In light of the crisis in financial markets, the Technical Committee (TC) of the International Organization of Securities Commissions (IOSCO) gave mandate to its Standing Committee on the Regulation of Secondary Markets (TCSC2) to examine the viability of a secondary market reporting system for structured finance products (SFPs), with a particular focus on the nature of the market and its participants, as well as on the potential benefits and drawbacks of such a regime. In undertaking this task, TCSC2 solicited information from a variety of sources from the financial services industry across several jurisdictions. This final report follows the publication of a Consultation Report1 on 16 September 2009 and the analysis of the responses received.
Most market participants took the view that a carefully developed post-trade transparency regime with a phased implementation would be beneficial to market efficiency. All respondents to the Consultation Report agreed that the level of post-trade transparency on any particular market needs to be carefully tailored on the basis of the characteristics of that particular market and the particular SFPs being traded.
In some other important ways, views from market participants varied considerably. In general, buy-side participants are supportive of increased post-trade transparency for SFPs. They expressed the view that increased transparency would assist them in valuing these products, and in general lead to an improvement in price discovery and liquidity. Buy-side participants were supportive of increasing trade transparency, starting with the most liquid and standardised SFPs, with further analysis needed by member jurisdictions before moving onto less liquid SFPs.
In contrast, sell-side participants raised some concerns about post-trade transparency in SFPs. While most sell-side participants agreed that post-trade transparency of some products could be beneficial, they stressed the need for regulators to carefully consider individual market characteristics before mandating post-trade transparency in even the most liquid SFPs. One of their primary concerns is that the non-standardised, complex and illiquid nature of structured finance products would make meaningful price comparability difficult or impossible. However, some sell-side participants agreed that if carefully tailored to the particular product and market, and limited to the most liquid and standardised SFPs, increased post-trade transparency could be beneficial to market efficiency.
The TC recognises that there are divergent views about the merits of requiring enhanced post-trade transparency for SFPs, but nevertheless believes that greater information on traded prices would be a valuable source of information for market participants. The TC therefore recommends that member jurisdictions should seek to enhance post-trade transparency of SFPs in their respective jurisdictions taking into account the benefits of and issues related to post-trade transparency discussed in this report.
In the TC‘s view, member jurisdictions should work initially towards implementing post-trade transparency taking into account the factors mentioned below. To do this, member jurisdictions will need to gain a detailed understanding of how those factors apply in their market. Following the implementation of post-trade transparency for one or more particular types of securities, member jurisdictions should carefully analyse the impact of the transparency on the market for these SFPs, and look to extend post-trade transparency to other securities, when it deems it beneficial to do so.
In the TC's view, it is appropriate for post-trade transparency regimes to be tailored to take into account the unique nature of the market and participants in each jurisdiction, and each member jurisdiction is best placed to judge the appropriate time, scope and manner for enhancing post-trade transparency.
The TC believes that enhanced post-trade transparency should be provided in the most cost-effective way reasonably possible, but should at the same time seek to avoid a negative impact on efficiency and liquidity of markets. The TC believes that it would be appropriate to develop a post-trade transparency regime that provides for the transparency of trade-by-trade data or aggregate data, depending on the liquidity of the particular SFP. Over time, member jurisdictions should seek to move to greater trade-by-trade transparency, where it believes that doing so would provide an overall benefit to the market without revealing a substantial amount of private information.
In light of the above, the TC believes that, amongst other things, member jurisdictions should consider the following factors when seeking to develop a post-trade transparency regime for SFPs:
Ø The degree of liquidity or secondary market trading for a particular SFP;
Ø The initial and outstanding amount of the issue;
Ø The rating of the issue;
Ø Whether the SFP was publicly offered or offered via private placement;
Ø Whether there is a broad investor base for the particular instrument;
Ø The degree of standardisation of a particular SFP;
Ø Costs of implementation of a post-trade transparency regime or costs of extending any existing post-trade transparency system to SFPs;
Ø Any appropriate time delays in publishing trade information;
Ø Whether to require the dissemination of trade-by-trade or aggregate trade information; and
Ø Thresholds with respect to the disclosure of trade volumes and further measures to help ensure anonymity of the market participants.
© IOSCO
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