IOSCO issues final recommendations on securitization, CDS market

Formed in late 2008 in response to calls for a review of the scope of unregulated financial market segments and products, the task force looks at securitized products, including asset-backed securities (ABS), asset-backed commercial paper (ABCP) and structured credit products such as collateralized debt obligations (CDOs), synthetic CDOs, and collateralized loan obligations (CLOs), as well as credit default swaps (CDS).

“The overall objective of the Task Force was to recommend ways to redefine the perimeter of regulation in certain OTC markets,” says Kathleen Casey, chairman of IOSCO’s technical committee. “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. 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.”

Securitization
IOSCO makes the following recommendations with regard to securities:

1. Consider requiring originators and/or sponsors to retain a long-term economic exposure to the securitization in order to appropriately align interests in the securitization value chain;

2. Require enhanced transparency through disclosure by issuers to investors of all verification and risk assurance practices that have been performed or undertaken by the underwriter, sponsor, and/or originator;

3. Require independence of service providers engaged by, or on behalf of, an issuer, where an opinion or service provided by a service provider may influence an investor’s decision to acquire a securitized product; and

4. Require service providers to issuers to maintain the currency of reports, where appropriate, over the life of the securitized product.

Risk management
IOSCO suggests that improved disclosure for investors could be attained by having issuers provide initial and ongoing information about underlying asset pool performance. Disclosure should also include details of the creditworthiness of the person — or persons — with direct or indirect liability to the issuer. Further, regulators should review investor suitability requirements as well as the definition of sophisticated investor in the relevant market and strengthen these requirements, as appropriate, in the context of the relevant market.

Credit Default Swaps
On the issues of counterparty risk and lack of transparency, IOSCO recommends the following practices for regulators:

1. Provide sufficient regulatory structure, where relevant, for the establishment of CCPs to clear standardized CDS, including requirements to ensure:

a) appropriate financial resources and risk management practices to minimize risk of CCP failure;
b) CCPs make available transaction and market information that would inform the market and regulators; and
c) cooperation with regulators;

2. Encourage financial institutions and market participants to work on standardizing CDS contracts to facilitate CCP clearing;

3. The CPSS-IOSCO Recommendations for Central Counterparties should be updated and take into account issues arising from the central clearing of CDS;

4. Facilitate appropriate and timely disclosure of CDS data relating to price, volume and open-interest by market participants, electronic trading platforms, data providers and data warehouses;

5. Support efforts to facilitate information sharing and regulatory cooperation between IOSCO members and other supervisory bodies in relation to CDS market information and regulation; and

6. Encourage market participants’ engagement in industry initiatives for operational efficiencies.

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