Tuesday, October 6, 2009

SEC, Fed take steps to lessen dependence on credit rating agencies

Posted to FinReg21 by Darrell Delamaide:

Federal regulators announced some tentative steps to wean the market away from exclusive reliance on credit agency ratings, but they are finding it more difficult that originally thought.

The SEC approved some of the amendments announced in July to remove references from various regulations to credit ratings issued by nationally recognized statistical rating organizations (NRSROs), primarily with regard to Rule ATS governing alternate trading systems. These will take effect in November.

However, the agency deferred consideration on other proposals to remove the references and re-opened the proposals to public comment because they ran into too much opposition.

For instance, the proposal to change the exemptions to Regulation M, which restricts activities by interested parties, from certain types of “investment grade” securities to a different definition brought an outcry from issuers that it would impose costly compliance burdens on issuers that were previously exempted. Moreover, some of those commenting said, it would exempt some high-yield issuers who should be subject to the restrictions.

It appears from the SEC’s explanation that the concepts of “investment grade” and “non-investment grade” are so embedded in regulations that it will be difficult to find adequate substitutes.

The Federal Reserve Board, for its part, said it was opening up its Term Asset-Backed Securities Loan Facility to ratings from other agencies that meet certain criteria. The proposed rule would require a certain minimum level of experience in rating deals of any particular type, and would likely result in an expansion of TALF-eligible NRSROs for asset-backed securities, the Fed said.

“It is intended to promote competition among NRSROs and ensure appropriate protection against credit risk for the U.S. taxpayer,” the Board said in its announcement.

The Fed said it will also start analyzing the risk on asset-backed securities used for TALF collateral itself, to ensure that it “complies with its existing high standards for credit quality, transparency, and simplicity of structure.”

To facilitate this risk assessment, issuers who want to bring a TALF-eligible ABS transaction to market will be required to provide the same data on the transaction that was provided to any NRSRO. The collateral will also still require two triple-A ratings from TALF-eligible NRSROs.

Credit rating agencies have come under fire for failure to adequately assess the risk associated with securities backed by subprime mortgages. Numerous congressional committees are also looking into ways to increase the accountability of the agencies and to lessen dependence on them.

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