Comments Sought on Structured Finance Ratings Methodology
In the wake of claims that standard rating criteria do not adequately reflect the risks of complex structured finance instruments, Moody’s is taking the unusual step of seeking comments on its ratings methodology and whether and how it might be changed or improved.
In a Request for Comment, Moody’s “discusses possible alternatives for differentiating structured finance ratings from non-structured finance ratings, highlights potential features and limitations of these options, and seeks market
opinion on the next step – or combination of steps – that may be appropriate for us to take.”
To facilitate the collection and assessment of market feedback on the proposal, Moody’s is asking interested parties to complete a survey by the end of this month.
Some market participants have asserted that structured and non-structured securities possess inherently different risk characteristics, such that, for example, Aaa-rated structured securities may not have the same risk characteristics as Aaa-rated corporate securities, Moody’s says.
Distinguishing the ratings of structured securities from non-structured securities could help raise investor awareness of potential differences in meaning and behavioral attributes between the two categories of securities, providing further information to investors in their investment decision-making processes.
Options for consideration are to:
- Move to a completely new rating scale for structured securities, for example, numerical rankings of 1-21. These would continue to contain ordinal rankings of expected credit risk and would probably map to corporate ratings.
- Add a modifier to all structured ratings utilizing the existing rating scale, e.g., Aaa.sf. This would designate the issue as structured, but add no other additional information.
- Add a suffix to the existing rating scale for structured ratings that contains additional information – for example, estimates of multi-notch rating transition risk. This could be Aaa.v1, Aaa.v2, etc. We would derive these gradations through an analytical process that would be disclosed to the market.
- Use the existing rating scale for structured securities, and put additional analytical information in a separate scale that would exist in a separate data field. For example, an issue could have a “Aaa rating, with a ratings change risk indicator of v1”. The added field would be analogous to our existing ratings outlooks and watchlists.
- Make no changes to the rating scale, but provide additional information and commentary through written research.
The survey is accessible at www.moodys.com/ratingsurvey. Moodys says responses can be provided on an anonymous basis and can also be submitted via e-mail to Moody’s Credit Policy inbox at CPC@moodys.com. Moody’s hopes to provide the market with an analysis of the responses received within the following two to three months.
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