Monday, November 19, 2012

IOSCO: banks should be forced to provide "all documents and data relevant to assess ... securitization product"

IOSCO, the International Organization of Securities Commissions, has come out in favor of investors having access to "all documents and data relevant to assess the creditworthiness of each securitization product".

Equally importantly, IOSCO recognizes that banks must be forced to provide this information. They have not done so to date.

The IOSCO requests for "all documents and data relevant to asses the creditworthiness of each securitization product" also means that the proposals of a European Data Warehouse (with monthly data) and the Prime Collateralised Securities label (a sell-side initiative) are inadequate for assessing the creditworthiness.

Regular readers know that the IOSCO statement has two parts:  "what" is disclosed and "when" it is disclosed.
  • The "what" is all the information collected on the underlying collateral on a borrower privacy protected basis.
  • The "when" is on an observable event basis where all activities like a payment or delinquency involving the underlying collateral are reported before the beginning of the next business day.  Without this frequency of reporting, investors don't have all the data they need to assess each securitization.
As reported by Bloomberg,
Banks should be forced to give investors buying securitized debt data for stress tests to gauge its risk, global regulators said as they push to make financial markets safer. 
The International Organization of Securities Commissions said investors should have the same access as credit-ratings companies to “all documents and data relevant to assess creditworthiness of a given securitization product,” as part of a push to improve regulation of the industry. 
The group also said that the EU should work to iron out differences with the U.S. on its rule-making.
“Iosco considers that investors should be able to test whether future cash flows generated from underlying pools” of assets in a securitization will “pay investors in full and on time,” ....

Please re-read the highlighted text again as this is what your humble blogger has been saying since before the financial crisis began.

Regular readers know that leading up to the financial crisis the credit-rating companies "represented" that they had access to information on the underlying collateral performance that allowed them to update their ratings on a timely basis.

In the fall of 2007, the credit-rating companies testified before the US Congress that they actually did not receive data on the performance of the underlying collateral any more frequently than other market participants and this frequency was inadequate for timely ratings updates.

Frequency is a problem because if credit-rating companies cannot do a risk assessment on a timely basis, then neither can investors.  If investors cannot assess the risk of each securitization, they cannot "know what they own".

If investors cannot know what they own, they are blindly betting when they buy a securitization.  The US National Association of Insurance Commissioners white paper on the Future of Mortgage Finance set the global standard for the buy-side and said that blindly betting requires a lot more capital to be held against the position.

In its statement, IOSCO assumes that this frequency problem has been fixed and that the credit-rating companies now have data on an observable event basis.

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