There’s an old joke that I learned on a trading desk when I first started in finance: What’s the difference between buy side and sell side? On the buy side you can say “you’re a jerk,” before hanging up the phone.
It’s funny because it’s true. After four years on the buy side, I learned that it’s really okay to say it; during my two years on the sell side, I experienced people saying it to me, no matter how much it may have hurt my feelings.
Needless to say, in finance, sometimes tensions run high.
Fast forward to the present, I am now at the Structured Finance Association (SFA), an organization that represents both the buy and sell sides as well as everything in between. This includes the entire world of people who help make financial transactions happen, not just financial services firms, but data providers, rating agencies, analytical firms, law firms, technology companies, and more. Through it all, the voice of the investor is critical in everything that SFA does and stands for.
Sometimes this creates internal tension. But, sometimes the right amount of tension can make you stronger. The reason this healthy tension exists with SFA is because our founding doctrine purposefully only allows us to take an advocacy position with total consensus. This is unique, especially for Washington, D.C.: We’re the only institution with a charter that mandates agreement from the entire industry before advocating a viewpoint. There may be an “outlier” view from time to time, but we must strive to build agreement before taking a stance.
I have found this is a strength for several reasons. The most obvious of these is that, when we take a stance, SFA can assure our audience that the entire industry – including the investor – is behind it rather than different sides within the industry pushing separate views. More subtly, this may be a strength because it means we take strong views on fewer issues.
Our investor members represent a wide range of institutions, including insurance companies, large diversified global asset managers, smaller niche asset managers, real estate investment trusts, and retirement plan investment managers. What they share is their fiduciary responsibility to their customers, running the gamut of retirees, 401(k) investors, pension funds, among others. The investor members of SFA can only buy a bond for a client if they know it adheres to the client’s investment parameters. When they advocate on a policy issue impacting the market, they represent the interest of these investors as well.
A good example of the type of work we do would be the Qualified Mortgage, which is especially relevant with the looming expiration of the so-called “QM patch.” The tension here exists between originators of mortgage loans and their investors. Originators have a vested financial interest in the performance of the loan, but they also need to find loan characteristics that are secure enough to meet investors’ fiduciary standards before establishing lending guidelines. From a purely self-interested financial perspective, an issuer might want less liability whereas an investor would want as much right to “put back” a loan – to have the originator obligated to make good on a badly underwritten loan – as is possible to achieve.
This illustrates an issue we must always bear in mind: Different parties have different financial incentives. With this issue, as with all issues, the challenge is finding the optimization that allows loans and securities to be made, credit to be extended, rates to stay affordably low, and investors to know they have protected their clients’ interest. It’s a closed system that relies on enough consensus to work and produce a steady volume of good lending. In the case of QMs, we’re working to build an automated underwriting system that has buy-in from issuers, investors, and everyone in between. If we do that, we’ll know we have a market with transparency and clear rules.
But it’s not just QM. With the world’s transition away from the London Interbank Offered Rate, or Libor, our work to help ensure a smooth transition from Libor to the replacement rate was also the culmination of recognizing the different stakeholders and finding a result that worked for them. We work on behalf of an industry committed to fixing problems that are fast upon us and doing so in a manner that considers the broader network of players. At the end of the day, the tension that exists between the security issuer and the investor allows us to focus our efforts on finding a way to keep the person in the middle – that is, the consumer and businesses – protected from needless confusion.
In these and all other endeavors, SFA’s role is to help facilitate solutions. We bring together not just these two parties, but everyone involved in the analytical and legal work of structuring the transaction. We help coalesce the entire lending, analytic, rating and investing communities to achieve standardization for the industry. When we do this, the industry can facilitate the creation of loans to all ranges of borrowers while also ensuring the creation of safe and sound investments for firms managing other people’s assets. In this way, we are looking for an outcome beneficial to all sides in a transaction, to the consumers they’re serving, and to the economy as a whole.
So, whether it’s striking the balance between originators and investors when it comes to QMs, the search for a suitable replacement to Libor, or any of our other initiatives, SFA relishes the chance to have two sides of the transaction sit together and work out a policy agreement for shared betterment.
And, of course, we try to do it without being jerks.