LONDON, July 13 (IFR) - The joint forum of the BIS is
pressing securitisation professionals to make progress in
document standardisation and reduce product complexity to enable
ABS to continue to be an alternative funding source for
institutions, and contribute to the availability of credit to
support the real economy.
Its "Report on asset securitisation incentives" cites
Europe's Prime Collateralised Securities (PCS) initiative as an
"example of how incentives to standardise disclosure and
structures could be provided".
This market-led initiative, it recalled, would "promote
market standards by means of an independent entity that grants a
securitisation label". Such standardisation, and transparency,
has been called for after over-engineered securitisation
products led to conflicts of interest.
The report acknowledges that there remains some investor
demand for bespoke complex products and that product
complexities is not necessarily a bad thing - for instance,
excess spread traps and performance triggers were introduced to
bolster the creditworthiness of the senior tranches.
"The challenge for authorities is to determine how to reduce
complexity and require document standardisation, and to do so in
a way which does not reduce incentives to innovate," the report
However, "it could be useful to standardise most
securitisation products to some extent", it added. "This would
facilitate the development of more liquid secondary markets and
help avoid the market gridlock experienced during the crisis."
It called for information disclosure to be "internationally
standardized", including basic definitions such as "defaults"
and "delinquencies". Such standardisation could allow
information to be more easily compared, it said.
Standardisation should foster enhancements and availability
in analytics software, providing investors with more tools to
assess their investment decisions, it pointed out.
Three other recommendations set out in the report are;
(1) Authorities should employ a broad suite of tools to address
misaligned incentives, which may include measures to improve
loan origination standards, and to align compensation
arrangements with long-term performance and asset quality.
(2) Authorities should encourage markets to improve transparency
to ensure that investors, other market participants, and
supervisors have access to relevant and reliable information.
(3) Authorities should encourage greater document
standardisation and less product complexity, which should assist
in reducing information asymmetries and stimulating liquidity in
secondary securitisation markets.
The PCS initiative is promoted by the European Financial
Services Roundtable and AFME. A banker involved in the
discussions said that this quality label will definitely be
He acknowledged that a series of hurdles still need to be
overcome (notably, accepting that imposing a pan-European LTV
ceiling is not possible). But industry professionals now
recognise that this label is needed to make ABS and RMBS
eligible under the new liquidity buffers under the Capital
Requirements Directive IV.
(Reporting by Jean-Marc Poilpre, editing by Anil Mayre)