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 stated.
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 created.
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)