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Friday, 18th September 2020
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Eight ways to restore confidence in securitisation markets back
The Global Joint Initiative to Restore Confidence in the Securitisation Markets (Global Joint Initiative) is a joint initiative created to address the crisis in securitisation markets by the the Securities Industry and Financial Markets Association (SIFMA), the American Securitisation Forum (ASF), the European Securitisation Forum (ESF), and the Australian Securitisation Forum (AuSF). In a document published in December, Restoring Confidence in Securitisation Markets, eight recommendations have been put forward to help restore confidence.

Recommendation 1: Increase and enhance initial and on-going pool information on US non-agency RMBS and European RMBS into a more easily accessible and more standardized format
A larger quantity of more standardized and easily accessible data points will facilitate stronger independent evaluations of RMBS by institutional investors and credit rating agencies alike. Increasing and standardizing ongoing reporting information will also significantly improve the valuations of outstanding RMBS as well as their ratings stability. Elements of improved disclosure should include:
• Standardized definitions and calculation methodologies for credit features (e.g., debt-to-income calculations; use of consistent methodology in obtaining consumer credit scores, where available; consistent definitions of “full documentation” of borrowers’ income)
• Standardized disclosure of defaults and foreclosures
• Additional information beyond what is currently offered (e.g., more qualitative information from mortgage applications including whether closing costs are financed; whether the purchaser is a first time buyer; whether a loan was originated by a mortgage broker)
• Greater accessibility by providing a standard data tape or other format for use by all originators, as adapted for differences in national jurisdictions, which could serve as the foundation for one or more industry-developed issuance data portals.
• Enhanced ongoing reporting of RMBS performance through provision of a dynamic set of data elements to be updated by servicers on a regular basis throughout the life of an RMBS transaction, and made available to investors and rating agencies through trustee- or servicer-maintained investor reporting websites and other third party information providers.

Recommendation 2: Establish core industry-wide market standards of due diligence disclosure and quality assurance practices for RMBS
Enhanced market practices and transparency around the due diligence efforts that occur during the pre-securitisation process would give investors greater comfort with regard to the underlying assets in a securitisation. New, industry-endorsed pre-securitisation due diligence standards will establish a common basis for evaluating the accuracy and integrity of information that is presented and relied upon in evaluating the risk and performance characteristics of securities, including by the rating agencies.
The standards, which may vary depending on national jurisdiction, are expected to include:
• Guidelines regarding sampling size of loans subject to due diligence
• Due diligence provider attestations, e.g., as to independence and sufficiency of time to review
• Standardized loan scoring and reporting or disclosure of results
• Standards and guidance for the credit, value and compliance components of the due diligence review process
• A standardized investor loan data set for verification during due diligence
• The Global Joint Initiative further recommends that CRAs publish assessments of origination practices and relative performance of underlying collateral, measured against the industry-backed standards, by originator.
• The Global Joint Initiative also recommends that originators publicly disclose information around their own internal quality assurance practices for all origination.

Recommendation 3: Strengthen and standardize the representations and warranties as well as repurchase procedures for RMBS
If a more effective enforcement mechanism for compelling the repurchase of securities by originators were implemented, market participants could then leverage the greater expected transparency around the performance of originators and underlying assets to price the securities, as well as the terms of the repurchase obligation themselves, to more accurately reflect differences in quality of origination.

Recommendation 4: Develop industry-wide standard norms for RMBS servicing duties and evaluating servicer performance
It is necessary to have a common understanding of the scope of a servicer’s contractual duties and responsibilities and adequate benchmarks for evaluating the servicers who are responsible for collecting and maintaining the asset base. This will allow interested parties to determine whether any deterioration is due to servicer deficiencies, or more exogenous and uncontrollable circumstances.
Contractual, reporting, and enforcement mechanisms to create an incentive system based on greater transparency around servicer performance must accompany the development of these standards. To that end, the Global Joint Initiative recommends the development of:
• A set of RMBS market-standard performance metrics that will cover all relevant aspects of servicer performance that can be objectively and reasonably measured.
• A set of model RMBS servicing provisions for pooling and servicing agreements to create more standardized work rules for servicers of private-label RMBS, create more consistent expectations of mortgage borrowers in relevant countries when and how loss mitigation strategies should be employed, as well as clarify and streamline procedures for removing or replacing servicers who fail to live up to the relevant performance standards

