Continued growth in credit risk transfer (CRT) could help make markets more liquid and efficient, according to a new report from international securities regulators.

The report from the Joint Forum on Financial Conglomerates, which was released yesterday, concludes that CRT activity has been developing rapidly due to significant product innovation, an increasing number of market participants, growth in overall transaction volumes, and perceived continued profit opportunities for financial intermediaries.

The Joint Forum encompasses global banking, securities and insurance regulators represented by the Bank for International Settlements, the International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors (IAIS).

The report defines CRT activity as credit derivative-related transactions. It concludes that continued development of the CRT market offers potential benefits, “in the form of more liquid and efficient markets for the transfer of credit risk”.

In this context, the Joint Forum believes that the most important high-level issues in this market are: the need for market participants to continue improving risk management capabilities; and for supervisors and regulators to continue improving their understanding of the associated issues.

Accordingly, the report contains a series of recommendations for market participants and supervisors in the areas of risk management, disclosure, and supervisory approaches.

The report was initiated in response to a request by the Financial Stability Forum to undertake a review of CRT activity. The objective was to contribute to an increased understanding of CRT activities and the issues that these activities raise for regulated financial institutions and their supervisors.

“Although the Joint Forum’s report does not point to immediate and significant concerns from a financial stability standpoint, I believe it is important for market participants to continue to improve risk management practices and for supervisors to continue improving their understanding of the associated issues in this area,” said the chairman of the Joint Forum, Gay Huey Evans. “Adoption of the recommendations included in the report will go a long way to ensuring this objective is met.”

Comments are due by Jan. 28, 2005.