Yesterday, the International Organization of Securities Commissions’ (IOSCO) Technical Committee released a report prepared by its Task Force on Unregulated Financial Markets and Products. The Task Force was established by the Technical Committee in November 2008 following the G-20 leaders meeting held in Washington.
The Task Force’s report addresses issues with respect to securitized products, including asset-backed securities (ABS), asset-backed commercial paper (ABCP), structured credit products such as collateralized debt obligations (CDOs), synthetic CDOs and collateralized loan obligations (CLOs), and credit default swaps (CDS). The report also includes a number of interim recommendations for regulatory action intended to “improve confidence in the securitization process and the market for credit default swaps.”
For securitized products, the interim recommendations include the following:
- Correcting incentives by requiring originators and/or sponsors to retain a long-term economic exposure to the securitization, improving transparency through issuer disclosure of all risk analyses performed, and requiring use by issuers of independent experts who revisit and maintain reports over life of the securitized product;
- Enhancing risk management practices by mandating ongoing issuer disclosure of underlying asset pool performance and review practices of underwriters, sponsors and/or originators, by strengthening investor suitability requirements and by encouraging development of alternative means to evaluate risk; and
- Promoting international coordination of regulation through assessments by various jurisdictions as to their regulatory reach and what regulatory enhancements may be needed.
For CDS, the interim recommendations include the following:
- Reducing counterparty risk and lack of transparency by providing a sufficient regulatory framework for the establishment of central counterparties (CCP) to clear standardized CDS, encouraging market participants and financial institutions to standardize CDS contracts to facilitate CCP clearing, facilitating appropriate and timely disclosure of CDS data, and establishing an appropriate framework for information sharing; and
- Promoting international coordination of regulation through assessments by various jurisdictions as to their regulatory reach and which regulatory enhancements are needed.
IOSCO recommendations do not automatically apply, but are implemented on a country-by-country basis through enabling legislation or regulation.