Deutsche Bank, Goldman Sachs and JP Morgan, the backers of a credit derivatives reference entity database called Red, have confirmed they are in exclusive talks to sell their database to UK start-up company Mark-it Partners.As RiskNews reported on January 31 (See: Top dealers plot ‘Project Red’ revival), the trio have held negotiations with a number of parties in an attempt to set up Red as a common infrastructure for the credit derivatives market. An independent company running Red is viewed as a more palatable approach to bring in rival dealers to support the database.
The timetable for talks is seen as aggressive, with the banks intending to make Red available to the broader market within the first half of the year. But there are a number of complexities that could delay the process. These include: how the banks are remunerated for contributing information on 2,000 reference names, the pricing of Red for industry participants, how Mark-it should develop Red moving forward and the ability for the banks to take-back Red should Mark-it fail to develop the database in a pre-specified manner.
The idea is to develop Red so market participants have an economical tool that matches reference entities (Res) with their associated benchmark bonds, or reference obligations (ROs). Failures to properly match ROs and REs have led to high-profile legal actions among dealers, which, while typically resolved relatively amicably, are viewed as a deterrent to new participants entering the rapidly growing credit derivatives market.
Parties involved in the early stages of talks with Red’s backers regarding a sale, were sceptical about the profitability of running a reference entity database as a ‘for-profit utility’. But Mark-it believes Red is integral and complementary to its range of daily credit derivatives data services that it started offering all market participants earlier this month.
Mark-it has the support of 11 major dealers: ABN Amro, Bank of America, CSFB, Deutsche, Dresdner Kleinwort Wasserstein, Goldman, Lehman Brothers, Merrill Lynch, Morgan Stanley, SSB and TD Waterhouse. JP Morgan – the notable large absentee – is also considering joining Mark-it’s backers. This may be tied into its talks with Mark-it regarding the Red divestment.
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