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Oversight group calls for safety regulations
By Huw Jones |
June 30, 2009, Tuesday
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Print Edition
Print Edition
FINANCIAL products should undergo registration like drugs to curb investor access until safety is proven, the Bank for International Settlements said on yesterday.
Policy makers were alarmed at how opaque and complex securitized products collapsed in value as the credit crunch began unfolding from mid-2007, despite being highly rated. This sparked huge writedowns by banks that shattered investor confidence.
"In a scheme analogous to the hierarchy controlling the availability of pharmaceuticals, the safest securities would, like non-prescription medicines, be available for purchase by everyone," the BIS, which acts as a forum for the world's central banks, said in its annual report.
"Next would be financial instruments available only to those with an authorization, like prescription drugs; another level down would be securities available only in limited amounts to pre-screened individuals and institutions, like drugs in experimental trials," the BIS said.
"Finally, at the lowest level would be securities that are deemed illegal."
Screening tests
A new instrument would be rated or an existing one moved to a higher safety category only after successful tests.
"Such a registration and certification system creates transparency and enhances safety ... This will mean that issuers bear increased responsibility for the risk assessment of their products," the BIS said.
Access to some products is already restricted in some countries, such as to hedge funds.
Policy makers are tightening financial rules in a process spearheaded globally by the Group of 20 industrialized and emerging market countries.
The BIS endorses many of the pledges the G20 made in April such as the need to monitor all parts of the financial market to limit tendencies to amplify rather than counter the prevailing trend.
Policy interventions should combine outright bans with regulations that bump up the cost of risky activities, it said.
The BIS goes a step further than the G20 by suggesting shifting off-exchange traded instruments on to exchanges. "The primary advantage of taking this step is that it ensures price transparency with less reliance on market-makers," the BIS said.
Policy makers were alarmed at how opaque and complex securitized products collapsed in value as the credit crunch began unfolding from mid-2007, despite being highly rated. This sparked huge writedowns by banks that shattered investor confidence.
"In a scheme analogous to the hierarchy controlling the availability of pharmaceuticals, the safest securities would, like non-prescription medicines, be available for purchase by everyone," the BIS, which acts as a forum for the world's central banks, said in its annual report.
"Next would be financial instruments available only to those with an authorization, like prescription drugs; another level down would be securities available only in limited amounts to pre-screened individuals and institutions, like drugs in experimental trials," the BIS said.
"Finally, at the lowest level would be securities that are deemed illegal."
Screening tests
A new instrument would be rated or an existing one moved to a higher safety category only after successful tests.
"Such a registration and certification system creates transparency and enhances safety ... This will mean that issuers bear increased responsibility for the risk assessment of their products," the BIS said.
Access to some products is already restricted in some countries, such as to hedge funds.
Policy makers are tightening financial rules in a process spearheaded globally by the Group of 20 industrialized and emerging market countries.
The BIS endorses many of the pledges the G20 made in April such as the need to monitor all parts of the financial market to limit tendencies to amplify rather than counter the prevailing trend.
Policy interventions should combine outright bans with regulations that bump up the cost of risky activities, it said.
The BIS goes a step further than the G20 by suggesting shifting off-exchange traded instruments on to exchanges. "The primary advantage of taking this step is that it ensures price transparency with less reliance on market-makers," the BIS said.
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