29 May 2008

IOSCO final report on sub-prime crisis

The report contains a comprehensive analysis and recommendations for future IOSCO work on issuer transparency and investor due diligence, firm risk management and prudential supervision, and valuation and accounting issues.

The report focuses on the market for structured finance products and the specific areas where failings were identified.

 

It contains a comprehensive analysis and contains recommendations for future IOSCO work on issuer transparency and investor due diligence, firm risk management and prudential supervision, and valuation and accounting issues.

 

The Task Force found that the recent market turmoil had relatively less effect on publicly traded structured finance products in some markets, and that secondary trading of structured finance products, for a variety of reasons, is opaque.

 

Also, many institutional investors and investment banking firms had inadequate risk modelling and internal controls in place, relied heavily (or even exclusively) on external credit ratings for their risk analysis, had inadequate balance sheet liquidity even when adequately capitalized, and given the work of the SSG on analyzing these issues.

 

Finally, concerns have been raised regarding the role fair value accounting principles and its role in providing adequate information about the strength of financial firms facing illiquid market conditions. Also, some financial firms appear to have inadequate human and technological resources to model their financial positions using fair value accounting principles under illiquid market conditions.  

 

The Report is organized into five parts:

- The first section is a brief summary of events related to the subprime markets that may have regulatory implications for international capital markets.

- The second section addresses issues relating to issuer transparency and investor due diligence.

- A third section reviews institutional investor risk management and prudential supervision.

- A fourth section investigates accounting and valuation issues for structured finance products under conditions of market stress.

- The fifth section incorporates findings from the IOSCO CRA Task Force’s report.

 

Recommendations of the report:

 

Issuer Transparency and Investor Due Diligence

• The Standing Committee on Multinational Disclosure and Accounting will consult with market participants regarding the typical structures and disclosure practices for private placements of asset-backed securities to determine the degree to which these practices are as developed as they are for publicly traded asset-backed securities;

• The Standing Committee on Multinational Disclosure and Accounting will review the degree to which existing IOSCO issuer disclosure standards and principles are applicable to publicly traded asset-backed securities and will develop international principles regarding disclosure requirements these securities if it finds that existing standards and principles are inapplicable to such offerings;

• The Standing Committee on Investment Management will review the degree that investment managers who offer collective investment schemes to retail investors have invested in structured products, the type of due diligence typically conducted when making these investments, the degree to which these investment managers have been affected by the current market turmoil;

• The Standing Committee on the Regulation of Secondary Markets, together with the financial service industry, will examine the viability of a secondary market reporting system for different types of structured finance products.

 

Firm Risk Management and Prudential Supervision

• The Standing Committee on Market Intermediaries will survey members’ experience on liquidity risk management and liquidity standards to assist and supplement the work being undertaken jointly with the Basel Committee on Banking Supervision;

• The Standing Committees on Market Intermediaries and Investment Management will undertake a study of the internal control systems of financial firms and asset managers and develop principles to address any concerns identified;

• The Technical Committee will ask originators and sponsors of securitization programs to develop best practices to reinforce their due diligence and risk management practices such that the quality of assets originated for transfer off their balance sheets is of the same quality and subject to the same evaluations as for those kept on their balance sheet;

• The Standing Committee on Multinational Disclosure and Accounting or a Chairs Task Force will consider whether additional guidance and disclosure relating to off-balance sheet entities would be valuable in meeting the needs of investors.

 

Valuation

• The Technical Committee’s Standing Committee on Multinational Disclosure and Accounting or a Technical Committee Chairs Task Force will consider whether additional guidance and disclosure related to measurement at fair value would be valuable in meeting the needs of investors;

• The Standing Committees on Market Intermediaries and Investment Management will explore whether, as a matter of internal control, registered intermediaries and investment advisers avail themselves of practitioners who are skilled or trained enough to model fair valuation adequately in illiquid market conditions.

 

Press release

Report

 

© IOSCO