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No More Free Rides for Buy-Side Players
Asset Backed Alert, Harrison Scott Publications Inc. (June 19, 2009)

Wall Street dealers appear to be ending a practice in which they have routinely assigned values to clients' holdings of asset- and mortgage-backed bonds free of charge.

Most top underwriters in the business have recently told buysiders that they plan to make such moves or have made hints to that effect, with some of the shops already taking action. The banks say they have little choice, due to fallout from the credit crisis - such as staff and budget reductions, and additional efforts that have become necessary in determining bond values.

The complimentary pricing services, usually offered via traders and salesman at major investment banks, have long provided regular buyers of structured products with subsequent mark-to-market valuations of those holdings on a daily, monthly or quarterly basis. The bondholders, in turn, have come to rely on the marks in managing their portfolios.

Some banks are now planning to charge fees for broader versions of the services, while others are cutting back on the pricing information they supply to clients.

The move away from free support has drawn mixed responses from buysiders. Some investors understand that cash-strapped banks must now charge asset managers for marks, realizing the institutions can't afford to absorb the related infrastructure costs - especially given the fact that volatile market conditions have made such exercises more labor intensive than ever. However, some see it as just another sign that investment banks have abandoned their franchises as market makers.

One of the major banks planning to launch fee-based pricing services is RBS, which is aiming for July 1 to start an initiative called PriceSmart (see article on this page). The move would follow J.P. Morgan's adoption of Bear Stearns' PricingDirect platform last year. Some investors are also thinking about turning to non-bank vendors for pricing data, including Interactive Data Corp., S&P and Thomson Reuters. Elsewhere, a slew of smaller broker-dealers and advisory shops that have stepped up or introduced pricing services during the financial crisis could now see their customer bases grow. But even with those options available, buysiders are bemoaning a decline in the up-to-the-minute marks they are used to receiving from traders on the front lines.

"This all started in the last few weeks . . . The whole world has changed," one asset manager said, noting that he just stopped receiving monthly marks from UBS. "You would usually go to your salesman for the marks, but now they're telling us, 'Sorry, we don't have the resources to support the market.' "

Another portfolio manager said he's still getting daily prices from UBS, but the bank warned him about two months ago that they would eventually stop. That's not surprising, as UBS largely withdrew from the structured-finance industry late last year.

As for RBS, the bank will cease providing complimentary marks in the next month or so - roughly coinciding with the launch of the PriceSmart platform. J.P. Morgan is said to have taken similar steps already, although one investor said he still gets daily pricing information from the bank for free.

Before the financial market tanked in mid-2007, stable bond values and a gushing pipeline of new benchmark issues made it relatively easy to figure out daily values for client holdings, said Scott Eichel, RBS' global co-head of asset- and mortgage-backed securities trading in Stamford, Conn. But activity is now concentrated in the secondary market, where prices range widely and require far more analysis.

At this point, "Your traders should be focused on your firm's risk and trade ideas for customers," Eichel said.



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