Tuesday, March 16, 2010

(sf) stands for structured finance

Behold — the latest structured finance-delineating symbol:

That’s Moody’s choice for a structured finance ratings indicator to accompany all its structured finance ratings from the summer onwards, according to a Monday statement. So for instance AA3 (sf).

In case you’re wondering why Moody’s is adding another acronym to its ratings system, we can tell you that a nominated structured finance label is one of the requirements of new European regulation for credit rating agencies. Basically any agency that wants European registration needs to come up with a structured finance symbol to distinguish structured finance ratings from the ratings of other securities.

It’s part of a European attempt to strengthen the (sf) aspect of the ratings business.

And the regulation does have some useful things in it. For example, under the new rules agencies should not be able to make recommendations on how securitisations are structured. That’s something which occurred quite frequently pre-financial crisis, when agencies shed their traditionally-passive role in favour of actively advising clients on how to structure deals to achieve the best possible rating.

But, structured finance symbol aside, some of the European regulation really ticks the `odd’ (or at least, `redundant’ ) box. For instance, the directive recommends agencies that rate securitisations have at least one supervisory member with “in-depth knowledge and experience at a senior level of the markets in structured finance instruments.” Well, you would hope (pray?).

Another requirement prevents ratings analysts from working for organisations they rated at some point or another. Some commentators have already pointed out that this limitation might be irrelevant in the case of structured finance, since securitisation-issuers are generally special-purpose vehicles – essentially shell companies unlikely to require their own analysts. Strangely, the employment limits do not appear to apply to analysts leaving agencies to work for companies who actually arrange SF deals.

Anyway, Moody’s is the last of the big three ratings agencies to choose a structured finance symbol as required by the regulation. Standard & Poor’s picked (SF) and Fitch went for sf back in February.

Which means none of them chose to go with FT Alphaville’s symbolic suggestions:

Poor show.

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