The regulators, having attracted their fair share of criticism over the structural weaknesses that were exposed by the liquidity freeze last year, are now scrambling to be seen to be addressing the market’s problems. Not surprisingly, the rating agencies have been first in the firing line. In late May, the International Organization of Securities Commissions (Iosco) set out its voluntary code of conduct for the rating agencies, and in June the US SEC outlined its proposed rules on addressing the conflicts of interest inherent in the rating agency model. The Financial Stability Forum also delivered a report in April calling for action across five areas of the market. The various proposals have, not surprisingly, met with howls of protest in some quarters but the need for the authorities to be seen to be doing something seems likely to prevail.
In a letter to the European Commission in February, the securitization industry committed itself to deliver improved transparency. But the EU’s Ecofin Council has given the industry until just the end of June to get its house in order. And there is much to do: in a keynote address at the Global ABS conference in June, Michel Prada, chairman of Iosco, stated that the market needs harmonized disclosure, differentiation by rating, more robust pricing mechanisms, incentives for better due diligence and more clarity in accounting mechanisms. But many would argue that this is a knee-jerk reaction by authorities that should have acted sooner. "We should probably be a little more active than we have been," conceded Prada. "Many colleagues think that it is detrimental to the markets for us to take views early but I think that we could do a little more. Many of us had identified the risks three or four years ago but, as Alan Greenspan would say, never go against a bubble."
The regulators all defend themselves by citing their voluminous research in recent years that pointed to the risks inherent in the mortgage market. They add that the industry should also bear responsibility for its own failings. "Ecofin put its trust in the ability of the industry to devise ways in which to increase transparency in order to avoid over-regulation," claimed Mario Nava, head of the financial markets infrastructure unit at the European Commission at the same conference. Nava has responsibility for delivering a response to Ecofin by the June deadline. "In the primary market there is not a lack of information – there is a lack of willingness to go out and look for it," he said.
