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"Dire predictions by market participants that regulatory changes or significant changes to market practices will result in the evaporation of liquidity tend to obfuscate reality”,
Ryan noted that private sector committees charged with developing best practices regarding disclosure to investors is currently being led by the American Securitization Forum and SIFMA, which are expected to issue a report later this summer. SIFMA is also leading another private-sector effort to help issuers, underwriters and credit rating agencies ensure the integrity and transparency of ratings and to appropriately use these ratings in risk assessment practices. Their work is expected to be completed by the end of July, Ryan said.
Regulators must have mechanisms and facilities that allow a market participant to fail without compromising the broader system, he outlined. While firm failures are painful, as a policy matter, we must be in a place where firms are allowed to fail.
The question of whether an institution could be "too big" to fail has evolved to whether an institution could be "too interconnected" to fail, Ryan said. However, regulators must balance the need for market stability with concerns about the likelihood of increased moral hazard, he concluded.
Therefore, regulators and private sector participants must strengthen market mechanisms such as post-trade practices, centralized clearing, risk management and transparency.
Recent events in financial markets were characterized by an erosion of market discipline and complacency about risk that affected a broad array of market participants, including originators of credit, financial firms that securitize credit, rating agencies, and investors, he outlined.
“Another area in which we need to witness a much greater awareness and appreciation of risk by market participants is the use of ratings”, he said. “While we must see changes to credit rating agency practices, the users of their services must rely less on, and appreciate more, the limitations of ratings products.”