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BoE eyes action on ‘complex’ securities

Monday 23 May 2011 – by Andrew Hickley

The Bank of England has called for worldwide regulators to exercise their powers to restructure securities that are too “complex”.

Claiming that heightened disclosure requirements have led to securities becoming “comprehensive but not comprehensible”, deputy governor Paul Tucker on Monday suggested that authorities are simply ticking boxes instead of verifying whether exotic securities are safe.

Regulators should be more willing to step in and require changes to the structure of these complex securities when they concluding that information about the instrument is inadequate and “cannot realistically be made adequate,” he said, speaking at a conference in London.

“Where something is incomprehensible, and has reached a scale where it could even jeopardise stability, the relevant authority should say so,” Tucker said.

“Where it can be made comprehensible via a succinct piece of analysis in the introduction of a prospectus, the authority could require that.”

This would help securities supervisors ensure financial stability in the markets, he argued.

In a speech outlining a raft of possible directions for securities regulators, Tucker recommended that trade repositories also record closer detail into the use of collateral in securities trades.

This would help “lift the veil” of a “vital financing market”, and would likely need to be done on the collateral swap market more generally, he said.

Tucker also called for requirements over reporting transactions for trade repositories to be given more worldwide attention in order to help regulators see where risks may be emanating from.

“We need to think about the purposes for which the information in TRs is collected, and thus how it is stored.

“Even though individual trade repositories are being set up to handle specific markets – credit-default swaps, interest-rate swaps, etc – it needs to be possible to see the pattern of risk and flows across markets and products.

“Recognising that, the [Financial Stability Board] has called for the relevant authorities… to set requirements for reporting of transactions to trade repositories that meet the needs of financial stability analysis.

“This work needs a higher profile.”

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