S&P takes aim at bolstering ratings process

By Susanna Moon

Chicago, Feb. 7 - Standard & Poor's said it began implementing a broad set of initiatives to improve its ratings operations and better serve capital markets.

"The ongoing transformation of the financial markets requires us to continue to bring more innovative thinking, greater resources and improved analytics to the ratings process," Deven Sharma, president of S&P, said in a press release.

"By further enhancing independence, strengthening the ratings process and increasing transparency, the actions we are taking will serve the public interest by building greater confidence in credit ratings and supporting the efficient operation of the global credit markets," Sharma said.

Changes include the following four areas:

• Governance: implement new measures to strengthen the integrity of the ratings process to ensure its independence, increase transparency and maintain investor confidence.

• Analytics: take steps to ensure the highest quality for the ratings models, processes and analytical talent and that the company remains equipped to rate complex financial structures with boosting transparency regarding assumptions.

• Information: provide greater transparency about the ratings process and more clarity about the risks that could cause a change in ratings assumptions.

• Education: start an extensive educational outreach program on understanding what a credit rating is and is not.

S&P said it already adopted a number of the changes and would implement the remainder throughout the year. The agency also plans to introduce further measures this year.

"This initial set of actions is the product of a comprehensive, formal assessment of our policies and practices conducted in collaboration with an independent third-party expert, as well as active dialogue with market participants, regulators and legislators," Sharma said in the news release.

"These actions are consistent with our commitment to continuous improvement," Sharma continued. "Our goal is not only to enhance specific processes but also to minimize even the potential for perceived conflicts of interest and provide the public a greater understanding of how our ratings are determined, what they mean and how market trends and events affect them.

"We are committed to playing a leadership role, in collaboration with market participants, regulators and experts, in addressing the issues currently facing the global credit markets."

S&P said it will take the following actions as part of its initiatives.

Governance

• Establish an office of the ombudsman to address concerns from issuers, investors, employees and others and which would oversee the handling of all issues with authority to escalate matters to the chief executive officer of McGraw-Hill Cos. and the audit committee of the board of directors.

• Engage an external firm to periodically conduct an independent review of S&P ratings' compliance and governance processes and issue a public opinion about managing potential conflicts of interest and maintaining independence.

• Institute periodic rotations for lead analysts.

• Conduct reviews whenever an analyst leaves to work for an issuer to ensure the integrity of prior ratings.

Analytics

• Complement traditional credit ratings analysis by highlighting non-default risk factors such as liquidity, volatility, correlation and recovery that can influence the valuation and performance of rated securities and portfolios of these securities.

• Add new surveillance capabilities, including tools, models and data sets for better monitoring performance of collateral pools over time.

• Establish a model oversight committee within the quantitative analytics group, separate from and independent of the business unit, to assess and validate the quality of models and tools.

• Increase annual analyst training requirements, enhance training programs and establish an analyst certification program.

Transparency

• Develop an identifier who would highlight to the market that the rating is on a securitization or on a new type of instrument.

• Include scenario analysis in rating reports to explain key rating assumptions and the potential impact on the rating of unexpected events.

• Work with issuers and investors to improve disclosure of information on collateral supporting structured securities.

• Request greater minimum portfolio disclosure criteria of issuers of certain structured securities.

• Collect more information about the procedures issuers and originators use to assess the accuracy and integrity of their data and to detect fraud.

Education

• Create a credit ratings user manual and investor guidelines to promote better understanding of the company's ratings process and the role of ratings in the financial markets.

• Establish advisory council with membership that includes risk managers, academics and former government officials to provide guidance on addressing complex issues and to establish topics for market education.

• Broaden distribution of analysis and opinions via the web and other media.

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