Lack of CMBX Transparency Draws Industry Scrutiny

by REIT Wrecks on April 2, 2008

International Trade Association Requests Release of Daily Trade Volume; Calls for Greater Transparency in Trading Data.

Last week, in move that may be at least partially responsible for the nearly 150 basis point drop in the AAA CMBX Index, the Commercial Mortgage Securities Association (CMSA), requested that trading data on the CMBX Index, including total volume and number of daily trades, be made publicly available in order to increase market transparency.

The CMSA made the request in a formal letter to Markit, the administrator of the CMBX Index, a synthetic credit default swap derivatives index introduced in March 2006.

“Public disclosure of derivatives trading data in the CMBX Index would provide an invaluable service to investors in the commercial real estate capital market finance arena,” said Leonard W. Cotton, Vice Chairman of Centerline Capital Group and President of CMSA.

“We believe the volatility in the CMBX index caused by momentum traders, rather than fundamental traders, distorts the true picture of the value of CMBS bonds, which are backed by the cash flows from loans on income-producing commercial real estate.”

“Given the role the Index has come to play in determining the ‘mark-to-market’ value of securities held by financial institutions in the current market environment, greater transparency on CMBX trading volumes and the number of daily trades would aid investors in assessing the merit of values as indicated by the Index,” Cotton added.

Dottie Cunningham, CEO of CMSA, expressed concern that the Index is not indicative of the underlying fundamentals of the investment product. “In a volatile market, this mark-to-market process becomes a self-fulfilling prophecy, driving prices down based on index trading activity rather than asset fundamentals,” she said.

“Some market participants may be relying on what we believe is a distorted value that perpetuates the current cycle of no issuance, erroneous spread widening and additional mark-to-market write downs.”

“The commercial real estate securities marketplace is a responsible, healthy and vital contributor to the overall economy,” said Cotton. “What we’re asking for are additional transparent practices that will allow the market to better evaluate the significance of the spread levels resulting from CMBX index trading.”

See the earlier post “Mr. Market Trips on Mark to Market” for general background on how the accounting impacts REITs, and for background on hedge fund speculation in the CMBX index see Is Commercial Real Estate Really Dead?

Click here for an updated Mortgage REIT list, including current yields

REIT dividends

Be Sociable, Share!


Leave a Comment

You can use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Previous post:

Next post: