International securities regulators have published a set of recommendations that aim to ensure that securitization markets can be revived on a sustainable basis, through enhanced disclosure and better alignment of incentives between originators and investors.
Indiscriminate securitization was one of the contributing factors behind the financial crisis. And, in the wake of the crisis, much of that market activity has ceased. However, regulators recognize that the ability to repackage loans into securities can be valuable financing tool, a source of risk diversification, and conducive to economic growth.
The International Organization of Securities Organizations (IOSCO) Friday published a final set of recommendations, which are designed to allow securitization markets to develop once again, but on a sound and sustainable basis.
IOSCO says that it has worked on the premise that regulation can contribute to a restoration of confidence and trust by setting standards market participants must meet to address issues that surfaced through the crisis, including securitization practices and structures that created distorted incentives, and encouraged inadequate risk management practices.
It stresses that risk retention requirements and enhanced disclosure requirements have an important role to play in addressing these issues. “Risk retention requirements better align the incentives of the suppliers of securitization products and … investors,” it notes. “Enhanced disclosure requirements about the underlying assets, flow of funds or waterfall and performance of securitization structures will help inform investors, and have the potential to re-build investor confidence in the securitization market. The greater availability of information will also help reduce the reliance on credit ratings agencies.”
The report sets out a series of recommendations for consideration by regulators and policymakers, including approaches to properly aligning incentives by setting regarding risk retention requirements; and requiring improved disclosure.
IOSCO’s work comes at the behest of the Financial Stability Board (FSB), which is also in the process of reviewing reforms of securitization markets, as part of its ongoing work for the G20 on the shadow banking sector.