Corporate & Securities Law

By James Hamilton

In light of recent market turmoil, European Central Bank President Jean-Claude Trichet has called on the financial industry to provide more public information about securitization. As part of this effort, he emphasized the need for the consistent valuation of complex derivatives and adequate disclosure by banks of their exposures. In remarks at hearings held by the European Parliament, the official also praised the efforts of the regulatory community in coping with the current market situation.

In the view of the ECB chief, it is crucial to promote a widespread consistent valuation of derivatives and other complex structured products, in particular related to the US sub-prime mortgage sector. He welcomes the efforts of the Basel Committee on Banking Supervision and the Committee of European Banking Supervisors in considering joint measures to contain the potential effects of the turmoil. The official also underlined the importance in stress situations, like the current one, of effective and smooth cooperation and exchange of information between the regulators and central banks.

Clarity is also needed concerning liquidity commitments to off-balance sheet vehicles, he noted, and the magnitude of assets that may be re-intermediated back onto the balance sheets of financial institutions. The process of improving clarity started with Q3 2007 financial statements, he observed, and should be advanced further when institutions publish their annual accounts for 2007 as a whole.

As part of enhanced disclosure about securitization, the chief emphasized the need for credit rating agencies to review their methodologies for derivatives and other complex structured products and to address potential conflicts of interest. Investors must also reconsider their excessive reliance on ratings. This has been a consistent message from the ECB President.
While he has essentially rejected the call to give central banks a role in the credit assessments of securities and their issuers, the senior official supports initiatives to enhance the transparency of rating methodologies and facilitate more competition in the market for credit assessments. In this regard, he has favorably mentioned that European Commissioner for the Internal Market Charlie McCreevy has requested CESR to examine specific issues relating to the rating process of structured finance products and report back to the Commission. This could be an interesting year for examining the role that ratings agencies played in the crisis.

Full post as published by Jim Hamilton's World of Securities Regulation on January 06, 2008 (boomark / email).