Top dealers plot ‘Project Red’ revival

The backers of ‘Project Red’, a credit derivatives reference entity database (Red) set up by top dealers Deutsche Bank, Goldman Sachs and JP Morgan to remove basis risk in credit trading, have conditionally agreed to sell the service to UK credit risk data company Mark-it Partners.

The deal, signed on January 27 at JP Morgan’s 270 Park Avenue offices in New York, means Mark-it will enter a period of exclusive negotiations with Project Red’s backers to create an open, ‘for profit’ public utility for credit reference information aimed at bringing integrity and confidence to the credit derivatives market. This follows the failure by the trio to bring in other credit derivatives dealers to support Red, which was officially unveiled in March last year.

The sale, which has been kept under tight wraps, is conditional on Mark-it meeting a number of criteria, many of which have yet to be ironed out. But key among them is the ability for dealers to retain the right to call back Red, should Mark-it fail to maintain the database or develop it into a market standard for the credit reference entities. This means Red should have a separate governance structure to the rest of the company’s businesses. Hard negotiations are due during the next few weeks, with subtle details and financial terms still to be thrashed out, including the cost of purchasing Red and the cost structure for dealers that subscribe to the service.

Mark-it, founded in 2001, will have to cover Red’s annual operating costs of between $1 million to $2.5 million, depending on how extensive, open and detailed its services are, market insiders said. While it fought off a challenge from the Depository Trust Company, the world’s largest securities depository, to enter the final phase of talks, its business case could prove tricky given that many of the 10 or so companies that tendered to buy the database during a beauty parade shied away from the project because they couldn’t establish how it would make profits.

However, Mark-it, set up by a number of ex-Toronto Dominion bankers led by Lance Uggla, the former vice-chairman of Canada’s TD Securities, has already secured the backing of 10 major credit derivatives dealers – but notably not JP Morgan, although it may become an eleventh backer should the Red deal go through – to support its data pricing services, established to rival the likes of Totem and Lombard. These dealers have signed a deal that will give them between 6% and 7% of Mark-it apiece should the British company invite them to invest capital to boost its operations – giving them about two thirds of the company. Mark-it is planning an extensive marketing campaign in mid-February, sources indicated. This number of equal backers could provide enough credibility to allow the company to act as a public utility for credit reference information.

A full version will appear shortly in the February issue of Risk