[Federal Register Volume 75, Number 246 (Thursday, December 23, 2010)]
[Notices]
[Pages 80866-80868]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-32280]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63573; File No. 4-622]
Credit Rating Standardization Study
AGENCY: Securities and Exchange Commission.
ACTION: Request for comment.
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SUMMARY: The Securities and Exchange Commission is requesting public
comment to help inform its study pursuant to Section 939(h) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 on
the feasibility and desirability of: Standardizing credit ratings
terminology, so that all credit rating agencies issue credit ratings
using identical terms; standardizing the market stress conditions under
which ratings are evaluated; requiring a quantitative correspondence
between credit ratings and a range of default probabilities and loss
expectations under standardized conditions of economic stress; and
standardizing credit rating terminology across asset classes, so that
named ratings correspond to a standard range of default probabilities
and expected losses independent of asset class and issuing entity.
DATES: The Commission will accept comments regarding issues related to
the study on or before February 7, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
Send an e-mail to [email protected]. Please include
File Number 4-622 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number 4-622. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov). Comments are also available for
Web site viewing and printing in the Commission's Public Reference
Room, 100 F Street, NE., Washington, DC 20549, on official business
days between the hours of 10 a.m. and 3 p.m. All comments received will
be posted without change; we do not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Randall W. Roy, Assistant Director,
Division of Trading and Markets, at (202) 551-5522; Alan A. Dunetz,
Branch Chief, Division of Trading and Markets, at (212) 336-0072; Kevin
S. Davey, Securities Compliance Examiner, at (212) 336-0075; Kristin A.
Devitto, Securities Compliance Examiner, at (212) 336-0038; Mark M.
Attar, Branch Chief, Division of Trading and Markets, at (202) 551-
5889; or Raymond A. Lombardo, Branch Chief, Division of Trading and
Markets, at (202) 551-5755, Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-7010.
Discussion:
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (the ``Dodd-Frank Act'')
into law. Under Section 939(h) of the Dodd-Frank Act, the Securities
and Exchange Commission (the ``Commission'') is required to study the
feasibility and desirability of: (A) Standardizing credit
[[Page 80867]]
ratings terminology, so that all credit rating agencies issue credit
ratings using identical terms; (B) standardizing the market stress
conditions under which ratings are evaluated; (C) requiring a
quantitative correspondence between credit ratings and a range of
default probabilities and loss expectations under standardized
conditions of economic stress; and (D) standardizing credit rating
terminology across asset classes, so that named ratings correspond to a
standard range of default probabilities and expected losses independent
of asset class and issuing entity. Not later than one year after the
date of enactment of the Dodd-Frank Act, the Commission must submit to
Congress a report containing the findings of the study and the
recommendations, if any, of the Commission with respect to the study.
Request for Comment:
The Commission believes that submissions by interested parties with
a wide range of views, including those of investors who use credit
ratings, portfolio managers, credit rating agencies, investment firms,
underwriters, issuers, regulators and the academic community, will
provide valuable information as it conducts the study required by
Section 939(h) of the Dodd-Frank Act. Accordingly, the Commission
requests commenters' views on each of the topics to be addressed in the
Commission's study under Section 939(h) of the Dodd-Frank Act. In
particular, the Commission seeks commenters' views in response to the
following questions:
(1) Is it feasible and desirable to standardize credit ratings
terminology, so that all credit rating agencies issue credit ratings
using identical terms?
a. Do commenters agree that the term ``credit ratings terminology''
as used in Section 939(h) of the Dodd-Frank Act refers to the symbols
and numbers credit rating agencies use to denote credit ratings and the
definitions and meanings they promulgate for those symbols and numbers?
If not, what other (or additional) credit rating terminology should
this study focus on? Commenters who identify other terminologies should
indicate for all subsequent questions whether they are discussing the
other terminologies or ratings symbols and numbers and their
corresponding definitions and meanings.
b. Are there credit rating terminologies used by different credit
rating agencies that are currently comparable? If so, please identify
and explain how they are comparable.
c. Identify differences in the credit rating terminologies used by
credit rating agencies. What is the significance of these differences?
d. What issues do commenters encounter when they seek to compare
ratings from different credit rating agencies?
e. Some credit rating agencies employ multiple credit rating scales
designed to distinguish between different types of issues and/or
issuers. For example, a credit rating agency may employ different
credit rating symbols for ratings of long term securities, short term
securities, money market funds, claims paying abilities of insurance
companies, and issues and/or issuers in different jurisdictions. Do
commenters believe that some types of credit rating symbols used by
credit rating agencies are more or less suitable to standardization? Is
it feasible or desirable to use a single credit rating scale for all
types of issues and issuances? Should a standardized credit rating
scale include separate symbols for different types of credit ratings?
