"Circuit breakers" proposed for structured finance
LONDON (Reuters) -- Bankers are developing proposals for "circuit breakers" in the structured finance market that would stop a downward spiral in prices, although some fear this could reduce liquidity further, a Thomson Reuters forum heard on Wednesday.
David Clark, a consultant working in the Institute of International Finance (IIF) group on valuations, said the group is recommending alternative approaches to valuation for securities in thin or illiquid markets.
This could mean the transfer of a security from valuation on a mark-to-market basis to an amortised basis over a period of several years during which the investor would have to hold the debt.
"It's a way to stop the implosion, the vicious circle of pricing," Clark, who is working on behalf of the International Capital Markets Association (ICMA), told the forum.
Bankers have become concerned that mark-to-market accounting has exacerbated the credit crisis, as some holders are forced to mark down prices of securities whose fundamental credit quality has not changed in an illiquid market. The subprime crisis has led to indiscriminate selling of asset-backed securities, and in some cases meant there are no prices available at all for some bonds.
However, Dave Covey, head of European ABS research at Lehman Brothers, said he would be hesitant to support a measure that could further limit trading of a security.
"I would hate to see anything give anyone an excuse not to sell a bond," he said, adding that this kind of change in valuation method could give some institutions advantages over others.
Clark acknowledged on the sidelines of the forum that the proposal faced criticism that a circuit breaker could damage fair-value accounting practices that underpin the market.
DATA, DATA, DATA
All the speakers agreed, however, that a prerequisite to improving pricing and valuation practices in structured finance was to improve the availability, consistency and clarity of data.
Dealers in asset-backed securities are growing increasingly aware of the need to provide investors with detailed data they have previously regarded as proprietary, Lehman's Covey said.
"Dealers are getting over their proprietary interest in information. We have a vested interest in opening up to the market all the data that we can," he said.
"More data needs to be collected and aggregated in systematic fashion," said Meredith Coffey, a senior vice president at Reuters Loan Pricing Corporation. That would enable investors to develop a holistic view of risk, with connected data from disparate asset classes such as high-yield bonds, credit derivatives, equities and loans, she added.
But in addition to the availability of data, ensuring the data is clear and understandable is also key to resolving the problems in the market, said Rick Watson, head of the European Securitisation Forum, an industry lobby group working with the European Commission to develop best practice for the market.
He noted that investors needed to build infrastructure so that senior management could understand what individual fund managers were buying at the portfolio level.
"The technician may be understanding what is going on, but not communicating it to the board," he said.
This problem has been clear from the travails of some of the world's top investment banks, where senior executives have been unaware of the concentrations of risk built up in various parts of their operations. That has led to billions of dollars worth of write-offs and an increased focus on transparency on bank balance sheets and accurate valuations of securities. (Reporting by Jane Baird, writing by Richard Barley; Editing by Braden Reddall)
