Success Factors of an Industry Utility: an interview with the European DataWarehouse’s Markus Schaber
Following the 2007/2008 economic crisis, there was an increased need to improve transparency and restore investor confidence in the European securitization market. In 2009, the structured finance industry, spearheaded by the European Central Bank (ECB), came together to address the problem. Their efforts resulted in a vision to create a European central data repository that would offer visibility and timely access to standardized loan-level data provided by originators to all market participants. In 2010, the ECB took the next step by announcing its intention to establish loan-level data requirements in order to pledge ABS as collateral in the Eurosystem. Today that vision is a reality with the European DataWarehouse—one of the very few industry-owned pieces of infrastructure in Europe and a model for enabling market transparency. In this article, CROSSINGS talks to Markus Schaber, CEO of the European DataWarehouse, to discuss the challenges, successes and future vision for the European DataWarehouse.
Markus Schaber: The success of the European DataWarehouse (ED) can be attributed to three key principles. The first is centralization. It is the only centralized utility for the asset-backed securities market. When there are competing utilities within a single market, the effectiveness of having all market data in one place is diluted. The second key principle is standardization. With a centralized repository, it’s easier to enforce standardization, which leads to a much higher level of comparability. We provide clear definitions in terms of how the data must be delivered, so everyone is contributing in the same format. This gives us a wealth of information—one massive database that allows us to compare and contrast transactions. The third key principle or success factor is the transparency ED provides, which helps create a level playing field. Without a single standardized repository, some market participants would have better information than others. With ED, everyone has the same access to the same information. I think these three factors —centralization, standardization and transparency—make ED successful today and position us for success in the future as well.
Markus Schaber: With a utility, governance is absolutely key. Market participants need to have the comfort that we’re truly working for the markets. At the same time, we have to be commercial. We have a cost plus approach, where our prices are based on our cost, not on certain profit targets. We have an independent pricing committee which reviews our pricing structure and a diversified set of shareholders with no larger shareholder. Our governance model includes the ECB, and is focused on ensuring the overall market participants’ interests are top of mind.
Markus Schaber: The research we conducted prior to the creation of ED absolutely validated the need for a central repository, so we knew moving forward was the right direction. But there were differing views in the market. However, since the ECB made the use of ED a requirement and it’s become a market best practice, market participants are recognizing that the type of transparency ED affords is not only beneficial—but also necessary.
CROSSINGS: How is ED relevant globally, particularly in light of Regulation AB II being published in the United States?
Markus Schaber: Our mandate is to bring transparency to the highly fragmented European market. So it’s unlikely that we as a company would look to expand into other countries, such as the United States. In our discussions with US institutions, however, it’s clear that having something more centralized makes sense. In fact, the United States already has access to loan-level data in various segments. And while what we did with ED may not be 100 percent transferrable, it could serve as a template or example that other countries can follow.
CROSSINGS: How has the adoption process been with ED? Have there been any surprises?
Markus Schaber: No surprises—but a few challenges. I think that one of the key challenges is that when you start something like ED, you must first onboard everyone, and that, obviously, involves both administrative and legal aspects. Making sure people had access and registered was relatively straightforward. But, it was slightly more challenging on the legal side. This is due to the fact that there are 28 different jurisdictions in the EU and approximately 200 participating banks, yet we needed to have one contract in order to maintain consistency. But we were able to work through those issues.
Garnering market participation can also be a challenge. That’s why some form of public sector intervention is so crucial—not just monitoring and moderating the process, but also advocating for it. Because of the public sector push that ED received, we now have a very high percentage of market coverage.
Markus Schaber: An ongoing challenge for any utility or market initiative is that with so many different stakeholders—with sometimes conflicting needs and requirements—it’s important to balance the interests of all market participants. I also think one of the bigger challenges for a utility is to make sure that things are moving at a reasonably fast pace. But at the same time, it’s important to make sure that the market understands why you are doing certain things. So communicating changes regularly is necessary.
Markus Schaber: Outreach is very important to the European DataWarehouse. We focus quite a bit on communication and use multiple channels to reach our constituents, such as face-to-face meetings at industry conferences and through electronic channels such as workshops and webinars. For example, every month, we host a webinar where we explain what we are doing, where we are and where we stand. We also go to the key financial centers in Europe, meet with banks to explain our next steps, how our IT development is currently working and how we are developing new tools. Plus, our data users routinely give us feedback on what they would like to see. It’s especially important given the fact that we are a utility and for most of our users, ultimately a cost center. So, we need to make sure that we are continuously providing a service environment that’s relevant to our users and meets their changing needs.
