Poor incentives, inadequate oversight and a drive for high yield were behind the crisis in the credit market, and securitisation in particular, according to a paper issued today by the International Organisation of Securities Commissions.
The report said badly-designed incentives in the securitisation industry meant there was too much focus on producing and distributing large volumes of products, and not enough on the due diligence required to ensure high product quality. The subsequent wave of mass downgrades and collapse in value of thousands of transactions has destroyed investor confidence in securitised products, Iosco added, something that could take years to restore.
"Given the magnitude of the crisis and the need to rebuild confidence, it is unlikely that industry initiatives alone will be sufficient," the report said, suggesting instead regulators should impose various new measures. These could include a tighter code of conduct on credit rating agencies, improved transparency for originators, and a requirement for originators to retain some exposure to the products they issue, in order to give them an incentive to ensure higher quality. Salesmen would pay more attention to the quality of underlying assets if their compensation were linked to the assets, it added.
The organisation also called for stronger rules in investor suitability, to prevent the selling of complex products to investors unable to assess their risks, and mandatory disclosure of details of the assets underlying the products.
In the credit default swap (CDS) market, also central to the financial crisis, Iosco backed the move towards central clearing, and urged the standardisation of CDS contracts.
More on Structured Products
Controversial tax reforms would foist “unworkable” compliance burdens on firms
Product aims to improve on PowerShares S&P 500 Low Volatility Portfolio ETF using risk reduction
Conditional income product offers steady income and could offset potential bear market losses
Product offers 17% maximum return but investors’ capital is protected
Sign up for Risk.net email alerts
Sanjay Sharma talks about risk transparency and how his book helps achieve it.
A five-minute formula from Alexander Denev that takes you through a simple probabilistic graphical model and explains how and why these are used. Find out more about the ground-breaking book, Probabilistic...
Industry leader Vincent Kaminski discusses the challenges faced by energy markets and his new book, Managing Energy Price Risk, 4th Edition.
Momtchil Pojarliev talks about his book, The Role of Currency in Institutional Portolios, currency investing and the potential role of currencies in institutional portfolios.
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.