. The most fundamental investment question may remain unanswered for the majority of buy side firms with regard to asset-backed investments: How can we effectively gauge and monitor the performance and risks associated with of our investments on an ongoing basis?

In this report, Technology in the ABS World: Delivering to the Transparency, Investment, and Risk Management Agenda, Celent analyzes how the asset-backed securities market has changed since the crisis and envisages how the technology market can evolve to play a role in facilitating the revival of the marketplace.

With the May 16 deadline for ABS reporting to TRACE fast approaching, firms have to make significant operational and technological changes to incorporate the requirements in business operations, technologies, and compliance and supervisory systems. This report serves as a guide to resolving these issues.

Main findings of the study include:

  • The funding market is currently finding investors only for the safest issuances, such as covered bonds and similar products. While ABS will find more traction and growth in US markets, in Europe there will be a greater inclination to invest in covered bonds.
  • There are negative internal perceptions of the ABS/MBS market. Although this originated from the mortgage market, it also reflects lack of interest in other ABS asset classes. Regulation and technology are the two enablers that can bring investors back to the market.
  • Investment analysis in an integrated environment, where risk and operations are aligned, is imperative. Integration, instead of the fragmented niche solutions in the systems landscape, is important in the provision of solutions in order to tie together investment and risk workflows for investors.
  • The newer regulations will result in disclosures of huge volumes of data, and the onus will be on the solution providers to provide better data management, higher quality data analytics, sophisticated stress testing, and improved risk management functionality.

 

“With structured finance and ABS data expected to decrease in cost, due to regulation, and undergo a level of commoditization, Celent expects opportunities for next-generation solutions that reflect stringent investment and risk management realities, yet are cost-effective in the context of eroding top line fee structures,” says Cubillas Ding, Research Director with Celent and coauthor of the report.

“As answers continues to unfold, regulation is the first step in restoration, but it does not directly create actionable resolutions,” adds Sreekrishna Sankar, Celent Analyst and coauthor of the report. “Market participants and vendors now have to rise to the challenge of bringing to life viable, market-oriented solutions. Only then can asset-backed markets be back on a sustainable growth path.”

This report discusses the future of the ABS market and the role that technology will play in its revival. The report analyzes the landscape of technologies in the market that are utilized for managing the lifecycle of ABS investments from an investor perspective, as well as evaluating considerations in selecting solutions or solution components.

This 54-page report contains 21 figures and 11 tables.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Introduction

6

 

Structured Finance and ABS: Issuance Process and Participants

6

Securitization and Asset-Backed Markets

8

 

Securitization Market: State of Affairs

8

 

Which Regions Are Showing Signs of Life?

10

 

Which ABS Sectors Are Showing Signs of Life?

12

 

Why Have Markets Not Fully Revived?

14

Regulatory Impact on the ABS Market

17

Technology Imperative for the ABS World

23

 

Trade and Operations Management

24

 

Investment Portfolio Analysis

25

 

Risk Measurement and Assessment

27

Vendor Ecosystem, Solution Approaches, and Technology Considerations

29

 

Current State of Affairs: Fragmentation and Complexity in the ABS Investment Lifecycle

29

 

Current State of Affairs: Reviewing the Solutions Employed

31

 

The Future: Analysing the Solution Spectrum and Framework for Defining IT Approaches

36

Looking Forward / Conclusions

41

 

Investors

41

 

Issuers

41

 

Solution Providers

42

Appendix A; Technology Vendors

44

 

Data/Content Providers and Aggregators

44

 

Portfolio and Risk Services

45

 

Structured Financial Pricers/Analytics

46

 

Specialised Portfolio and Risk Systems

47

 

Front-to-Back Derivatives/ Structured Product Solutions

48

 

Specialised Structured Finance Solutions

48

 

Valuation Services

49

Appendix B: The Funding Market

51

Leveraging Celent’s Expertise

53

 

Support for Financial Institutions

53

 

Support for Vendors

53

Related Celent Research

54

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