Toward an Understanding: NRSRO Failings in Structured Ratings and Discreet Recommendations to Address Agency Conflicts

Abstract

This article explains the key differences in the roles of rating agencies with regard to structured finance compared to single-issuer debt, highlights weaknesses in the current recommendations and oversight of the agencies, and concludes with recommendation of a series of discreet changes that would effectively address the most significant weaknesses within the current oversight regime of rating agencies in structured finance, including: recommending that charter-constrained investors own only exchange-traded structured securities, requiring agencies to apply updated models in a timely manner, requiring frequent re-rating of securities relative to original deal assumptions at issuance, reducing liability exemptions for certain structured finance rating practices, creating minimum industry standards for analysts’ professional training in structured finance, prohibiting revolving-door practices for rating agency analysts, and requiring agencies to form independent statistical staffs to develop, test, implement, and review models. Over time, these changes most likely would significantly diminish market need for and reliance on official ratings.

TOPICS: MBS and residential mortgage loans, CLOs, CDOs, and other structured credit