If so, what separate credit symbols should be included in the
standardized credit rating terminology? Alternatively, should credit
rating terminologies for some types of issues or issuers not be
standardized? If so, for which types of issuers or issuances?
f. The credit ratings of some credit rating agencies address
probability of default while the ratings of other credit rating
agencies address expected loss. Other rating scales may address other
metrics such as, for example, distance to distress (e.g., with respect
to the public finance ratings of some credit rating agencies). Do
commenters believe that it is more or less desirable to have credit
ratings of different credit rating agencies address different risks?
Why?
g. Some credit rating agencies employ credit rating modifiers
including, for example, ``credit watch'' and ``rating outlook'' to
indicate a view as to the likelihood that a credit rating may change.
Do commenters believe that it is feasible or desirable to include such
credit rating modifiers in a standardized credit rating terminology?
Why?
h. If commenters believe that standardizing credit ratings
terminology is desirable and feasible:
i. What level of detail should be included in the standardized
credit rating terminology?
ii. What mix of quantitative and qualitative factors should be
referenced in each rating definition?
iii. Should a standardized credit rating terminology address
likelihood of default, expected loss, or some other metric?
iv. Some credit rating agencies issue a number of broad categories
of credit ratings that can be further delineated using identifiers
(e.g., pluses and minuses) to allow additional gradations of ratings.
How many gradations of credit quality should be included in a
standardized terminology for credit ratings?
v. Should a standardized credit rating terminology employ a
separate terminology for certain asset classes (e.g., for structured
finance ratings)? Are there asset classes or types of ratings, such as
short term or financial strength ratings, where a separate terminology
should be considered?
vi. What organizations or combination of organizations should be
responsible for developing and administering the standardized credit
rating terminology? For example, should the Commission develop and
administer the standardized terminology? Should an independent board or
organization be formed to develop and administer the standardized
terminology?
vii. What time period should be allowed for credit rating agencies
to map their existing ratings to a new credit rating terminology, or
for private contracts and investment management agreements that
reference credit ratings to be changed to refer to the standardized
terminology?
viii. Do commenters believe that it would be more desirable for
credit rating agencies to retain their existing credit rating
terminologies and make publicly available detailed information on how
each credit rating agency's ratings can be mapped to a standardized
terminology? Or would it be more desirable if the credit rating agency
used only the standardized terminology?
(2) Is it feasible and desirable to standardize the market stress
conditions under which credit ratings are evaluated?
a. Under what market stress conditions are credit ratings currently
evaluated?
b. To what degree do commenters believe that credit rating agencies
currently identify the market stress conditions under which credit
ratings are evaluated? To the extent these market stress conditions are
identified by credit rating agencies, do commenters believe that the
market stress conditions used by different credit rating agencies at
comparable credit rating levels are similar? If so, how are they
similar? If not, how do they differ?
c. Do commenters believe that market stress conditions can be
defined in a consistent manner across different industry sectors and
geographic regions?
d. Do commenters believe that standardized market stress conditions
[[Page 80868]]
are equally relevant to the evaluation of all asset classes or issuers?
For example, are there some asset classes or issuers where the relative
degree of idiosyncratic risk versus systemic risk differs? If so, are
market stress conditions less relevant, for example, to asset classes
and issuers where there is a higher level of idiosyncratic risk?
e. If commenters believe that it is feasible and desirable to
standardize the market stress conditions under which credit ratings are
evaluated:
i. What parameters should be defined in these market stress
conditions? For example, unemployment rates, declines in GDP and
financial market declines are widely referenced indicators of market
stress. What other parameters do commenters believe should be defined?
ii. How should market stress conditions differ across different
industry sectors and geographic regions?
iii. Should these stress conditions reference specific historical
market stresses such as, for example, the Great Depression or the 2008
financial crisis?
iv. Should each credit rating level have its own specifically
defined stress conditions?
