Wednesday, October 24, 2012

Australian regulators plan 'safer, simpler' securitization market

Australian regulators offered up their proposal for how to restart structured finance by offering 'safer, simpler' securitization deals.

At the heart of their proposal is an attempt to boost transparency through the introduction of industry-wide reporting standards.

And who did the regulators talk to in developing these reporting standards? 

The Australian Securitisation Forum.  Another arm (see American Securitization Forum and the Association of Financial Markets in Europe - formerly the European Securitisation Forum) of the sell-side run lobby that tries to hide behind the masquerade of being an industry trade group.

To absolutely no ones' surprise, the reporting standards look exactly like the standards being pushed in Europe, the UK and the US.  These standards do nothing to increase transparency and will not end the real-money buyers' strike.

Regular readers know that the issue of disclosure has two components: what and when.

The sell-side has argued that 'what' is disclosed should be a subset of all the data fields that the originators and loan servicers track.  Does this make any sense?

The originators and loan servicers are experts in valuing and monitoring the underlying collateral.  If they track a data field, there must be a reason.  Otherwise, they would not track the data field as there is an expense to tracking the data field.

Why should investors and other market participants be deprived of information that the experts consider valuable? Your humble blogger does not feel they should.

The sell-side through their lobbying groups have also argued that 'when' disclosure is made should be less frequent than when the computers used to track the data on the collateral are updated.  Does this make any sense?

If the collateral were held by a bank, examiners would expect that the bank reviews the collateral on the next business day after an observable event like a payment or delinquency occurs with the collateral.  This is the global standard for loan portfolio management.

Why should investors and other market participants be deprived of the ability to monitor the performance of the underlying collateral according to best practices?  Your humble blogger does not feel they should.

Fortunately, I am not alone in thinking that investors and other market participants should be provided with observable event based reporting that includes all non-borrower privacy protected data fields.

The US National Association of Insurance Commissioners (NAIC) published a white paper in which they have embraced the notion of linking capital held by the insurers based on the disclosure provide by the structured finance security. 

Securities that offer observable event based reporting and include all non-borrower privacy protected data fields would have the lowest capital requirements. Securities that look like the RMBS deals currently in the marketplace would have the highest capital requirements (they are seen as blind bets). 

The NAIC white paper has effectively set the global standard for disclosure for the buy-side.  

One of the ways it sets the global standard is through the simple fact that each structured finance security is designed to appeal to investors on a global basis.  Included in these investors are US insurers.  Hence, the NAIC standard is relevant for Australian securitizations. 

It is relevant as it effects all institutional money managers.  If US insurers are effectively prohibited from buying Australian securitization deals (which is what holding a lot of capital against any investment in these deals would be) because inadequate disclosure makes them blind bets, how can other institutional money managers invest in these deals?

Specifically, what do they tell the investors in their funds?  Do they say that they are better at blindly betting?  This issue is important because if the institutional money managers lose money investing in these securities, a legal case can be made by investors against the money managers that the money managers should make the investors whole.

Hopefully, the Australian regulators will realize that what the sell-side and the industry trade groups like the Australian Securitisation Forum have to say about disclosure is irrelevant as it is only the buy-side that matters.  A point made by Paul Volcker and the Group of 30.

The NAIC white paper has made it easy to know what the buy-side wants.  It is now up to the Australian (and European, UK and US) regulators to deliver.

I look forward to talking with the Australian regulators and helping them to implement reporting standards that comply with the NAIC white paper global standard for disclosure.

From an article in the Herald Sun,
THE Reserve Bank of Australia (RBA) is introducing industry-wide reporting standards for mortgage-backed securities to boost investor confidence in the market. 
The new standards, which for the first time will allow investors to compare the performance of mortgage-backed securities on a like-for-like basis, comes in the aftermath of the global financial crisis, which crushed the volume of new issuance. 
If, after a transition period beginning early next year, issuers have not conformed with the new reporting standard, their securities would become ineligible for the central bank's repurchase agreements (repos) program....
Issuers are given a big incentive to comply and provide the required disclosure.  This incentive was also provided by the ECB and BoE.
the data, to be reported quarterly, would benefit the broader market by providing more transparency to Australian RMBS.
Subprime mortgage-backed securities provided data more frequently and they are considered 'opaque'.

Under the NAIC white paper standard, data must be reported on an observable event basis before the beginning of the next business day.

Fortunately, without any extra cost, servicers can report the information on this basis because their information systems are designed to be updated on an observable event basis.
"The Reserve Bank will also require that issuers make these reporting templates available to the public, free of charge," Dr Debelle told the Australian Securitisation Forum in Sydney on Monday.
This is very important.  The cost of disclosure is built into the transaction and all market participants regardless of their ability to pay can access the information at the same time for free.
"Issuers will have to inform the Reserve Bank of where their data are being stored and being made available to the public.
The data should be stored and made available though a data repository.
"It will also be a requirement that issuers ensure that these data are accurate."...
This is easily done and can be independently confirmed by auditors.
"Hence, in consultation with the Australian Securitisation Forum, we have sought to achieve some uniformity and greater depth in the information reported," Dr Debelle said....
One can assume that Dr. Debelle will be willing to comply with the NAIC white paper standards given that without the real-money buy-side investors there is no market.
Dr Debelle said the new standards would help the RBA to more precisely value the securities held on its balance sheet in terms of both price and risk. 
They would also decrease the RBA's reliance on credit rating agencies in assessing the securities.
This is true only if the NAIC white paper standards are adopted.  Otherwise, there is no improvement in ability to value the securities or less dependence on credit rating agencies.
The standards were similar to those introduced by the European Central Bank and Bank of England, while in the United States the Securities and Exchange Commission was considering what information needs to be provided by issuers as a result of new legislation.
Presumably, these organizations will come around to the realization that failure to adopt the NAIC white paper standards means there are no real-money buyers.


creditplumber said...

Really excellent post, Richard.

We've been closing transactions with daily and granular observable credit risk data for 5 years. we could never understand why banks didn't buy into the methodology. It has become clear that by doing so they would undermine their ability to generate fees and control servicing.

Some are beginning to get the need for daily and granular observable event data. They realise (some) corporate clients want the info for their own credit risk analysis and risk management purposes. But it takes time.

Keep up the good work.

Richard Field said...