Among the financial market reform concepts in the private sector that have resurfaced in the wake of the recent downturn and as part of the quest for transparency has been the idea that securitized mortgages and other asset-backed securities could be traded on an exchange as stocks are.
Larry Fondren, a financial market innovator who said that a lack of support and opposition from dealers and other market participants cut his somewhat similar effort short back in the 1990s, thinks it is time to try again.
The world is different now, he said, adding that it is less tolerant of what he describes as the market's potential for abuse.
Wall Street is not what they once were in terms of public perception or due to consolidation from the downturn, he adds. Finally he notes that a key difference today is that the government wants more transparency, albeit not so much from dealers but from issuers.
As this publication has noted before, there have been discussions involving operational experts setting Securities and Exchange Commission information standards on the equities side who have said there are some similar concepts being eyed for the debt securities market.
Separately, as noted by this publication last fall, Fondren has been working on an exchange for MBS and ABS called DelphX.
It serves as a vehicle for trading an alternative form of securitization called most recently SIGMAs, or Syndicated Investor-Guaranteed and Managed Asset securities, that are based on American Depositary Receipts.
But Fondren said DelphX could be more broadly used to trade more traditional bonds as well.
He thinks it fits in well with regulatory moves like financial reform and the Securities and Exchange Commission's Reg AB.
Fondren thinks new regulatory rules can move forward with SIGMAs and some of the former "look like and behave like SIGMAs" in terms of their requirements for transparency, "skin in the game" and centralized data.
He stressed the importance of transparency to the regulatory process. "As soon as you have a dark corner, a dark pool, how can you regulate?"
He said his company and the institutional investors he works with have broadly sought "skin in the game" and properly aligned incentives and have favored reform's ultimate aims in that area.
Interestingly, though, his sense from the buyside is there was more of an interest in insuring risk rather than requiring an equity stake such as seen in the mandated 5% risk retention in regulatory efforts. Fondren, who has an insurance background, said guarantees of asset performance he describes as similar to a stop-loss policy have been discussed.
This would require assets to perform to a certain level with the insurance "paying out" at the point at which agreed-on level of risk was exceeded. Insurance policies and transparent exchange trading certainly face their own challenges and risk management issues, but Fondren believes these would be different from and preferable to the current less-transparent situation in the mortgage- and asset-backed securities market.
In discussing the recent flash crash as an example of the challenges exchanges face, Fondren notes that technology issues like this one "can be addressed and ultimately checks and balances...can be put into place in the future.
"That's a different challenge from 'I don't know where the market is,'" he said. "Volume is a problem the [mortgage- and asset-backed securities] market would love to have."
