While the financial services industry has to date focused on accountability and credit ratings elements under Dodd Frank, it is critical that the SEC continues to push initiatives to restore investor confidence, explains Sapient Global Markets vp – business development David K. Donovan

News that the US SEC postponed a vote in early February regarding the adoption of rules revising the disclosure, reporting and offering process for ABS is disappointing, given the regulator's previously-stated determination to enhance transparency across ABS and MBS instruments. Transformation of this opaque asset class has been high on its agenda since Chairman Mary Shapiro noted the SEC's top three priorities for reform at the American Securitization Forum back in 2011.

Her final theme in that speech - "investors' lack of tools and information to value the securities properly" - seemed to be overlooked in comparison to the headline-grabbing points surrounding a lack of accountability and flaws in the credit ratings process. Yet, it is arguably the most transformational issue, with the potential to have the longest lasting impact.

Although receiving minimal attention from the financial industry itself, it is as crucial to unlocking today's financial gridlock as the SEC's other priorities through its ability to draw investors back to the markets via standardised and transparent securitisation and to result in the return of liquidity to consumer and corporate credit. In the succeeding years the financial industry focused inwardly on central counterparties (CCPs), swap data repositories (SDRs), swap execution facilities (SEFs) and derivatives clearing as the major issues of Dodd-Frank. While perhaps understandable given the upheaval in market infrastructures, a central tenet of the new rules is the introduction of fairness, standardisation and transparency to the market, particularly ABS and MBS.

Chairman Shapiro herself noted the far-reaching importance of this market on the overall economy: "In the years leading up to the financial crisis, the nearly US$10trn securitisation market provided liquidity to almost every sector of the economy: from residential real estate to student loans to credit card debt. Lenders were able to make new loans and credit available to a wide range of borrowers and companies seeking financing."

Simply put, we need that market to come back - but not at all costs: it has to be in the right way. If Title IX of the Dodd-Frank Act is implemented correctly, it will create a market with strong investor confidence in the way securitised products are traded.

This offers the potential to revitalise both consumer and corporate credit liquidity while providing transparency and good governance for decades to come. This is a key part of what is needed to stabilise the housing market with interactions that will enable the economy to grow and add jobs.

There is a fundamentally sound way to accomplish this important goal - all information on ABS/MBS securities should be made part of a digital database that is uniformly available to everyone. To support this goal, this database must be set up using a standard definition of terms that ensures broad understanding and clarity. With that in mind, and to achieve its stated goals, the SEC should adopt the sections focused on transparency in the SEC proposed rule 33-9117 from April 2010 (the '2010 ABS Proposing Release', File No. S7-08-10).

This would ensure transparent, auditable and consistent valuation and analysis of ABS, MBS and covered bonds - resulting in the ability of both investors and regulators to readily understand ABS and MBS securitised instruments. This is a significant undertaking that provides an integrated platform to collate deal, bond and loan-level European ABS information into a single centralised database. It is important to note that globally similar initiatives are already up and running, notably the European Data Warehouse (EDW).

The EDW is an important model to follow because it allows ABS originators to submit loan-level data electronically in accordance with reporting templates developed by the ECB. The investor community, data providers, rating agencies and central banks can retrieve details about specific ABS transactions and their current underlying collateral pool. It is this level of transparency that the SEC should be striving to achieve in US securitised products.

With the SEC promoting global open standards in the disclosure of ABS/MBS securities, technology companies could create the tools that would enable accurate market and credit risk assessment through an automated system to value, monitor and manage the risk of these structured financial instruments. This would also give regulators the ability to create software tools that could survey the entire market by scanning large databases of portfolios of securities.

These new investor tools for accurate valuation and risk assessment help to create a more educated customer. It will bring investors back to the market, free bank balance sheets and directly result in the return of liquidity to consumer and corporate credit via well-designed and transparent securitisation. These standards are lightweight and technical, along similar lines to how public utilities work within agreed guidelines to foster interoperability, competition and innovation.

Prior to the proposed SEC rule, investors and regulators relied upon opaque, complex rating agency models and a handful of software vendors that published only selected securities. Covering the universe of ABS/MBS was very slow, because each vendor had to 'model the deal'" independently, using their own proprietary technology. This benefited only the largest investors, which could value these specific securities independently with their paid subscriptions.

The SEC proposal accelerates transparency because all issuers will have to publish descriptions of their deals and all vendors will have access to the same technology through both new and established companies. With this transformational 'open source'" approach, companies can develop the software tools that investors - both large and small - need to perform analytics and analysis, from valuation to multiple user-defined 'what if'" stress scenarios, with the ability to dynamically query securities and reference data.

As Chairman Shapiro said: "Investor decisions ultimately drive the financial markets. When investors do not have the proper tools and information to make sound decisions, the consequences can be dire: for investors' accounts, capital allocation, the financial markets and the economy as a whole."

By establishing a level playing field, with fair, open and timely access to accurate and useful information and market data through this digital database with standardised terms, investor confidence will continue to improve, credit markets will loosen up and credit terms will ease. We will be well on our way to recreating a new, robust securitisation market that draws investors back in because it is well understood and enables them to be confident in their ability to make sound decisions. This will accelerate the healing process in the credit markets and open up the free flow of credit.