Expanding Structured Finance Footprint, Markit Adds CLO Tranche Pricing

Nathan Kirk, Markit's director and head of US securitized products, says the move backs growing client demand—new issuances in the CLO market are estimated to top $75 billion this year, a tremendous leap from years previous—and builds on other securitized products the provider prices, including residential and commercial mortgage-backed securities (MBSs) and asset-backed securities (ABSs) that package credit card or student loan debt. 

The addition of CLOs brings Markit's total daily evaluated prices to about 2.3 million, and in developing the new offering, its objective was to provide full drill-down into evaluation, just as it does with bonds—which some investors are increasingly replacing with CLO exposure—and syndicated (or bank) loan pricing, from which the CLOs, themselves, are built.

"Clients want independent pricing obviously, but they also want to understand how we've calculated that price," Kirk says. "So this isn't simply pricing against a CUSIP; it's about the additional information provided around the assumptions our evaluators utilize, and in supplying that we feel it provides a very transparent view into how those conclusions are reached."

That methodology aims to mirror the way the market prices CLOs, and involves two elements, according to Kirk. "First is our access to observable pricing information and leveraging our in-house solution, Markit Quotes, that extracts that from messages sent from the sell side to buy side. Second is then to understand how those price points relate to the wider universe of securities, so we employ relatively sophisticated categorization techniques to look at the characteristics of the tranches, and then bucket them together to draw out their relationship with comparable securities," he explains.

Markit sees at least three use cases for the product—pricing verification, risk management, and price discovery—and expects healthy interest in the new offering among its 350 clients that already use its pricing for other securitized products globally, some of which participated in beta testing for the service.

The vendor also plans to expand the service to non-investment grade, mezzanine equity CLOs not currently covered. Kirk says delivery for that next step is tentatively set for the back end of the third or fourth quarter of this year.