A round-up of all the week's structured credit news
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Fitch launches stability scores
Fitch Ratings has launched a set of stability scores for synthetic CDOs that are designed to provide a better understanding of the prospective stability of ratings assigned to CDO tranches by indicating the propensity of a tranche to retain its original rating over a period of one year from closing. The move follows a consultation period with market participants.
The key aspects to rating stability include the level of excess credit enhancement, underlying diversity, barbelling of underlying credit, level of overlap in CDO-squareds and term of the deal. The findings were made possible by simulating the possible rating outcomes at a given point in the future after accounting for expected portfolio performance.
"We received overwhelming support from investors to apply this research in a way that provides a greater level of risk transparency to synthetic CDOs being issued," says Richard Gambel, Managing Director, Fitch Ratings. "The product is unique because it is forward looking and it takes into account all transaction and portfolio features, not just the level of excess credit enhancement."
Central to the delivery of the analysis was the concept of a stability score to put the measure of stability into an absolute, as well as relative context. Stability scores range on a scale of ST1 to ST3, with the first indicating a minimum one-year theoretical estimate of stability of 90%, the second between 90% and 80%, and the third less than 80%.
For the moment, stability scores will be generated for AAA tranches of corporate CDOs, but Fitch plans to expand them to lower rated tranches and to CDOs that reference ABS in the future.
Meanwhile, Fitch has released an updated version of its VECTOR default model in Beta format. The changes include an updated user interface, together with other features that focus on ease of use, including an automated data loader for corporate reference entities. The development of the new version includes a review of the entire assumption set, with a focus on both updating assumptions to account for additional data and to improve the integrity of the relationship between these assumption sets.
The new version also includes a revised framework for the analysis of emerging market assets in internationally-rated deals. The proposed approach puts greater weight on regional and country concentrations when determining asset correlation, rather than on industry concentrations.
Fitch's fundamental credit view has not changed, despite the comprehensive updating of assumptions. For the vast majority of Fitch-rated CDOs, the model changes don't indicate any difference in the ratings of the liabilities. But for short-dated transactions, the new model tends to take a harsher view - although this is expected to have a greater impact on the agency's view as transactions season, rather than at inception.
Markit brings standardised ABCDS payment calculations
Markit Group has launched Reference Cashflow Database (RCD) - standardised payment calculations for CDS on ABS in a bid to facilitate settlement in the rapidly growing sector.
While outstanding contracts in the single-name and index markets now total around US$175bn and an estimated US$5bn contracts trade every week, further growth in the single-name sector has been dampened by settlement. ABCDS have a pay-as-you-go structure, in which payment shortfalls are calculated on a monthly basis. But availability of data for the required calculations remains poor and the calculations themselves are complex, with the documentation open to different interpretations.
RCD holds information on almost 15,000 ABS securities.
Legislation broadens ability to market CDOs to pension funds
The US Congress has passed pension reform legislation (the Pension Reform Act) that significantly relaxes the rules governing when ABS - including CDOs and CMBS - may be offered to investors holding certain types of retirement plan assets. Compliance with its stringent fiduciary and prohibited transaction rules has historically made issuance under ERISA impractical for most securitisation issuers.
One regulatory exception (known as the Significant Participation Exception) relied on by issuers of either below-investment grade securitisations or those that are not characterised as debt for tax purposes applies if an issuer does not have 'significant participation' by 'benefit plan investors'. Under current regulations, the definition of 'benefit plan investor' includes foreign plans, government plans and insurance company general accounts, as well as ERISA plans and plans subject to Section 4975 of the Code. The difficulty in tracking holders of securitisations that are held in global form has meant that most issuers relying on the Significant Participation Exception either prohibit ERISA investors or prohibit all benefit plan investors.
In a new definition of 'plan assets', the Pension Reform Act revises the 'significant participation' exception to limit the definition of 'benefit plan investors' to include only those investors subject to ERISA or Section 4975 of the Code. It is also expected that many hedge funds that previously didn't satisfy the Significant Participation Exception will now satisfy the requirements of the exception.
FNX releases Sierra Treasury Select trading platform
FNX Solutions has launched Sierra Treasury Select, a cross-asset trading and processing solutions platform for regional banks and corporate treasuries. The front-to-back solution provides enhanced functionality for multiple asset classes including credit derivatives. It provides additional analytic, risk and position management tools; enhanced workflows and processing capabilities; parallel processing capabilities; and extensive connectivity capabilities, with over 60 plug-in connections to pricing services, prime brokers and accounting solutions.
LatentZero partners with MarketAxess
LatentZero has formed an alliance with MarketAxess to provide improved STP and enhanced electronic trading connectivity for users of its order management and trading solution, Capstone Minerva. The technology offers users cross-asset order management and trading capabilities, the ability to integrate real-time market data from leading providers into its trading blotter, and direct access and algorithmic trading services using the FIX messaging protocol.
