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For more background see: http://news.ycombinator.com/item?id=1272541 http://news.ycombinator.com/item?id=1272541 SEC is proposing that prospectuses (prospecti?
by mustpax 16y ago
For more background see: http://news.ycombinator.com/item?id=1272541 http://news.ycombinator.com/item?id=1272541
SEC is proposing that prospectuses (prospecti?) for asset backed securities include a simulator written in Python. The investor can use this simulator to test out the behavior of their investment under various conditions.
Fascinating idea, I wonder, though, what is going to happen when the simulator and the prospectus disagree. I would assume the text of the prospectus would override the source code. It is going to be quite a challenging task trying to align legalese and Python, or any other programming language for that matter.
- btilly 16y agoUnless the simulator carries more legal force than the prospectus, the entire exercise seems to be useless.
- yummyfajitas 16y agoPresumably if the simulator and the prospectus differ in a material manner, the bond packager/issuer would be subject to some legal liability.
- btilly 16y agoThe problem is that the prospectus is a legal document. When you run legal documents through the legal process, you often get indeterminate answers. How much liability should the bond packager/issuer have if their simulation accurately reflects their understanding of the agreement, but a court decides that their understanding was incorrect?
- yummyfajitas 16y agoI think that amount would vary based on whatever the standards are for due diligence and the indeterminate nature of the legal answers. However, as I understand the proposal, most such legal problems would be irrelevant as far as the python program is concerned. The python program would only answer questions like "what happens if party XXX becomes insolvent" or "what if 84% of mortgages are repaid, 10% are prepaid and 6% are in default". Most legal disputes would center on issues like "were material factors relating to mortgage repayment rates properly disclosed" or "are former home borrowers currently squatting 'in default' or merely 'delinquent' if the mortgage servicer has failed to evict them". The answer to questions like these is simply the input to the python program.
- btilly 16y agoAbsolutely, the Python program cannot replace the prospectus for the reasons you describe. However current practice is that the prospectus also describes, in legalese, the rules by which you determine what happens if party XXX becomes insolvent, or what happens if 84% of mortgages are repaid, 10% are prepaid and 6% are in default. And then there are multiple scenarios supplied to clarify people's understanding of how those rules work. There is a cottage industry that basically consists of taking these prospectuses and creating computer versions of them. This is called reversing a deal. I've seen these models take anywhere from a day to a week for simple models, and for complicated ones outside specialists may need to be used. These models are considered valuable property, and so a given deal may wind up being reversed by multiple people. These created models often do not agree with each other or the servicer. If the prospectus continues to contain the authoritative explanation, then this activity is still a necessary sanity check. If the script is definitive, then this error-prone step can be greatly streamlined and automated. Getting rid of this expensive activity strikes me as a very good thing. Disclaimer, I used to work for a company whose main job was reversing deals, and then keeping models up to date as the cash flows came in. I did not work on that side of the business, but I've seen how important it is.