Securitization Business - A Prime Candidate for Transformation
Securitization has been an integral part of global financial system for decades and despite some critics blaming securitized and structured products for the Great Financial Crisis of 2008, recent trends confirm that the global securitization market is here to stay. In this high risk, high gain business, regulators across the world are bringing in a slew of new legislations designed to usher in more transparency, accountability and stability in the financial markets.
Challenges in securitization business for servicers
- Securitization business is complex in nature and the inherent risk associated with the business is very high, on account of the high value of each transaction and nuanced / complicated structure.
- Due to the complex nature of the securitization products, most of the banks use MS Excel spreadsheets and MS Access databases to manage this business.
- Too much of paper work is followed and physical data storage is costly, cumbersome and unreliable.
- Managing risk profile / risk exposure of the asset is complex and is prone to errors in a manual processing environment.
- It is difficult to have audit trails in place to support the independent review performed over key tasks where the processes are manual in nature.
- High dependency on individuals with good knowledge of the securitization operations is required to manage day to day operations smoothly. To compound matters, there is a huge shortage of skilled resources with knowledge of securitization products and processes.
Risk management best practices across the industry
- Segregation of duty between front office, middle office & back office is critical to manage risk effectively.
- Strong Compliance procedure and systems should be put in place to ensure securitization transactions are done correctly. Efficient documentation of the process steps and controls is critical to avoid operational risks.
- Maker -Checker approval (4 eyes / 6 eyes controls) on all the manual processes should be followed across the process chain.
- Spreadsheet models and access databases developed using right Relational Database Management System (RDBMS) principles helps avoid some of the operational errors.
- On the job training is the major training approach followed across the securitization processes. There are some excellent training programs on securitization run by Chartered Financial Analyst (CFA) Institute, American Securitization Forum, Chartered Institute for Securities & Investment (CISI) etc. which are also used by many firms to augment domain knowledge within the team.
Solution to drive growth in securitization business
Considering the complexity of securitization processes, a robust control environment supported by IT systems and automated work flows to mitigate risk is highly necessary. However, the current set of Commercial Off The Shelf (COTS) products are either too specific to any particular securitized product e.g. Credit Default Swap (CDS) or Loans, or they do not cover the entire value chain.
To conclude, securitization industry is going through major changes and it's critical for banks to have a robust IT platform based operations structure to support this change and revitalize growth in business, while meeting the new regulatory requirements.