CROSSINGS: What are some of the challenges you’ve faced in managing the data and how have you addressed them?
Markus Schaber: Undoubtedly, the biggest challenge is data quality. With so much data coming from so many bank IT systems, we’ve seen both data quality and data completeness issues. Much of the data is pulled from original systems designed for servicing, accounting or other functions. Often there is missing data due to old loans and old files—as well as potential inconsistencies. The transformation of this data into a standard template is an ongoing challenge and obviously, where we spend a lot of time and effort.
In general, the focus on ensuring data quality is increasing in Europe, but it’s not at the level it needs to be. Banks are beginning to realize that their internal data really does matter in more ways than they previously thought. It matters from a regulatory perspective because asset quality review exercises will become more important and more frequent. It matters in the reporting of capital market transactions. And it matters for internal controlling purposes as well.
We address the data quality issue in a number of ways. We filter out the more obvious mistakes using an automated approach. We’ve developed data quality rules that we run in the system, but there is still a lot of manual work involved. We communicate on a day-to-day basis with the banks to make sure they understand what they need to deliver and that we understand what data they can deliver if it doesn’t exactly conform to the standard. A lot of drill down is necessary, and obviously the deeper you dig, the more issues you find. So I think this will keep us busy for quite some time.
Markus Schaber: Data users and people in general are starting to have fairly high expectations in terms of data accessibility and usability. As a utility, our basic mandate is that we provide data in order to enable transparency. But the market needs have shifted and participants now expect a certain level of data aggregation, data visualization and the ability to compare the data in a very easy and straightforward way.
A new trend is that people really want to have access to data directly online with browser-based systems. Downloading data is something many actually try to avoid. And people also want to avoid installing software, which requires getting their IT departments involved. Instead, they want easier and much faster access to data in a much more digestible way. Not only do people expect you to deliver the data, but they expect you to do so in various channels. They expect that the data is more or less readily usable and that they can slice and dice it to suit their needs.
Since we are a utility, in principle we could make the argument that it’s not our job to provide such extensive functionality. But since we believe that it is important to provide transparency to the market, we are adopting more technologies to enable us to deliver the data in the way that the users want to see it.
Markus Schaber: Undoubtedly there are a number of areas in the financial markets, such as covered bonds or money markets, where a utility model can make sense. Whenever there is a need for more transparency in a particular market segment—and if the market participants believe there is added value in having such utility—then ED can serve as an example and be replicated.
CROSSINGS: What is the Capital Markets Union and what is ED’s role?
Markus Schaber: The Capital Markets Union is a new political initiative spearheaded by the European Commission with the aim to create a much more Pan-European capital market. As a result of the financial crises, many segments of the European capital markets retracted to national boundaries causing a high degree of fragmentation. At the same time, there is still a high reliance on bank lending to the real economy. So, for companies, access to capital markets products is still fairly difficult. The Capital Markets Union aims to lower the reliance on bank funding and enable a more integrated capital market. In order to achieve that, we need to overcome the fragmentation hurdles. However, actually putting something in practice will not be so straightforward. There are many considerations, including the different data protection laws in the various countries. And I think that’s where we are undoubtedly most relevant, as an example on how to succeed both from a governance perspective as well as from a technical perspective.
Markus Schaber: I think the future will be determined by whether the market buys into this strategy of having a Pan-European standardized data repository. So far, we’ve made good progress—and people are open to the idea. We’re also being asked to look at other projects, which is good but also a challenge, because we’re still a relatively small company. I think we will undoubtedly expand horizontally—providing our utility model and governance to others who have similar issues.
joined European DataWarehouse GmbH (ED) in January 2013 as Chief Executive. Following the “loan-level initiative” of the ECB, ED was created in 2012 as a market initiative and utility aimed to increase transparency in the ABS market. ED is owned by a broad range of market participants.
Prior to ED, Markus worked in various roles in the European securitization markets since 1995, inter alia as Head of Securitization at the European Investment Fund, Managing Director at Deutsche Bank London with responsibility for Northern and Central European securitization markets and as Director at Fitch Ratings with responsibility for CLO ratings and structured finance ratings in Germany.