Mark-it Partners puts it all on Red

Deutsche Bank, Goldman Sachs and JPMorgan are negotiating the sale of their credit derivatives reference entity database, Red, to UK credit risk data company Mark-it Partners.

Red acts as an electronic Domesday Book, cataloguing the legal existence of reference entities to ensure that both sides of a transaction can verify precisely which reference credit they are trading on. It was initially intended to be a non-profit project.

JPMorgan declined to comment on the reason for the sale, other than to reiterate the banks’ altruistic intentions for Red. The sale follows the failure of the three banks to convince other parties to adopt Red as a part of the industry’s data-sharing infrastructure. It is understood that the banks’ rivals are expected to be more comfortable supporting the project if an independent company owns it.

Many potentially tricky issues must be cleared up before the sale will go ahead. The banks will not give Mark-it carte blanche to run the project, and so plans for the pricing and future development of Red (including provisions for Red to be returned to the banks if Mark-it fails to stick to those plans) must be hammered out, along with the price of the deal. Nevertheless the banks insist that Red will be available to the market within the first half of the year.

Eleven major credit derivatives dealers have come forward to support Mark-it’s data pricing services: ABN Amro, Bank of America, CSFB, Deutsche Bank, Dresdner Kleinwort Wasserstein, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley, Salomon Smith Barney and TD Securities. Surprisingly, JPMorgan has not yet offered its support, although this is likely to be a quirk of the present negotiations.

Mark-it last month launched the first integrated daily pricing service for global credit derivatives and cash credit instruments. The company took advantage of the lack of timely pricing data and secured the signatures of the aforementioned 11 banks to provide their credit data on a daily basis and allow redistribution of such information.

“This is an important step in the maturity of the market,” says Lance Uggla, chief executive of Mark-it Partners. “At present, most credit market participants are struggling to achieve daily price verification on all but the most liquid of assets and this is hindering the growth of the market. With this product we aim to become the definitive source of credit pricing data in the financial markets.”

The system is designed to aid transparency and help credit traders. “The launch of the system helps overcome one of the obstacles to the growth of the multi-trillion dollar global credit markets by enabling institutions to gain better insight into an opaque market and to improve their ability to manage risk and verify asset prices,” he adds.

Uggla says the system will be attractive to many industry participants, from small credit funds, banks, reinsurers, insurance companies and hedge funds to external auditors and regulators. “I would expect our partners to benefit from our daily data set alongside a KMV-type product” he says.

As well as independent price verification, Mark-it provides a number of additional benefits including improved capital modelling, accurate data for front-office applications, a tool to improve risk management surrounding entity naming, and data for use in loan portfolio pricing and optimisation.

Mark-it says the applications have taken over two years to develop and use XML and Oracle technology. They can be accessed with a secure connection over the web.Credit

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