Recommendation 5: Expand and improve independent, third-party sources of valuations and improve the valuation infrastructure and contribution process for specified types of securitisation and structured products
The market needs an improvement in the number of securitized products for which valuation information is widely available and an improvement in the quality and transparency of such information. The Global Joint Initiative therefore recommends that the industry form a Valuation Task Force (‘Project Value’) to determine, among other issues, guidelines for the range of securities for which valuations would be contributed, and the expectations of participants and contributors. The Project Value team would seek to meet with the boards and senior management of the various data providers on the strategic importance of this expanded support.

Recommendation 6: Restore market confidence in the CRAs by enhancing transparency in the CRA process
Greater market transparency from the above recommendations should empower investors and other market participants to do more of their own credit research, and thereby reduce the market’s overall reliance on CRAs.
SIFMA and ASF each created CRA Task Forces. The issues that headed the list are the issues that the CRA Task Forces addressed in their recommendations are summarized below:
• CRAs should provide enhanced, clear, concise, and standardized disclosure of rating methodologies, underlying data examination and verification, as well as surveillance procedures, so as to foster greater transparency and allow market users of ratings to understand their bases and limitations
• CRAs should provide access to data regarding CRA performance so as to allow investors to assess how CRAs differ both in the performance of their initial ratings, and in their ongoing surveillance of existing ratings
• CRAs should disclose summary results of due diligence, underlying asset examinations, and other information they relied upon or that forms part of the basis for the rating assigned to a structured finance product
• Lawmakers, regulators, and policymakers across the globe should coordinate more closely in addressing CRA oversight, in order to avoid counter-productive, piecemeal, inconsistent attempts at remediation
• Conflicts of interest should be addressed with a sensitivity towards the difference between core CRA services and ancillary services
• CRAs should ensure that rating performance of structured products are consistently in line with rating performance of other asset classes, which will increase investor confidence in the reliability of ratings.

Recommendation 7: Establish a Global Securitisation Markets Group to report publicly on the state of the market and changes in market practices
The industry should share responsibility with regulators to understand and manage risks going forward. The mission of the Global Securitisation Markets Group (Markets Group) would be to report publicly on the state of the market and on deficiencies and necessary changes in market practices. Composed entirely of industry participants, the Markets Group will accomplish its overall mission through the following discrete actions:
• Oversee publication by SIFMA/ASF/ESF/AuSF of an annual report on the state of the securitisation markets that will include at minimum: (1) a review of volumes and economic trends; (2) an assessment of important new products and recent changes to existing products, including an evaluation of any new risks these might present; (3) a review of the ongoing operational/infrastructure requirements and current capabilities to meet market demands; (4) an evaluation of potential legislative and regulatory changes and their impact on the market; (5) an ongoing list of potential areas of improvement for existing market practices

Recommendation 8: Establish and enhance educational programs aimed at directors and executives with oversight over securitised and structured credit groups, as well as at investors with significant exposure to these products
Participation in the securitisation and structured credit markets should be limited to sophisticated investors possessing the capabilities and resources necessary to assess and monitor the risks embedded in those products. Investment firms should also have principles in place to assess the creditworthiness of securitisations without reliance on CRA ratings alone, as well as have effective securitisation valuation principles of their own in place.

Financial intermediaries and investors should revisit their policies and procedures to ensure that their own capabilities, as well as those of their counterparties, are consistent with the minimum standards mandated by regulators and supplemented by industry best practices. To do so, directors and senior executives of financial institutions must better understand the risks inherent to the securitisation markets and the potential ramifications of ongoing changes in those markets.

This recommendation seeks to provide and disseminate that enhanced understanding of the securitisation markets by creating, under the collective aegis of SIFMA, ASF, ESF, and AuSF and building upon the ASF’s Securitisation Institute, an educational program specifically targeting this senior level audience.
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