Wednesday, August 10, 2011

An open letter to the ECB and Market Group concerning the ABS Data Warehouse

Dear Sirs,


Based on publicly available information, including the ECB's public consultation and its letter encouraging the development of an ABS data warehouse, it appears highly likely that the proposed ABS data warehouse will violate my firm's US patent.  The patent covers the basic function of the data warehouse from collection and standardization of the issuer's data through dissemination.

How could a European ABS data warehouse violate a US patent?  By violating the patent holder's right to be the single entity that can sell the product, in this case ABS performance data, in the US.  

As you know, each ABS security is designed to appeal to as many investors as possible.  This includes US investors ranging from money market mutual funds to banks to pension funds to hedge funds.  These US investors would be logical buyers of the ABS performance data  which the patent holder has the right to sell.

Let me use an example to try to clarify this point.  Imagine that there was a US patent on a trailer hitch.  A European manufacturer sees the hitch and starts manufacturing and selling it in Europe.  So far, there is no problem.  Could the European manufacturer sell the hitch in the US without violating the patent?  To date, US courts have rule "no".  Where the product is manufactured does not change the patent holder's rights.

How is it that firms like LoanPerformance have been able to sell ABS security performance data in the US without violating the patent?  The patent covers an ABS data warehouse that offers current performance data and not once-per-month or less frequent data.

To date, the ECB and the Market Group have been focusing on once-per-month data, so why is the patent relevant?  Because once-per-month data is not adequate for European investors to meet the know what you own requirements under Article 122a of the European Capital Requirements Directive.

The rating services have testified to the inadequacy of once-per-month or less frequent data before the US Congress.  The rating services observed that once-per-month data is not timely enough to update ratings or their equivalent, ABS security valuations.  

If once-per-month is not timely enough to update ratings on an ABS security, it is common sense that once-per-month is not timely enough for investors to meet the European Parliament's intentions when it comes to the know what you own requirement. 

As a result, the ABS data warehouse will have to offer more timely data.  When moving to more timely data, there is no logical stopping point between once-per-month and current data.  The same current data that is covered by the patent.

I look forward to talking with you about this issue in the near future and working with whoever operates the ABS data warehouse.

Sincerely,

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