EURANDOM

October 29 & 30, 2009
Asset Backed Securities (venue: EIB, Luxembourg)
Organizers
Guido Bichisao, European Investment Bank
Henrik Jönsson, EURANDOM
Wim Schoutens, K.U. Leuven & EURANDOM
Karsten Sundermann, European Investment Bank
Participants: 88
A two day conference on securitization and asset-backed securities “Pricing and valuation of ABSs”
was held at the European Investment Bank in Luxembourg, October 29 and 30, 2009, with 14 speakers
from industry and academia. The conference attracted more than 80 participants from both industry
and academia and can be viewed as a very successful event.
The content of the first day was four longer (45 minutes) presentations on regulatory initiatives, rating
methodology and valuation of ABSs. Marco Angheben, ESF, presented the most recent discussions with
IOSCO, CESR, the European Commission and other regulators, central banks and policy makers surrounding
the improvement of the current infrastructure for post-trade transparency. It also described
the industry initiatives aimed at improving valuations, price discovery and transparency overall for
structured finance products.
Representatives from two of the major rating agencies, Moody’s and Standard and Poor’s, gave their
views on the rating and valuation of ABSs. Benedicte Pfister (Moody’s) introduced Moody’s ABS rating
methodology and models and presented in more detail the agency’s rating methodology for SME
ABSs. The speaker also described how they have introduced measures (V score and Parameter sensitivity)
to improve the reporting of the ratings sensitivity to underlying assumptions to investors. Peter
Jones and James West (Standard and Poor’s) presented different valuation approaches in use at the
present and the challenges to valuation that currently exist, i.e. data, analytic and cashflow requirements.
Through a valuation assumption survey, where Standard and Poor’s asked market participants
on their use of methods, models and assumptions for ABS valuation, the agency tries to create transparency
of input assumptions used. The talk ended with a case study where the input assumption found
in the survey was used to valuate an existing ABS deal.
Laila Kollmorgen and Luke Mellor from Forseti Capital gave their view on mark to valuation techniques
in an uncertain market. In the talk, the speakers compared the advantages and disadvantages
of over-the-counter platforms and bespoke cashflow models and when it is appropriate to use the different
approaches. The availability and quality of new issue and ongoing rep line data together with
examples of good and not-so-good trustee reports as well as the valuation issues of credit dependent
counterparties and their effects on the deal and how to determine the new levels of stressing was also
touched upon during the presentation.
The first day ended with a round table discussion chaired by Eric Péree, Chief Economist at EIB, and
with a panel consisting of Anneli Peshkoff, Director Treasury, EIB; Wim Schoutens, Prof. Dr., KU Leuven
& EURANDOM; Fabrice Susini, Board Member of ESF & Member of EFR; Michel Stubbe, Head of division
Market Operations & Analysis, ECB; and Frederico Galizia, Head of Risk Management, EIF.
The second day of the conference was devoted to nine 30 minutes talk. The first two talks in the morning
were presented by non-industry participants, Henrik Jönsson (EURANDOM) and Jessica Cariboni (EC
Joint Research Center). Henrik Jönsson discussed model risk and parameter uncertainty in the assessment
of ABSs. Model risk refers to the fact that the outcome of the assessment of ABSs depends on
which quantitative model is used to derive, for example, defaults in the asset pool backing the ABSs.
The uncertainties in the parameters used as input to these models add to the uncertainty of the output
of the assessment. The significance the model choice and parameter values have on the assessment of
ABSs was shown in different examples.
Quantitative sensitivity analysis as a tool for handling model choice and parameter sensitivity was presented
by Jessica Cariboni. Jessica gave an introduction to quantitative sensitivity analysis and showed
how sensitivity analysis can be used to assess the contributions of the inputs to the total uncertainty of
the outcome of an analysis.
The rest of the day contained presentations by representatives from different practitioner experts in
the field. Let us mention two of these presentations, the one by Martin Scheicher, ECB, and Joao Garcia,
Dexia. Martin Scheicher presented a research study on the pricing of subprime mortgage risk in
good times and in bad, describing the use of regression analysis to establish the relationship between
observed index returns and macroeconomic news as well as market-based proxies of default risk, interest
rates, liquidity and risk appetite. Joao Garcia gave a colorful and dynamic presentation where he
EURANDOM Annual Report 2009 30