US - Legislation limiting the type of structured products that can receive ratings from credit ratings agencies has been introduced in the US this week, in a bid to restore confidence to the market.
To be eligible, structured finance products would need to have established track records and proven default rates, and securitisations comprised of homogenous securities.
Sean Mathis, a New York-based adviser to pension fund managers and other fiduciaries at Mathis & Company, who helped to draft the legislation, told Global Pensions the legislation was intended to have the effect of reopening the structured finance market.
"What that really requires is to have people be able to believe in the ratings the agencies give to structured finance products," he said.
James C. Allen, director, Capital Markets Policy Group, CFA Institute Centre for Financial Market Integrity, said the CFA had previously called on credit rating agencies to refrain from rating new structured products until there was sufficient statistical data to defend the ratings, and the bill's proposals took that position a step further by engaging the SEC in determining what should and shouldn't be rated.
He said: "We believe the credit ratings agencies should apply a symbol that designates when a rating relates to a structured product, rather than to a traditional corporate obligation.
"We also believe underwriters and issuers should make data available to the market in a timely manner prior to the sale of such instruments that relates to the deal structure, the servicing agent, and the demographics, performance, and expected volatility of the underlying assets."
John Williams, partner, Allen & Overy LLP, said if the federal government was to involve itself in making determinations as to what type of structured products could be rated, SEC rulemaking was probably the most sensible approach.
But he added: "I worry that efforts such as these to regulate on the basis of types of financial products can often be unsatisfactory in the long term, as they inevitably must merely take a snapshot of the current range of products.
"If the rules are not flexible enough to deal with product types not yet invented, they can lead to arbitrary distortions in the market later on."
Travis Larson, vice president, strategic communications, at the Securities Industry and Financial Markets Association (SIFMA), said it was still reviewing the legislation.
He said: "This is one of many proposals that have been issued - including SIFMA, which has its own investor-led credit rating task force which will be providing recommendations this summer."
Last month, the SEC proposed a set of comprehensive reforms to regulate credit rating agencies, including one requiring them to differentiate between corporate bonds and structured products.
Standard and Poor's and Fitch Ratings declined to comment, and Moody's could not be contacted.
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