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The Securities Industry and Financial Markets Association’s (SIFMA) Credit Rating Agency Task Force has voiced its concerns with the proposal articulated by the Securities and Exchange Commission (SEC) at today’s Open Meeting of the SEC on rules relating to Nationally Recognized Statistical Rating Organizations.
In a letter to the three SEC Commissioners, SIFMA’s global investor-led task force highlighted the possible serious adverse and unintended consequences for our markets if existing credit rating scales are changed.
“We applaud the SEC for focusing on transparency and disclosure. Ratings modifiers, however, are not the answer,” said Boyce Greer, co-chair of SIFMA’s Credit Rating Agency Task Force and president of Fixed Income & Asset Allocation at Fidelity. “What’s needed is greater transparency in the analytics and credit evaluation that underlie the rating.”
“As a sound bite, modifiers are appealing,” noted Deborah Cunningham, co-chair of SIFMA’s Credit Rating Agency Task Force and chief investment officer of Federated Investors. “But they would be a completely cosmetic solution to a fundamental problem that is better addressed at the source – the substance that underlies the rating.”
The letter points out that the credit rating modifier proposal could “impair capital raising (for student loans, auto loans, credit cards, mortgages, and the like), and lead to the sudden sale of structured finance securities, at fire-sale prices, into an already highly illiquid market at a time when our financial markets can ill afford such an unnecessary shock.”
“We appreciate the SEC’s sensitivity to considering carefully the unintended consequences that such a change might trigger, before the Commission adopts any final rules,” said Cunningham. “When you pull on a string, it is usually a good idea to consider what might unravel. The possible consequences for our markets if rating modifiers are adopted could be disturbing.”
The task force suggests in its letter how to build greater transparency into the ratings process, without the risk of adversely impacting capital raising and financial markets. While agreeing that transparency is paramount, the task force recommends that the focus be on the credit rating agencies enhancing disclosure of collateral credit quality characteristics.
“What we do agree on is that there is a significant problem here, which must be addressed,” added Cunningham. “Fortunately, we believe that we have a solution that treats the illness without killing the patient.”
The task force members are from the US, Europe, and Asia, and include asset managers, underwriters, and issuers. Among them are experts in structured finance, corporate bonds, equities and municipal securities. The task force has been designated by the President’s Working Group on Financial Markets as the private-sector group to provide the PWG with industry recommendations on credit rating matters. The task force is also working with credit rating agencies, with the goal of developing jointly agreed–upon recommendations this summer.
