Sub-prime Crisis

Subprime crisis continues to be a major concern by regulatory bodies. At early Feb 2008, the IOSCO Technical Committee reviewed the progress on the sub-prime crisis, focusing on four key issues:

• enhanced transparency by issuers of structured products and appropriate due diligence frominvestors;
• risk management process for intermediaries;
• valuation and accounting issues; and
• the roles and duties of credit rating agencies.

The Technical Committee discussed various possible advancements in the model IOSCO Code of Conduct Fundamentals for Credit Rating Agencies, including:

• disclosure of the assumptions underlying the individual ratings for structured finance transactions;
• prohibition of advice on the design of structured products which an agency also rates; and
• reasonable steps being taken to use information of sufficient quality to support a credible rating.

The Technical Committee also outlines several key steps that can be taken by market participants to help restore confidence in the operation of the market:

• Financial institutions are encouraged to enhance the information available to the primary market for structured finance instruments;
• Market participants should cooperate to identify information that would be relevant and useful in achieving an appropriate level of transparency in the secondary market;
• Financial institutions should make accurate and complete disclosure of the size and the level oftheir exposures related to structured finance to the market;
• Institutional investors and asset managers are encouraged to develop and undertake strict due diligence processes in their assessment prior to any investment into complex, structured products.

Every time when there is a wide-spread financial crisis, the fundamental problem identified by the regulators is associated with transparency and disclosure. This is always a hindsight. If regulators are unable to fully understand the systemic risks created by a new financial instrument in advance, new types of crisis will burst again and again in the future.