It is always like this – things go wrong because of natural process of sheer over-exuberance, and we react with more rules and more regulations, as if it was lack of rules that caused the problem. Not unexpected at all, the Department of Treasury issued an 89 page report proposing several new regulations in the financial market.
As for securitization transactions, it proposes originators to be mandated to keep at least 5% risk in the securitized portfolios – similar to what European counterparts have already impose (See our news here). Recognition of upfront gain on sale should be eliminated, and off balance sheet treatment should be ruled out (see FASB’s new standards). Originators should have fees or incentives based on actual performance of the pool. Originators should give representations and warranties as to performance of the pool – something which is today seen as violating the true sale condition. In short, the true sale business is clearly frowned upon in the report.
SEC should continue its effort to regulate credit rating agencies. Ratings to structured products should be distinguished from other products – something which technically takes away the very comparability of ratings. Surprisingly, the report also says the regulators should reduce dependence on ratings for risk weights, and should think of different risk weights for structured and unstructured products.
On credit derivatives, the Report has comprehensive regulation on all OTC derivatives, including credit derivatives. Clearing of all standard OTC derivatives should be required through centralized counterparties.
[Reported by : Vinod Kothari]
For full text of report, see here.