Unregulated Financial Markets and Products

In May 2009, IOSCO's Technical Committee published "Unregulated Financial Markets and Products - Consultation Report". The Report contains interim recommendations for regulatory action designed to improve confidence in the securitisation process and the market for credit default swaps (CDS). The interim recommendations contained in the Report address issues of immediate concern with respect to securitised products and CDS. Securitised products include asset-backed securities (ABS), asset-backed commercial paper (ABCP) and structured credit products such as collateralised debt obligations (CDOs), synthetic CDOs, and collateralised loan obligations (CLOs).

While encouraging industry responses in the securitisation process and CDS market, IOSCO recognises that industry initiatives alone will not be sufficient to restore transparency, market quality and integrity and has therefore formulated a number of interim recommendations to address the following concerns associated with both these areas.

Securitisation

Interim Recommendation 1 – Wrong Incentives

1. Consider requiring originators and/or sponsors to retain a long-term economic exposure to the securitisation;
2. Enhance transparency through disclosure by issuers of all checks, assessments and duties that have been performed or risk practices that have been undertaken by the underwriter, sponsor and/or originator;
3. Require independence of experts used by issuers; and
4. Require experts to revisit and maintain reports over the life of the product.

Interim Recommendation 2 – Inadequate risk management practices

1. Mandate improvements in disclosure by issuers including initial and ongoing information about underlying asset pool performance and the review practices of underwriters, sponsors and/or originators including all checks, assessments and duties that have been performed or risk practices that have been undertaken. Disclosure should also include details of the creditworthiness of the person(s) with direct or indirect liability to the issuer;
2. Strengthen investor suitability requirements as well as the definition of sophisticated investor in this market; and
3. Encourage the development of alternative means to evaluate risk with the support of the "buy-side".

Interim Recommendation 3 – Regulatory structure and oversight issues

IOSCO recommends that jurisdictions should assess the scope of their regulatory reach and consider which enhancements to regulatory powers are needed to support the interim recommendation #1 and #2 in a manner promoting international coordination of regulation.

Credit Default Swaps

Interim Recommendation 4 – Counterparty Risk and Lack of Transparency

In forming the interim recommendations below, IOSCO considered the establishment of central counterparties (CCPs) for the clearing of standardised CDS as an important factor in addressing the issues of counterparty risk and transparency.

Interim Recommendation 5 – Regulatory structure and oversight issues

IOSCO recommends that jurisdictions should assess the scope of their regulatory reach and consider which enhancements to regulatory powers are needed to support the interim recommendation #4 in a manner promoting international coordination of regulation.