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The Journal of Structured Finance

The Journal of Structured Finance

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Proposed Reform of the Rating Agency
Compensation Model

Mahesh Kotecha, Sharon Ryan, Roy Weinberger and Michael DiGiacomo
The Journal of Structured Finance Spring 2012, 18 (1) 71-75; DOI: https://doi.org/10.3905/jsf.2012.18.1.071
Mahesh Kotecha
is president of Structured Credit International Corp. in New York, NY.
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  • For correspondence: mahesh.kotecha@4scic.com
Sharon Ryan
was a senior financial advisor at Structured Credit International Corp. in New York, NY.
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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
Michael DiGiacomo
is a director of The Levin Foundation in New York, NY.
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  • For correspondence: michael.digiacomo@levininstitute.org
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Abstract

While there is little disagreement that rating agencies contributed to the financial crisis, the barrage of resulting regulations across the world has yet to address the rating agency compensation model. The authors believe the dominant issuer-pay compensation model, with its inherent conflicts of interests, needs to change, at least for structured financings. Regulators, not only because the industry will resist change, but also because such reform is not easy, have ducked reform of rating agency compensation. The authors propose to replace the dominant issuer-pay model with an issuerand-investor-pay model that squarely addresses the conflicts of interests. This article describes how the new issuerand-investor-pay model might work, including the kind of legislation that such a change would require and how it might be implemented.

TOPICS: Factor-based models, statistical methods

  • © 2012 Pageant Media Ltd
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The Journal of Structured Finance: 18 (1)
The Journal of Structured Finance
Vol. 18, Issue 1
Spring 2012
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Proposed Reform of the Rating Agency
Compensation Model
Mahesh Kotecha, Sharon Ryan, Roy Weinberger, Michael DiGiacomo
The Journal of Structured Finance Apr 2012, 18 (1) 71-75; DOI: 10.3905/jsf.2012.18.1.071

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Proposed Reform of the Rating Agency
Compensation Model
Mahesh Kotecha, Sharon Ryan, Roy Weinberger, Michael DiGiacomo
The Journal of Structured Finance Apr 2012, 18 (1) 71-75; DOI: 10.3905/jsf.2012.18.1.071
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  • Article
    • Abstract
    • THE DEVELOPMENT OF AN ISSUER-AND-INVESTOR-PAY RATING COMPENSATION MODEL
    • PROPOSED ISSUER-AND-INVESTOR-PAY COMPENSATION MODEL
    • NEEDED LEGISLATION2
    • BENEFITS OF THE NEW COMPENSATION MODEL
    • FUNCTIONS OF THE U.S. RATING FUND
    • GOVERNANCE OF THE U.S. RATING FUND
    • IMPLEMENTATION
    • CONCLUDING COMMENT
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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