Australian Securities Commission Says Securitization Reform Must Be Global

While the subprime crisis originated in the US, the Australian Securities and Investments Commission believes that the ongoing reform of the securitization process must be global and be primarily based on the Financial Stability Forum’s recommendations. In recent remarks, Commissioner Belinda Gibson said that while each national market has responded somewhat differently to the crisis, there are some common cross-border attributes, including a reduction in funds available for lending and a fall in investment performance leading to concerns about further negative market activity as investors switch to safer products.

As various national regulators collaborate on many levels to solve the problems, the commissioner singled out the FSF as the leading cooperative institution in the reform movement. The Financial Stability Forum has proposed a sweeping overhaul of financial regulation centered on strengthened risk management, enhanced disclosure, and the reform of valuation and credit rating for complex structured products. At the heart of the FSF’s plan is the broad reform of the entire securitization process. Originators, arrangers, distributors, managers and credit ratings agencies are all called upon to strengthen transparency at each stage of the securitization chain, such as by enhancing and standardizing information on an initial and ongoing basis about the pools of assets underlying structured credit products.

Innovatively, the forum calls for a college of regulators to be put in place by the end of 2008 for each of the largest global financial institutions. The FSF’s conclusions and recommendations are consistent with those of the President's Working Group on Financial Markets, but on a global scale.

Commissioner Cooper said that a central theme of the reforms must involve the credit rating agencies. She noted that the SEC has proposed reforms in this area; and that soon the European Commission will propose the regulation of credit rating agencies. The Australian Commission and Treasury are currently working on a project to reform the rating agencies. One issue that must be addressed is the conflict of interest that arises when fees are connected to ratings outcome or product issue success.

There is also a wider market issue about the extent to which investors rely on the ratings that the agencies give to asset-backed securities when they make their investment decisions. Similarly, the commissioner questions whether the level of diligence undertaken by the ratings agencies warrants investor reliance. As part of the project, the Australian regulators will also try to ascertain the level of review that the rating agencies undertake on an ongoing basis.

On the important issue of valuing complex asset-backed securities, the commissioner said that the methods used to value the securities must be disclosed; and the timing of disclosure will be very important. For example, she stressed that the announcement of a devaluation should not be delayed until a restructure proposal can be negotiated. While acknowledging that the valuation of illiquid securities is difficult, she emphasized that this is an area where undue conservatism could be contrary to the interests of investors.