Ratings agencies must try harder, Sifma says

A report from the Securities Industry and Financial Markets Association (Sifma), a New York-based industry lobby group, has criticised efforts by the major credit rating agencies to reform themselves.

Sifma said the proposal from Standard & Poor's to distinguish structured product ratings with a suffix - so that they would be rated AA.sf rather than simply AA, for example - could exacerbate the credit crisis.

"The task force is concerned that this proposed change could further damage our already unsettled capital markets, impair capital raising (for student loans, auto loans, credit cards, mortgages and the like), and lead to the sudden sale of structured finance securities at fire-sale prices, into an already highly illiquid market, at a time when our financial markets can ill afford such an unnecessary shock to their system... the use of credit rating modifiers to distinguish structured finance securities would at best be a cosmetic solution to the credit rating problems. Given that most investors in structured finance issues are highly sophisticated qualified institutional buyers, with $100 million or more of assets under management, they are unlikely to gain any new information from an appended .sf," the association said.

A new rating system would force asset managers to revise their investment guidelines and could cause a sell-off even of reliable structured products; overhauling laws and regulations would also be a time-consuming and costly process. Instead, agencies need to provide more information about the ratings models they use and the data on which the models depend, Sifma said.

Of Sifma's 12 recommendations, five surrounded the need for greater transparency: agencies should disclose their methodology, due diligence results, data sources, surveillance procedures, fee structures and historical ratings performance, Sifma said. The ratings agencies should also address possible conflicts of interest between their ratings and advisory businesses, and regulators around the world should collaborate to oversee the agencies, aided by an advisory board to be set up by Sifma. Lastly, the association counselled caution by investors, who it said should do their own analysis instead of simply relying on credit ratings.

The list was drawn up by a 37-strong Sifma task force, led by Deborah Cunningham, chief investment officer at Federated Investors in Boston, and Boyce Greer, head of fixed income and asset allocation at Fidelity.

See also: Iosco says regulators should monitor and inspect rating agencies
S&P outlines "stability" changes to structured product ratings
Basel committee outlines reforms for rating agencies
Agencies agree fee reform
A matter of trust