RSS FeedBy M. Isi Eromosele
There is plenty of latitude for reforming financial regulatory rules to affect the containment of systemic risks. The following is a continuation of recommendations for reform regulations:
Regulate Clearinghouses and Exchanges for Derivatives
There is a need to reduce interconnectedness problem of credit default swap (CDS) by the use of clearing houses and exchanges. If clearinghouses were to clear CDS contracts and other standardized derivatives, like foreign exchanges and interest rate swaps, systemic risks could be substantially reduced by more netting, centralized information on the exposures of counterparties, and the collectivization of losses.
To the extent that certain CDs could be traded on exchanges, price discovery or liquidity would be enhanced. Increased liquidity would not be only valuable to traders; it would better enable clearinghouses to control their own risks through more informed margining and easier close-outs of defaulted positions.
Reform the Securitization Process
Securitization has brought new sources of finance to the consumer market, not only for mortgages, but also for auto loans and credit card purchases. It has permitted banks to diversify their risks. The collapse of the home mortgage industry would have been more devastating to the U.S. banking system if all mortgages had not been securitized. There is an imperative need for this market to be rebuilt from its foundation, especially since significant flaws has been exposed in its operations, as a result of the financial crisis.
Originators, whether banks or brokers, need stronger incentives to originate loans that conform to what they had promised. The incentive problem should be fixed by strengthening representations, warranties and repurchase obligations. Additionally, increased disclosure of originators’ interests in securitized offerings should be mandated. High risk practices, such as "no document" loans, should be banned outright. The current disclosure regime and underwriting practices can be improved.
In order to restore confidence to the integrity of global credit ratings and improve how the global fixed-income markets function in the future, there should be the development of consistent global standards, ensuring unitary system of enforcement, thereby avoiding governmental interference in the rating determination process.
Global Synchronization
It is imperative to have a synchronized global approach to improving the present financial regulations. A global system requires globally synchronized rules. International capital rules require significant modification. A failure to affect international synchronization would lead to the duplication of requirements that could result in the simultaneous buying and selling of the same negotiable financial instruments or commodities in different markets in order to make an immediate profit without risk.
The framework for dealing with failed financial institutions needs to take into account their multi-national structure. Clearinghouses and exchanges have to handle internationally traded derivatives, which may be subject to different requirements in different in different countries.
Securitized debt markets are global and thus, standards for origination and disclosure require global synchronization. In addition, there clearly needs to be synchronization between the United States’ Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS), in contemplation of a single unified standard. It is time for an improved global financial regulation rules.
M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance
Copyright Control © 2011 Oseme Group
0 comments:
Post a Comment