As securitizations return to favor in the capital markets by helping banks to generate meaningful credit capacity, the International Organization of Securities Commissions (IOSCO) has published a consultation report seeking comment on policy issues arising from the work of its Task Force on Unregulated Markets and Products (TFUMP) on these financial instruments. The paper is in response to the Financial Stability Boards work to strengthen oversight and regulation of the shadow banking system.
The FSB asked IOSCO to conduct a stock-taking exercise on the requirements for risk retention and measures enhancing transparency and standardization of securitization products, and to develop policy recommendations as necessary. The FSB’s request followed earlier IOSCO and Joint Forum work aimed at regulatory initiatives to support recovery of securitization markets.
Due to the incipient recovery of the securitization market IOSCO is trying to help it along and ensure it does not go back to where it was a few years ago, said a spokesperson for IOSCO. Securitization vehicles are involve the pooling together of various physical and non-physical assets in a structure from which bonds are issued to institutional investors. Before the sub-prime crisis, monoline insurers guaranteed these vehicles in order to offset their complexity for investors. However, following the sub-prime crisis, the majority of monoline insurers, which were exposed to these investments, folded and the securitization vehicles fell out of favor with investors. Now, banks seeking to raise capital and companies with fixed based assets are increasingly turning to securitization vehicles in order to raise capital. Similarly, issuers and underwriters of this paper have been working with investors to prove these instruments are not as complex as once thought.
The latest paper is based on a survey of member jurisdictions and builds on earlier work by the Securities Exchange Commission and the European Commission on developments in the US and the EU in over 20 jurisdictions.
IOSCO has undertaken work since 2009, at the request of the FSB, intended to support recovery of securitization markets. IOSCO issued a report prepared by TFUMP in September 2009 which made recommendations about improvements in regulatory oversight of securitization markets intended to assist in restoring investor confidence and market quality. During 2010, TFUMP conducted a survey about the implementation of these recommendations in member jurisdictions. It reported the results of that survey to its technical committee in a report published in March 2011.
In the latest IOSCO report the TFUMPF makes the following observations:
– From a European perspective, there is a view that securitization is a viable alternative source of funding for the banking sector at a time when it needs funding diversification. Good functioning of, and access to, securitization as a funding alternative would, in turn, support recovery in the real economy.
– There is evidence of a revival in investor appetite, particularly among US institutions looking to secure yield opportunities in their own and European markets.
– Given investor interest in diversifying away from their home markets, and the appeal of offshore pools of liquidity for issuers, there is concern about the potential impact of differences in regulatory requirements across jurisdictions in impeding cross border investing and issuance in the securitization markets.
– There is concern among issuers, in particular, that securitization continues to be stigmatized by sub-prime crisis events.
In light of these observations, TFUMP’s thinking and analysis proceeded on the basis of the principle that securitization is an important market-based funding source for banks. Its effectiveness as a reliable funding alternative depends on a sound market system in which market participants have access to information that supports a comprehensive understanding of the features and risks associated with investments in securitizations.
The paper makes policy recommendations addressing differences in approaches to risk retention, improvements in transparency and measures to standardize disclosure.
Task Force co-chair and managing director of the Autorit des Marchs Financiers (AMF) Edouard Vieillefond, said: The Consultation Paper which follows analysis of regulatory developments in over 20 jurisdictions provides us with an opportunity to work toward greater harmonization in our approach to regulation of this important sector. We look forward to receiving industry views on the measures we propose.
Data from other sources confirmed the significant decline in issuance since pre-Global Financial Crisis peaks and generally slow recovery in jurisdictions covered by this work. In the US, new issuance totaled $124 billion in 2011, down from a 2006 peak of $753 billion. In Europe, new to November 2011 was 207 billion, down from a peak of over 700 billion in 2008.
Looking at developing markets, securitization issuances in Brazil rose from Reais 32 billion in 2010 (Reais 23 billion for contractual investment funds (FIDC) and almost Reais 9 billion for commercial mortgage-backed securities (CMBS) and residential mortgage backed securities (RMBS) to more than Reais 50 billion in 2011 (Reais 37 billion for contractual investment funds and almost Reais 14 billion for CMBS and RMBS).
Securitizations in Mexico were down 26% in 2011 to $2.5 billion. RMBS account for 82% by value of Mexican securitizations. The market is dominated by two government related issuers (INFONAVIT and FOVISSSTE).
In South Africa, issuance volumes dropped from R41 billion in 2007 to R3 billion in 2010. Volumes are expected to remain at this level with most activity understood to be refinancing. RMBS accounts for 50% of rated public offers.
Recent recovery of Japanese securitization markets from JPY 1,187 billion in first half 2010 to JPY 1,912 billion in first half 2011 (61% year on year) is led primarily by the increase in RMBS issued by Japan Housing Finance Agency as a government agency, accounting for 86% of the net increase during the period, while other products including RMBS issued by non-government agencies are still at their lowest levels.
New issuance in 2011 was A$26 billion comparable to 2010 levels and down from the 2006 peak of over AUD 70 bn.
As at January 2012, the total amount outstanding in the Canadian securitization market was C$93.9 billion. In 2011, new issuances returned to levels seen prior to the 2008 recession. The total volume of new ABS and ABCP issuance throughout the year was C$23.4 billion, which represents an increase of 17% over the prior year and 7% over pre-recession levels of 2008.
TFUMP’s observations and findings point to policy recommendations about differences in approaches to risk retention, improvements in transparency; and standardization in product disclosure for consultation with interested parties.
On risk retention, most TFUMP members are of the view that differences in retention requirements between current US proposals and recent EC initiatives identified in this report may have significant cost implications for and may impede cross border issuance. The key issue is differences in approach to exemption provisions.
TFUMP proposes that it monitor industry experience and views on the impact of the differences it has identified in regulatory approach between jurisdictions (e.g., the US and the EU). TFUMP foreshadows that should industry feedback and experience point to the envisaged impacts emerging it will consider developing appropriate regulatory responses and mechanisms to address those differences.
TFUMP’s analysis points to well-developed regulatory requirements in many jurisdictions about disclosure in relation to public offerings (and in some jurisdictions, in relation to private placements).
TFUMP proposes that IOSCO consult (through TFUMP) with investors about their appetite for stress testing information and, if appropriate, provide guidance on the disclosure issuers should be expected to make about stress testing and scenario analysis of pooled assets.
TFUMP has seen little evidence of standard disclosure templates being consistently required in the jurisdictions involved in the survey, other than a few exceptions. However, TFUMP notes industry and regulatory initiatives in this regard in Europe and the US and similarities in the types of data fields developed that would apply to various asset classes.
TFUMP proposes that IOSCO encourage industry to develop best practice templates and to encourage industry bodies to work with their counterparts in other jurisdictions to ensure consistent and harmonized approaches. IOSCO should consider developing principles to support harmonization in these approaches.
Comments on the consultation paper are sought by August 6 2012.
(JDC)