IOSCO Releases Securitization Regulation Proposals
November 16, 2012
The International Organization of Securities Organizations (IOSCO) published today a final report on the Global Developments in Securitization Regulation.
The publication is a series of recommendations intended to ensure that securitization markets develop in a sound and sustainable manner, according to a release from the agency.
IOSCO stated that securitization is a valuable funding tool, when functioning properly, that facilitates economic growth and the diversification of risk. However, the global financial crisis has damaged investor interest and confidence in these markets, the IOSCO added in a release today.
"Since the outbreak of the crisis, global securitization markets activity has suffered a significant downturn," IOSCO said.
The release stated that the final report makes observations about the role sound securitization markets can play in supporting economic growth as well as regulation can have in limiting systemic risk and restoring investor trust and confidence.
It also offers a snapshot of the global securitization markets; summarizes key themes, observations and issues from the responses to the consultation paper in terms of approaches to risk retention, transparency and standardization. The paper also gives suggestions on these three factors while identifying other medium or longer-term policy priorities for consideration.
The Financial Stability Board (FSB) is currently reviewing securitization market reform as part of its work for the G20 on the shadow banking sector. In this context, the FSB asked that IOSCO conduct a stock-taking exercise on certain securitization concerns such as risk retention, transparency and standardization, and come up with policy recommendations as needed.
IOSCO's final report on securitization builds on earlier IOSCO work intended to support sustainable securitization markets growth, which includes a roundtable with industry players and responses to a consultation paper about the Global Developments in Securitization Regulation published in June 2012.
According to its release, IOSCO has based its work on the premise that "regulation can contribute to a restoration of confidence and trust by setting standards market participants must meet to address issues that surfaced through the crisis." These cover securitization practices and structures that created misaligned or wrong incentives and resulted in the inadequate risk management practices. IOSCO considers that risk retention requirements and enhanced disclosure requirements have a key role to play in addressing these issues.
IOSCO has also analyzed the different standards being implemented and has considered the extent to which various approaches to regulatory reform might cause hinderances to cross-border activity. Based on this analysis, the agency identified in its report a different suggestions for consideration by regulators and policymakers.
The suggestions map out a way to convergence and implementation of approaches to incentive alignment specifically about risk retention requirements. They build on recent developments in standardized templates for asset level disclosure and other disclosure-related initiatives to help form informed investment decisions. The report also offers up some further issues for consideration that help encourage sound regulation of sustainable securitization markets.