Bond industry to collaborate on valuation project

NEW YORK Dec 3 (Reuters) - Bond industry groups from around the world on Wednesday said they would embark on a project to better define values of illiquid securities as part of a broader effort to boost confidence in their markets.

But the groups, including the Securities Industry and Financial Markets Association in New York, are still holding out hope that U.S. government purchases of illiquid securities will give investors the best idea of pricing.

In lieu of purchases by the Treasury's $700 billion Troubled Asset Relief Program, SIFMA and organizations in Europe and Australia will form a valuation task force to align methods by which assets such as subprime mortgage-backed securities are priced.

The wide range of opinion over how such bonds should be valued has been a key factor behind frozen markets around the world. Even if fundamental value is determined, investors have been reluctant to buy bonds at a given price since another party may trade similar securities at a lower price, causing an immediate loss on the initial transaction.

"That's what is holding up a lot of the trading that is going on ... or not going on," said Sanjeev Handa, head of global public markets at TIAA-CREF in New York.

Another problem is the loans underlying the bonds are losing value due to soaring foreclosures, projections for another year of home price drops and a U.S. recession.

The team will be assembled by year-end and meet with data providers to streamline the independent valuation process.

Results from the project will likely fall short of systems that encourage trading in non-securitized assets, such as the TRACE system that reports trades on corporate debt, according to panelists assembled in New York, London and Melbourne.

Many securitized bonds do not trade with the frequency required to provide reliable data on a TRACE-like system, the groups contended in a report that also recommended ways to enhance information on underlying assets and boost confidence in credit rating agencies.

Public disclosure may also discourage trading by investors trying to sell distressed holdings, according to the report.

Asset-backed securities have suffered since Treasury Secretary Henry Paulson shifted the TARP focus from planned purchases of illiquid bonds to providing capital to banks and other financial institutions. Market participants had been counting on the government's purchase to establish a price floor, which would encourage investors to spend money they've amassed for distressed investments.

Tim Ryan, president and chief executive officer of SIFMA, said the markets eventually will need the government to start buying the securities to determine prices.

"The Treasury ought to have bought these securities a year ago," Steven Schwarcz, a professor at Duke University School of Law, said on the panel in New York.

Other industry groups involved in the effort to boost disclosures and transparency are the American Securitization Forum, the European Securitisation Forum and the Australian Securitisation Forum. (Editing by Leslie Adler)