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SEC wants prospectus source code to be published

April 23rd, 2010

The US Securities and Exchange Commission are proposing new rules involving the prospectuses for public offerings of asset-backed securities including publishing the source code used to calculate the contractual cash flow provisions.

Requiring that the source code used to perform the financial modeling for a prospectus be made available is an excellent idea. A prospectus document contains a huge number of technical details and more importantly for anybody trying to understand the thinking behind it, a lots of assumption. Writing a program requires that all necessary details be enumerated and appropriately connected together and more importantly creating code that can be meaningfully executed usually means making explicit any assumptions that were previously implicit.

There are parallels here with having access to the source code and data used to make climate predictions.

The authors of the proposals are naive to think that simply requiring source to be written in a language for which there is an open source implementation (i.e., Python) is all they need to specify for others to duplicate the program output generated by the proposer (I have submitted some suggestions to the SEC about the issues that need to be addressed). The suggestions that a formally defined language be used is equally naive.

The availability of this source code opens up some interesting commercial prospects. No, not selling analysis tools to financial institutions but selling them program fault information, e.g., under circumstance X the program incorrectly predicts A will happen when in fact B will actually happen. Of course companies know this will happen and will put a lot more effort into ensuring that their models/code is correct.

Will these disclosure rules change the characteristics of financial software? One characteristic that I’m sure will change is the percentage of swear words in the comments and identifiers.

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