Toronto, – Regulators considering reforms to the asset-backed securities (ABS) market should look beyond transparency requirements in their efforts to improve investor comfort in the ABS market, says a report from the C.D. Howe Institute.
In “ Better Braking for ABS,” authors David C. Allan and Philippe Bergevin say reforms should require, as a condition for allowing a potential ABS issue to be sold on the public market, participation by third-party investors who have the expertise and incentive to assess the ABS’ viability.
“Regulators do not want to see reconstituted ABS markets that are once again underpinned solely by investors’ confidence in ratings,” noted co-author David Allan. “Third-party subordinated investors back their own assessments of risk with skin in the game.”
The market for asset-backed securities – financial instruments backed by underlying assets such as mortgages – collapsed in 2007, as a cascade of downgrades and defaults brought turmoil to credit markets and the world economy.
Authorities in the United States have since proposed sweeping changes to the ABS market. The Canadian Securities Administrators, representing provincial securities commissions, recently released a discussion paper proposing similar reforms, which would require:
sharply enhanced transparency in ABS structures,
CEO certification of the adequacy of such structures, and
disclosure of previous asset repurchases by the securities’ sponsor.
While enhanced transparency is an important building block for reform, these proposals need to go a step further. Allan and Bergevin say that the Canadian model should include a requirement for participation by specialized third-party institutions who would take risk positions ranking behind senior investors in creditor priority, as a ratification of the intentions of issuers and a validation of the views of rating agencies.
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For more information contact:
Philippe Bergevin, Policy Analyst, C.D. Howe institute;
Email: cdhowe@cdhowe.org
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