When Kevin Gould was head of European fixed income at TD Securities, he would look around for daily market-wide data on credit prices. None existed. So he and a few colleagues left the bank to set up a company to produce it.
The result was Mark-it Partners, which finally went live in February this year. In May the bank signed up UBS Warburg as its twelfth equity partner and Cheyne Capital Management as its first buy-side customer.
The system is a credit data exchange. Every night market makers contribute data for every cash security and credit default swap curve they close; in return they can access data from the entire pool. For each security, pooled data is used to generate a daily composite security price and spread.
The market certainly needs this type of tool. The means by which brokers determine the prices offered appears to be more of a black art than a science. As one credit analyst puts it: “Anything that attempts to take the fog out of the corporate bond market has to be a good thing.” John Weiss, portfolio manager at Cheyne Capital, says it will be using Mark-it to verify traders’ marks across the 450 credit curves it tracks and that it will pair well with the company’s own daily marking procedures.
One would think that the task of prising what many consider to be proprietary information away from the banks would be challenging. But Gould, chief operating officer of Mark-it, says banks are waking up to the risk management benefits.
“Some traders may think this is a conflict of interest but banks now have a big responsibility to mark to market and institutions are moving towards very sophisticated capital-modelling techniques. Loan portfolio optimization techniques need daily data, for example.” Gould thinks it will also bolster the credit-trading business. “Banks may be giving up their information, but the argument is that more transparency will produce more liquidity that will allow people to better manage their positions.”
Gradually improving transparency It’s not the first firm to try to improve pricing transparency in the credit market. MarketAxess lists the almost real-time trading data on US cash bonds collected by the NASD’s Trace system, and both Creditex and CreditTrade list prices for default swaps. But Mark-it is the first to attempt to demystify the highly opaque default-swap market and the pricing relationship between this and the cash market.
“MarketAxess takes traded data on the US corporate bond market and just the cash bond market,” says Gould. “We have the closing curves of all the cash bonds and default swaps, covering 2,000 different credits and 25,000 securities.”
Mark-it has also been mandated by Goldman Sachs and JP Morgan to run Project Red, short for Reference Entity Database. “It ensures I know which entity I’m trading. If I’m trading a Ford bond, it’s important I buy protection on the same Ford entity. There have been some very expensive mistakes which have hindered the growth of the CDS market,” says Gould.
The list of leading credit trading firms that have signed up as equity partners (see list on page 18) adds to the credibility of the data pool. When Mark-it got the final agreement to go ahead in May last year, nine banks signed up to the plan, including TD Securities. Since then it has added Citibank, Merrill Lynch and now UBS. Gould says Mark-it is not looking for more equity partners. “There is one other institution that we have been talking to for a year, but in essence all the equity is taken.” Mark-it is in negotiation with a number of regional players as well, including banks in Scandinavia and South Africa. Gould says: “When those sort of regional players do come on board, the pool of data should be even better. We’ve got a small partnership group but 50 institutions at different stages of hooking up to us.”