(3) Is it feasible and desirable to require a quantitative
correspondence between credit ratings and a range of default
probabilities and loss expectations under standardized conditions of
economic stress?
a. To what extent do credit rating agencies or others assign a
quantitative correspondence between credit ratings and a range of
default probabilities and loss expectations?
i. To what extent do commenters believe that the correspondence is
similar for comparable ratings from different credit rating agencies?
ii. To what extent do commenters believe that the correspondence is
similar across industry sectors and geographical regions?
iii. To what extent do commenters believe that the correspondence
is constant throughout the economic cycle?
iv. To what extent do commenters believe that the correspondence
has been constant over time? For example, do commenters believe that
the range of default probabilities and loss expectations corresponding
to the credit ratings of different credit rating agencies have become
more or less conservative over time?
b. Does the ability to assign a correspondence between credit
ratings and a range of default probabilities and loss expectations in a
sector vary depending on the degree to which a rating methodology for
that sector is more or less quantitative in nature? Are there other
factors, such as the quality or amount of historical performance data
or structural complexity that may make it more or less difficult to
assign a correspondence between credit ratings and a range of default
probabilities and loss expectations?
c. Does the likelihood of rating transitions for similarly rated
assets vary among asset classes? If so, how should variation in the
likelihood of rating transitions be addressed when a quantitative
correspondence is assigned between credit ratings and a range of
default probabilities and loss expectations?
d. Is there a role for market-based measures such as credit spreads
or option-based approaches (i.e., Merton-type models which provide a
distance to default measure based on equity prices) in determining a
correspondence between credit ratings and a range of default
probabilities and loss expectations?
e. If commenters believe that requiring a quantitative
correspondence between credit ratings and a range of default
probabilities and loss expectations under standardized conditions of
economic stress is feasible and desirable:
i. What factors should be considered in determining the range of
default probabilities and loss expectations associated with each
rating? Should specific time horizons be specified for each default
probability and loss expectation range? If so, how many different time
horizons should be specified for each credit rating, and what are
appropriate time horizons?
ii. The ratings of some credit rating agencies primarily address
probability of default while others address expected loss. Should
credit rating agencies be allowed to choose whether their ratings
address one or the other? Should a single rating address both
probability of default and loss expectation or should default
probabilities and loss severity be addressed separately?
iii. What are the views of commenters on how the accuracy of the
quantitative correspondence assigned by a given credit rating agency
between its credit ratings and a range of default probabilities and
loss expectations should be measured?
(4) Is it feasible and desirable to standardize credit rating
terminology across asset classes, so that named credit ratings
correspond to a standard range of default probabilities and expected
losses independent of asset class and issuing entity?
a. To what degree do commenters believe that credit ratings are
currently comparable across asset classes? For example, do commenters
believe that credit ratings of structured finance products or municipal
securities are comparable to credit ratings in other sectors?
b. In cases where credit rating agencies currently use the same
credit rating terminology for multiple asset classes, what is the view
of commenters on the adequacy and transparency of the procedures credit
rating agencies use to achieve comparability?
c. What mix of quantitative and qualitative factors should be
considered when standardizing credit rating terminology across asset
classes, so that named credit ratings correspond to a standard range of
default probabilities and expected losses?
i. To what degree should standardization be based on quantitative
factors such as, for example, historical performance metrics including
rating transition and default studies? What other quantitative factors
should be considered?
ii. To what degree should standardization be based on qualitative
factors such as, for example, analyst judgment regarding the
comparability of credits from different sectors? What other qualitative
factors should be considered?
d. Are there asset classes where the risk characteristics of the
asset class, limitations on the quality of data, structural complexity,
limitations on historical performance data, or other factors make it
more difficult to apply to that asset class a standardized credit
rating terminology which applies to other asset classes and issuers so
that named ratings correspond to a standard range of default
probabilities and expected losses?
All interested parties are invited to submit their views, in
writing, on these questions.
By the Commission.
Dated: December 17, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-32280 Filed 12-22-10; 8:45 am]
BILLING CODE 8011-01-P