The Basel Committee and the International Organization of Securities Commissions' 'Criteria for Identifying Simple, Transparent and Comparable Securitisations': Not So Simple

Abstract

This note examines the July 2015 Basel Committee/IOSCO (operating as the Task Force on Securitisation Markets or “TFSM”) “Criteria for Identifying Simple, Transparent and Comparable Securitisations” and the supplementary November 2015 consultative document entitled “Capital Treatment for ‘Simple, Transparent and Comparable Securitisations.’” The simple, transparent and comparable (STC) criteria put forward are intended to help all parties involved in a securitization transaction better evaluate the risks of a particular securitization, especially as it compares to similar securitizations. Furthermore, given that adherence to these guidelines will also reduce the overall complexity and risk of the transaction, the capital guidelines from November 2015 call for reduced regulatory capital charges for banks holding exposures to STC-compliant securities. While this is a prudent approach to reducing complexity and encouraging securitization transactions that can benefit the real economy, the proposed methods of implementation raise serious issues. This note will argue that the so-called “self-attestation” method for deeming securitizations to be STC-compliant creates the potential for conflicts of interest that undermine the effectiveness of the framework. The self-attestation method also creates the risk for legal uncertainty, leading to regulatory arbitrage and hampering secondary market liquidity. Finally, the release of the STC criteria very close in time to the European Commission’s release of the similar criteria for “Simple, Transparent and Standardised” (STS) securitizations belies a lack of coordination among global regulatory bodies addressing securitization reforms in the post-crisis era. The note concludes by arguing that global regulatory bodies must work closely to harmonize their securitization reform frameworks in order to promote the effectiveness of such measures and to avoid regulatory divergence.