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Surveillance of RMBS portfolios likely to ramp up, investors warned

  • 16/06/2016
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Surveillance of RMBS portfolios likely to ramp up, investors warned
Investors should be prepared for the regulatory shift in focus towards surveillance of residential mortgage-backed securities (RMBS), Clayton Euro Risk’s Tony Ward has warned.

Ward said that it was “no longer acceptable” for investors in RMBS portfolios to rely on the rating given to a transaction at the outset and then pay no attention to its performance for the duration of the deal.

The warning comes as it emerged that an agency rating-graded subprime mortgage securitisation was recently completed in the US for the first time since the financial crisis.

Speaking at a conference in Barcelona, Ward (pictured), said: “It is no longer acceptable to rely on the rating given to a transaction at the outset, invest and then stand back for the duration of the deal.

“It may not be the primary focus of regulators today to ensure that transactions are being monitored but they will get to it sooner or later. It will only take a whiff of a problem or downturn for them to fully focus on this sector and its obligation.”

He added: “Regulation now hems us in, whichever way we turn and we need to be prepared.”

Ward explained that monitoring and surveillance methods were already strictly embedded in a number of regulatory directives such as Solvency II, and that the argument for using a similar strategy to stay ahead of the performance of mortgage-backed securities was “compelling”.

In the US, regulatory requirements dictate the need for ongoing monitoring of RMBS portfolios, following the role of mortgage-backed securities in the lead up to the global financial crisis. European markets did not adopt the same approach after the global fallout, with investment in mortgage-backed securities having a lesser impact.

However, Ward said Europe would do well to follow the lead of the United States.

“The US could not afford to be in denial,” he said.

“In Europe, there was a sense that we’d got it right, hence the changes were not so immediate or dramatic. But the introduction of RMBS 3.0 and the Deal Agent Framework in the US among others contain lessons we can learn.

“They have led to greater transparency, greater protection for investors and the standardisation of deals, all of which have which helped to rehabilitate the industry’s reputation in America. The focus on surveillance we’re seeing today in the US is a direct result of these reforms.”

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