Europe Springs Ahead of US in Regulating Financial Instruments

There has never been any doubt that the “certificates” that were created and issued under the label of “derivatives” or financial instruments. They were financial instruments. They promised the buyer a schedule of payments extending indefinitely into the future. The problem has always been that the certificates conveyed no interest in any asset. And in the field of residential lending (and other installment contracts) no certificate ever conveyed any rate, title or interest to any debt, note or lien issued under the signature of a homeowner.

Much of this subterfuge was accomplished because the marketplace for trading search certificates or derivatives was a closely held private affair totally controlled by the investment. By avoiding the normal public exchanges and regulations, the necessity for accurate and transparent disclosures to investors and homeowners were treated as annoyances that were meant to be ignored.

The umbrella under which all this activity occurred was called “securitization.” The instruments that were issued under that umbrella word financial instruments. Those financial instruments often has no intrinsic value at all and no market value other than the pretensions that were supported in the closed private marketplace in which they were apparently “traded.”

None of the regulators in the European Union ever trusted the securitization infrastructure and none of them trusted the source of information regarding the securitization infrastructure or any trading based on representations coming from Wall Street. They’ve now taken a step to force trading of such instruments onto public exchanges. And that will cause or trigger a requirement of disclosure on a level that Wall Street does not want.

Search disclosures would force the rating agencies to reduce the rating for the “certificates” and implied “trenches.” This is in turn will remove stable managed funds from purchasing the instruments and the “market” will collapse. Wall Street threatens that such a scenario would be a calamity on the scale of the US debt ceiling that was treated as a crisis. But the truth is that the threat of freezing up all lending, even if pursued, would break the hegemony enjoyed by the major investment banks and not break the bank anywhere else.

Securitization is a valid innovation and finance. The 2008 crash and the continuing undermining of the US economy and the European economy could be avoided entirely if the free market had free information.

see https://www.investopedia.com/terms/m/mifid-ii.asp

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