Mark-it plans to offer data pricing service for structured credit

Mark-it Partners, a two-year-old company founded by senior bankers at Canada’s Toronto Dominion, is in advanced negotiations to set up a data pricing service for collateralised debt obligations (CDOs). If successful, this could become the first such daily pricing service available to the market.

The company, which officially launched its daily bond and credit derivatives data service earlier this week following what some in the industry said were a number of delays, believes it can use this underlying information to offer pricing transparency for CDOs. Improved transparency in the credit derivatives and structured credit markets is considered a critical component to ensure the market continues to grow both in terms of notional volumes and number of participants using such instruments.

Mark-it has already gained the backing of 11 major banks – all of which have options to purchase just over 6% of the company by the end of the year, although a price has yet to be agreed. But it has reached a hard-fought agreement for these banks to allow the company to anonymously redistribute their credit book data to third parties on a daily basis. This happens when three or more banks submit data on the same entity and means insurance companies, fund managers and other companies can access cleansed daily credit information for an annual payment ranging from $100,000 to $300,000, depending on the volume of information required.

But Mark-it, which has entered exclusive negotiations with Deutsche Bank, Goldman Sachs and JP Morgan – which is not a Mark-it backer at present, but is expected to enter the fold – about their plans to sell a joint-venture credit derivatives reference entity database, called Project Red, sees the potential of offering pricing transparency for CDOs as another pivotal component of its business strategy.

“The whole [issue] of pricing the CDO market is very important to us and our partners and we are working with them to develop some pricing in that area,” Mark-it chief executive Lance Uggla told RiskNews.

Developing such a service is far from easy. Although Mark-it has access to clean daily average prices for underlying bonds, about 1,100 credit derivatives curves, and, with Red, a heatmap of correct legal entities, it still needs to work out the correlations across those entities when looking at basket trades. “That is where it gets a lot more complex,” said Uggla.

As a result, Mark-it has teamed up with US analytics company NumeriX to develop suitable cross-asset correlation models. Mark-it is currently back-testing the models to study their performance, before presenting them for review by its partner banks.

The results of its findings should be available within the next few months.