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An Analysis and Description of Pricing and Information Sources in the Securitized and Structured Finance Markets

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An Analysis and Description of Pricing and Information Sources in the Securitized and Structured Finance Markets An Analysis and Description of Pricing and Information Sources in the Securitized and Structured Finance Markets The Bond Market Association and The American Securitization Forum October 2006 ANALYsis AND DESCRipTION OF PRiCING AND INFORmaTION SOURCES IN THE SECURITIZED AND STRUCTURED FINANCE MARKETS TABLE OF CONTENTS Executive Summary ................................................................................................. 1 I. Introduction and Methodology ............................................................................. 9 Study Objective ............................................................................................................................. 9 What Does the Study Cover ....................................................................................................... 9 The Pricing and Information Sources Covered in this Report .............................................10 II. Broad Observations and Conclusions ................................................................10 Each product sector is unique, though some general conclusions may be drawn ..........10 Structured Finance Products Trade in Dealer Markets .................................................10 Types of Pricing ..........................................................................................................................11 Primary Market vs. Secondary Pricing ....................................................................................11 Pricing Information Contexts and Applications .................................................................. 12 Secondary Market Trade/Transactions .................................................................................... 12 Mark-to-Market/NAV ................................................................................................................ 12 Repo Pricing ................................................................................................................................ 12 Risk Management ...................................................................................................................... 12 NAV/Accounting Valuation ...................................................................................................... 12 Examples of the Price Discovery Process ........................................................................19 Price Source Observations ........................................................................................................ 19 Collateral and Structure Characteristics Determine Market Liquidity and Price Availability .......................................................................................................19 Trade Flow Driven Pricing and Model-Derived Prices .................................................19 Electronic Platforms Add to Price Discovery, Operate in Commoditized and Liquid Product Markets ............................................................................................20 Certain Trends in Table 2 ................................................................................................20 Dealers Provide a Great Deal of Information; Multiple Dealer Relationships Lead to Investor Price Knowledge ...................................................................................21 Data Information Service Observations ................................................................................. 21 How and Why Market Participants Use Models ............................................................21 Typical Use of Models ......................................................................................................22 Models Measure and Evaluate ........................................................................................22 Valuation and Price Determination is Affected by More than Credit Modeling ...............................................................................................................22 Quantity and Quality of the Data on the Rise ................................................................23 Large Number of Vendors; Higher Value Placed on Data than Generic Models ..........23 tocA ANALYsis AND DESCRipTION OF PRiCING AND INFORmaTION SOURCES IN THE SECURITIZED AND STRUCTURED FINANCE MARKETS Frequent Updates ............................................................................................................23 Historical Data, Broad Coverage .....................................................................................23 Structured and Securitized Sector Specific Information Products Offered Directly to Customers, Distributed Through Third Parties and Incorporated in Products that Cut Across Sectors .....................................................................................34 III. Specific Product Sectors ...................................................................................................... 35 ABCP ........................................................................................................................................... 35 Pricing ..............................................................................................................................35 Data/Model ......................................................................................................................35 Agency Residential Mortgage Backed Securities — Pass-throughs and CMO .................. 36 MBS and CMO Valuation Briefly Summarized ...................................................................... 37 Prices: Pass-throughs ................................................................................................................ 37 Transaction Pricing .........................................................................................................37 Price Evaluation ..............................................................................................................38 Prices: Agency CMO ................................................................................................................. 38 Transaction Prices ............................................................................................................39 Price Evaluation ..............................................................................................................39 Collateral Data ............................................................................................................................ 39 Great Deal of Centralized Agency Pool Level Data .......................................................39 Prepayment Models and Agency Prepayment Data Tools Drive Valuations ..................... 39 Prepayment Data and Surveys .......................................................................................39 Prepayment Models ..........................................................................................................40 CMO Modeling Tools ......................................................................................................40 Non-agency Mortgage-Related Securities: ABS and CMO .................................................. 41 Pricing: Mortgage ABS .....................................................................................................41 Pricing: Non agency CMO ...............................................................................................42 Evaluated Prices ...............................................................................................................42 Prepayment Behavior and Valuation ....................................................................................... 42 Interest Rate Sensitivity ....................................................................................................42 Data/Models ................................................................................................................................ 43 Non-Agency and Agency Data Compared .....................................................................43 Proprietary Non-agency Mortgage Databases ...............................................................43 Trustee and Issuance Data Products ..............................................................................43 Rating Agency Information Products .............................................................................43 Consumer and Commercial ABS ............................................................................................ 44 Pricing .......................................................................................................................................... 45 tocB ANALYsis AND DESCRipTION OF PRiCING AND INFORmaTION SOURCES IN THE SECURITIZED AND STRUCTURED FINANCE MARKETS Data and Models ........................................................................................................................ 45 Data ..................................................................................................................................45 Models ...............................................................................................................................45 CMBS .......................................................................................................................................... 45 Diverse Property Types ....................................................................................................46 Prepayment Protected, Credit Sensitive ..........................................................................46
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