05 May 2009

IOSCO consults on interim recommendations on unregulated financial markets and products

The Consultation Report makes recommendations about regulatory approaches that may be implemented with respect to securitisation and credit default swap markets and then goes on to discuss the broader unregulated financial markets and related products.

The Consultation Report makes recommendations about regulatory approaches that may be implemented with respect to securitisation and credit default swap markets and then goes on to discuss the broader unregulated financial markets and related products.

 

The recommendations address issues of immediate concern with respect to CDSs and securitised products, including asset-backed securities (ABS), asset-backed commercial paper (ABCP) and structured credit products such as CDOs, synthetic CDOs, and collateralised loan obligations (CLOs).

 

The Consultation Report identifies the need for further consideration of the other unregulated financial markets and products before general recommendations can be developed.

 

Deadline for responses is 15 June 2009.

 

Press release

Consultation document

 

Interim Recommendations

 

Securitisation

1. Consider requiring originators and/or sponsors to retain a long-term economic exposure to the securitisation;
2. Enhance transparency through disclosure by issuers of all checks, assessments and duties that have been performed or risk practices that have been undertaken by the underwriter, sponsor and/or originator
3. Require independence of experts used by issuers; and
4. Require experts to revisit and maintain reports over the life of the product.

 

Inadequate risk management practices

1. Mandate improvements in disclosure by issuers including initial and ongoing information about underlying asset pool performance and the review practices of underwriters, sponsors and/or originators including all checks, assessments and duties that have been performed or risk practices that have been undertaken. Disclosure should also include details of the creditworthiness of the person(s) with direct or indirect liability to the issuer;
2. Strengthen investor suitability requirements as well as the definition of sophisticated investor in this market; and
3. Encourage the development of alternative means to evaluate risk with the support of the "buy-side".

 

Regulatory structure and oversight issues

IOSCO recommends that jurisdictions should assess the scope of their regulatory reach and consider which enhancements to regulatory powers are needed to support TC interim recommendation #1 and #2 in a manner promoting international co-ordination of regulation.

 

Credit Default Swaps

In forming the interim recommendations below, the Task Force considered the establishment of central counterparties (CCPs) for the clearing of standardised CDS as an important factor in addressing the issues of counterparty risk and transparency.

 

1. Provide sufficient regulatory structure for the establishment of CCPs to clear standardised CDS, including requirements to ensure:
   1. appropriate financial resources and risk management practices to minimise risk of CCP failure;
   2. CCPs make available transaction and market information that would inform the market and regulators; and
   3. cooperation with regulators;
2. Encourage financial institutions and market participants to work on standardising CDS contracts to facilitate CCP clearing;
3. CPSS-IOSCO Recommendations for CCPs should 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. Establish an appropriate framework to facilitate information sharing and regulatory co-operation 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.

 

Regulatory structure and oversight issues

IOSCO recommends that jurisdictions should assess the scope of their regulatory reach and consider which enhancements to regulatory powers are needed to support TC interim recommendation #4 in a manner promoting international co-ordination of regulation.

 

On the basis of the interim recommendations for these markets, the Report also identifies the need for further consideration of the other unregulated financial markets and products before general recommendations can be developed.

 

© IOSCO