Illuminating Opaque Credit Markets: Excerpt from Financing Recovery from Large-Scale Natural Disasters, Congressional Research Service Report for Congress

The following excerpt is from the CRS Report for Congress: Financing Recovery from Large-Scale Natural Disasters, November 18, 2008, by Rawle O. King, Analyst in Financial Economics and Risk Assessment, Government and Finance Division.

You can read the section of the CRS Report that describes the problems of transparency in financial markets to which Marketcore’s methods provide the answers here.

The full text of the report can be downloaded in PDF form here.

Illuminating Opaque Credit Markets. On one level, what is proposed by the National Association of Insurance Commissioners, the Federal Reserve, and other financial sector regulatory agencies to solve the current financial market crisis can be interpreted as the replacement of individual silos of traditional business models in favor of unification of the forms and methodologies for credit risk transfer that result in financial products. According to this model, all risk transfer, whether insurance- or capital markets-related, can be allowed to compete on an open playing field. Regulation would still be required to contain market excesses and occasional disruptions. Such regulation in turn requires data and analytics to keep it informed.

Michael Erlanger, an inventor and corporate executive of Marketcore, an intellectual property development company focused on the financial service and insurance industry, claims to have identified the problems in the financial markets that led to the credit and liquidity crisis, and to have devised a solution. Erlanger asserts that the crisis is caused by the absence of “real-time” data flows in the financial services industry that would allow all market participants and regulators to determine or discover appropriate transaction terms, prices, and performances. The lack of “real-time” data flows has arguably contributed to market illiquidity, inefficient risk pricing, and operational inefficiencies to the detriment of all market participants.

According to Michael Erlanger, two things are needed to address opaque capital markets: (1) a framework for disclosure and reporting of comprehensive data and analytics pertaining to all financial instruments, including loans, lines of credit, other financial products, as well as insurance, reinsurance and securitized insurance risks; and (2) a transaction platform, or other data highway, such as the Internet, in which financial products are bought and sold, and where detailed data on the composition of the assets and of the transactions are collected, stored, and displayed. These data are available, wherever possible, on a real-time basis. The activity on the transaction platform is facilitated by what Erlanger calls “Transaction Credits” as buyers and sellers redeem those credits to either do more business, or to access market and product information. The transaction credits themselves can provide a consistent tracking mechanism in which all transaction details, including underwriting standards and actual per instrument financial performance, are retained and displayed as they occur.

The Marketcore approach to transparency is to create a transaction platform where market participants as well as state and federal regulators have access to view the disclosures and the transaction details. Marketcore argues that transparent information about the transaction details would keep market participants honest, while allowing all parties a reasonable expected profit from the transaction placed through the platform. Many financial market experts agree that illuminating credit markets is an efficient way to keep market participants and market regulators informed, leading to sounder financial decisions. Effective implementation would arguably require global alignment of accounting, regulatory and due process approaches to provide a standardize framework and restore confidence in contractual performance, so all participants are able to rely on the sanctity of a contract.

Transparency in the pricing and terms of securities is considered by many to be essential for financial market efficiency. By definition, transparent financial markets provide accurate information to allow for the discovery of transaction prices, as well as terms on securities and financial instruments of all types. It is considered important that this “real time” information be readily available to everyone, encouraging market participation.”

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