We will let you self-regulate ABS transparency, EC official tells bankers

Jun 03 2008 Peter Elstob in Cannes

If the industry is sincere about bringing more transparency to the structured finance market there will be no need for regulation, a senior European Commission official told bankers yesterday. Mario Nava, who heads the commission's financial markets infrastructure unit, told the Global ABS conference in Cannes that European finance ministers were prepared to trust the asset-backed securities sector to devise its own tools to improve information in both the primary and secondary markets. If the commission, which must put its proposals to Ecofin by the end of this month, is to endorse self-regulation in this area, there must be real results, he told the conference.

Nava reminded the assembled market participants that improving the information available and accessible to investors in the structured finance market is one of four pillars comprising Ecofin's response to the present financial turmoil, along with improvements to valuation methodologies, to the regulatory crisis mechanism (particularly in a cross-border context), and to market operation generally.

As far as the primary market was concerned, Nava said he personally agreed with those in the industry who said that the problem was not a lack of information in, for example, issue materials, but a lack of willingness on the part of some investors to do their own due diligence beyond reading the prospectus. Nava said that a lack of due diligence had been fundamental to the financial turmoil. He would not be drawn on whether the commission planned to introduce tougher due diligence requirements. "But I do think the industry needs to ask itself whether it applied all the due diligence that it could have done."

It was certainly crucial to improve transparency in the primary market for the future when that market came back — for example, by standardising definitions in prospectuses and other issue material. To resolve the present crisis, however, Nava said it was necessary to improve transparency also in the secondary market, and the commission has until the end of this month to present its proposals on how to achieve this, following a six-month dialogue with industry representatives. Nava's unit has the responsibility for delivering the proposals agreed with industry to the Ecofin council.

Resisting transparency

Speaking about the dialogue begun in January with the industry, Nava said that what had been plain from the start was the wide gap between unanimous calls for more information on risky products from governments and international official bodies, and the resistance to greater transparency on the part of industry.

Nava told the conference: "You are all industry representatives, so I don't have to explain to you why there was resistance."

In what he described as a personal comment, Nava went on to say that it had felt to him rather like the behaviour of a cartel. "What's the dream of an average member of a cartel? It is, of course, to sell a little bit more than his fellow cartel members, without it being noticed. So, the behaviour of an average member of a 'cartel' to improve transparency is to be a little less transparent without the others noticing," he said.

Initially, the industry had given many different reasons why more transparency would be impossible, such as commercial confidentiality, double-counting problems, and others. Nava said he had felt that industry was "searching for problems" rather than solutions. Six months later, however, these objections had all been addressed, and he was confident that the industry now accepted that there had to be more information about the secondary market — for example, about where the risks are in respect of certain products. In addition, this information needed to be kept up to date on a regular basis.

Nava stressed that, in order for the commission to be able to convince finance ministers that the industry could be trusted over secondary market transparency, there needed to be results. "So if industry comes up with something that the Ecofin can buy, I think we are on the right path," he concluded.