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The Journal of Structured Finance

The Journal of Structured Finance

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The Future of Structured Finance Ratings

Mahesh Kotecha, Roy Weinberger and Sharon Ryan
The Journal of Structured Finance Winter 2011, 16 (4) 28-33; DOI: https://doi.org/10.3905/jsf.2011.16.4.028
Mahesh Kotecha
is a president of Structured Credit International Corp. in New York, NY.
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  • For correspondence: mahesh.kotecha@4scic.com
Roy Weinberger
is a senior financial advisor at Structured Credit International Corp. in New York, NY.
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  • For correspondence: rweinberger@frontiernet.net
Sharon Ryan
is a senior financial advisor at Structured Credit International Corp. in New York, NY.
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  • For correspondence: sharon.ryan@4scic.com
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Abstract

The authors believe that restoration of confidence in ratings will require a change in the conflict-laden issuer-pay rating agency compensation models, careful studies of which are mandated under Sections 939D and F of the recently passed Dodd-Frank Act. While the investor-pay model is attractive, it has several limitations as the potential solution. The authors propose instead that both investors and issuers should pay for ratings, and describe how the Congressionally mandated method of payment used since 1975 to finance operations of the Municipal Securities Rulemaking Board could be cloned for this purpose. The establishment of the proposed new rating agency compensation system would require a buy-in by domestic and international market participants. If carefully crafted and implemented, the new system would be privately run, have virtually no additional costs, and eliminate the long-standing conflicts of interest that have plagued rating agency compensation models, providing the right rating agency incentives to ensure that ratings are both timely and accurate.

TOPICS: Information providers/credit ratings, credit risk management

  • © 2011 Pageant Media Ltd
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The Journal of Structured Finance: 16 (4)
The Journal of Structured Finance
Vol. 16, Issue 4
Winter 2011
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The Future of Structured Finance Ratings
Mahesh Kotecha, Roy Weinberger, Sharon Ryan
The Journal of Structured Finance Jan 2011, 16 (4) 28-33; DOI: 10.3905/jsf.2011.16.4.028

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The Future of Structured Finance Ratings
Mahesh Kotecha, Roy Weinberger, Sharon Ryan
The Journal of Structured Finance Jan 2011, 16 (4) 28-33; DOI: 10.3905/jsf.2011.16.4.028
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  • Article
    • Abstract
    • DODD-FRANK MANDATES STUDY OF COMPENSATION MODELS
    • RULE 17G-5(A)(3) DOES NOT SOLVE CONFLICT-OF-INTEREST PROBLEM
    • ORIGINS OF ISSUER-PAY MODEL
    • IS INVESTOR PAY MODEL THE ANSWER?
    • PROPOSED ISSUER- AND INVESTOR-PAY COMPENSATION MODEL
    • SUMMARY AND CONCLUSIONS
    • ENDNOTES
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