MAS has circulated draft prudential guidelines for securitisation to industry participants for comments. The guidelines for banks have been finalised.5 These take into account feedback from the industry and existing securitisation transactions. They set out the capital treatment of securitised assets, as well as disclosure, separation and other requirements for the various roles that banks take on in a securitisation transaction. The guidelines seek to define clearly the roles, responsibilities and risks that banks retain or undertake, when they participate in a securitisation transaction. They also ensure that banks hold appropriate capital against the risks they accept. Thus, a bank that has securitised its assets will be granted capital relief only where the transfer of risks and rewards of the securitised assets has been effective and complete. The internet and its impact on the securities industry The second major issue is the impact of technology and the internet on capital markets. In the securities industry, the internet has caused fundamental change, slicing the value chain more and more finely, and recombining it in novel configurations. Functions previously offered as a package by brokers, such as analysis and advice, recommendation and order routing, are being separated and broken up. New entities, such as aggregators or navigators, have emerged, offering hitherto-unseen types of services. These changes will bring major benefits to the industry and investors. Firstly, the internet has fostered a free flow of investment information. With a surfeit of news, financial institutions are rethinking their business models.

Credit derivatives form one potential growth area. Credit risk is an important issue for banks, particularly in Asia. Before credit derivatives were invented, banks generally had to stop extending new loans or services to customers to whom they had excessive exposure. This worked against the banks’ efforts to maintain valued client relationships. Credit derivatives provide banks an alternative. Banks can now repackage and divest excess credit risk exposures, and continue to service their clients. MAS has studied how credit derivatives should be captured under the existing capital adequacy framework for banks. It has circulated draft guidelines to industry players and associations for comments. MAS has now finalised the guidelines,4 which address capital treatment for three main credit derivative products: the credit default swap, the total rate of return swap and the credit-linked note. The guidelines reaffirm the principle of maintaining capital for risk exposure. If banks assume credit exposure via the use of derivatives, they will be subject to capital charges. But if banks use credit derivatives to hedge their underlying risk exposures, they will be granted relief, depending on the degree of risk transfer. For example, where the hedge is imperfect, because of mismatches in maturity, asset or currency, regulatory relief will still be available, albeit to a smaller extent. A second promising area is that of securitisation. Like credit derivatives, securitisation allows banks to manage their credit risk and capital more effectively. In its basic form, securitisation involves pooling assets in a special purpose vehicle, which is then funded by issuing securities.