Low interest rates set by central banks around the world have led investors to bet on higher returns from the same risky structured products that helped trigger the 2008 financial crisis.
Investors are again buying “structural leverage investments” such as collateralized debt obligations and real estate investment trusts, the International Organization of Securities Commissions, a group of global regulators, said in a report published today on risks to financial markets.
Structured products including CDOs and REITs were blamed by regulators for exacerbating the credit crisis that led to the collapse of Lehman Brothers Holdings Inc. in 2008 because they hid the real risks of the loans they were based on. The value of CDOs issued has risen six-fold from a low of $6 billion in 2010 to $35 billion this year, according to the Iosco report.
Interest rates returning to their normal levels “could have an adverse impact on the value of these products similar to what has been experienced in the financial crisis where the value of leveraged products was decimated,” the report said.
Regulators must also agree on common standards for distributing losses among members of derivatives clearinghouses, which are “a source of systemic risk in the event of significant market stress because they concentrate risk and financial resources,” according to Iosco.
“Disorderly resolution of failing entities or products can have severe, disruptive implications for securities markets,” David Wright, the group’s secretary general, said in a statement.
Madrid-based Iosco brings together national market regulators from more than 100 countries to coordinate rules and share information.
Clearinghouses such as London’s LCH.Clearnet Ltd. and Eurex Clearing AG operate as central counterparties for every buy and sell order executed by their members, who are required to post collateral, reducing the risk that a trader defaults on a deal.