The following presentation to the National Association of Insurance Commissioners (NAIC) was made in October, 2008 at the request of their Executive Management, and as part of Marketcore’s advisory work for them.
Evaluating Asset Risk
WHAT IS THE PROBLEM TODAY?
There are gaps in the information flows between the primary/origination market and the secondary, whole loan or securitization, market. We will refer to this problem as “the gaps.” From the point of view of market participants engaged in transactions, the gaps are key points of arbitrage between market sectors. From the point of view of insurance regulators or rating agencies, these gaps are a critical problem when trying to determine accurate valuation of asset s held by insurers.
- Gaps in information flows can occur at any point in the spectrum of financial product creation – from product origination to the end investor.
WHAT IS NEEDED?
- A system that eliminates gaps by accumulating and tracking data on the originated security, from beginning to end.
- Moreover, the data must be available in a timely manner – not as “moment in time static snapshots.”
This system must be available to regulators and rating agencies in a dynamic, interactive format that is reflective of the true nature of the securities themselves.
No security has a static perceived value. Value is not absolute. Perceived value varies with volatility in a number of aspects. Rating agencies and regulators must be able to monitor these factors. The world has changed from the time when rating agencies were first established. In the past, a high rating (AAA) was based on a single snapshot in time of the characteristics of a security. A high rating generally corresponded with low economic volatility and high liquidity. However, the proliferation of structured transact ions has resulted in the concentration of thousands of similar (and similarly rated) securities contained in a single bundle, thereby concentrating risk in a single structure. Such concentration of risk magnifies the impact of any change in percept ion of the underlying securities’ volatility or liquidity.
Rating systems must adapt to the world of today. Rat ing agencies must base their assessments of dynamic instruments on the dynamics of the market – which can only be done with access to realtime information flows.
MARKETCORE PROVIDES THE SOLUTION:
- The Market core (MC) system creates a seamless and trackable flow of data, from the moment of loan origination through to placement with the end investor in the secondary market.
The MC system gathers data in a central repository and generates a real-time “ticker tape” on that data. This system allows regulators, at any given moment in time or place, to see into the market, to view the asset s acquired, held, or sold by lenders or insurers, and to determine the market value of those assets. Using unique tools for tracking data as a financial product moves through the system, the MC system captures the dynamic flows of information and thus provides tools for real t racking and real audit of investment and loan product that has heretofore never existed. This is all captured, along with the market arbitrage, in the Transaction Credit™.