As Securities Trading Increases, Gaps Found in Investors’ Risk Oversight

The results of Principia Partners’ structured finance investor due diligence survey highlight increasing investor and issuer confidence in securitisation as an asset class, with 60% of investors stating they would increase their activity within the next 12 months. However, while trading activity is set to increase, analytical, risk oversight and operational challenges remain a major concern for financial institutions and asset managers. Investors often conceded that they were less than effective at performing the necessary level of due diligence required for continued investment in structured finance securities.

Over 500 senior securitisation market participants from 200 organisations took part in the study between June and September 2010. Nine out of 10 of the investors that responded stated that over the next two years their organisations had plans to implement technology to improve analytical, risk and operational processes to overcome challenges in managing asset-backed security (ABS), mortgage-backed security (MBS) and structured credit investment portfolios.

Investors selected and ranked the investment analysis, risk surveillance and operational requirements they saw as most critical to compliance with regulatory due diligence requirements in the next 12 months. They also provided insight into how well they currently performed against these key criteria.

The most important objective identified by investors was timely access and effective integration of collateral pool performance data for investment and risk analysis. This was followed by the effective modelling of deal waterfall structures and cashflows for all the assets managed within a given portfolio. Although recognised as critical activities, 54% of all the investors surveyed stated that they were ineffective at accessing and monitoring performance data for the securities they held, or those they planned to invest in. This includes an inability to monitor pool performance measures that must be tracked for capital relief under the Basel II Securitisation Framework Enhancements (SFE), such as delinquency, default, recovery and prepayment rates. Similarly, over 50% of investors stated that they were not effective at modelling deal structures and cashflow behaviour within their systems, hindering forecasting, ongoing valuations and stress testing.

“We have not performed well in these areas given a lack of information and systems to accomplish the necessary level of analysis and oversight. Systems limitations are still a primary shortcoming,” said a managing director, credit investment at a global bank based in the US. “A lack of focus to implement a global system for structured finance continues and manual entries are still needed to pull together the broad coverage and data required for all our exposures.”

Other key findings from the survey include:

  • Three-quarters of investors ranked the consolidated risk surveillance of portfolio, deal, tranche and collateral pool performance in their top two risk management concerns. Over half (55%) stated they were not effective at addressing this concern.
  • Seventy-two percent of investors said they were ineffective at establishing and monitoring hard and soft triggers related to structured finance assets.
  • Only 35% of investors felt they effectively managed their global structured finance exposures in a single integrated environment.


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