From the Regulators

Improved transparency and oversight aimed at restoring investor confidence

By James Langton |

The International Organization of Securities Commissions’ Technical Committee has issued a set of recommendations designed to improve the regulation of, and restore confidence in, the securitization and credit default swap markets.

The report, which was prepared by its Task Force on Unregulated Financial Markets and Products (co-chaired by the Australian Securities and Investments Commission and France’s Autorité des Marchés Financiers), recommends a series of regulatory actions to improve transparency and oversight of the securitization and CDS markets.

It aims to shore up confidence the securitization markets by addressing incentive issues, beefing up risk management practices, and improving oversight. Among other things, it calls on regulators to consider: requiring originators and/or sponsors to retain a long-term economic exposure to a securitization; requiring issuers to disclose all of their verification and risk assurance practices; requiring service providers (such as credit rating agencies) to be independent, and to maintain coverage over the life of a securitized product; and, improving disclosure of underlying asset pool performance; reviewing investor suitability requirements as well as the definition of a sophisticated investor.

In the CDS market, it seeks to address issues such as counterparty risk, inadequate transparency, and oversight issues. In particular, it calls for regulators to: facilitate the establishment of central counterparties, encourage standardizing CDS contracts; facilitate timely disclosure of CDS data; and, support efforts to improve information sharing and regulatory cooperation.

IOSCO says it believes that the recommendations relating to the CDS markets might be used to guide reforms in other unregulated financial markets and products, such as OTC derivative products, which may pose systemic risks.

“IOSCO acknowledges that financial innovation will always be a hallmark of a vibrant financial system, however such innovation need not, and should not occur at the cost of investor protection and market confidence,” said Kathleen Casey, chairman of IOSCO’s Technical Committee. “The recommendations contained in this final report are aimed at restoring investor confidence and at improving the functioning, integrity and oversight of unregulated financial market segments and products, such as securitisation and credit default swaps, and international financial markets generally.”

“The overall objective of the task force was to recommend ways to redefine the perimeter of regulation in certain OTC markets. As our recommendations go beyond the traditional remits of regulators, further work is required and is being undertaken by IOSCO to identify the appropriate criteria to be used in redefining the border between what has traditionally been considered regulated and unregulated markets,” she added. “Meanwhile, each jurisdiction should assess the scope of their existing regulatory regimes and decide how the recommendations should be applied to their own specific circumstances.”