Moody’s moved on on Monday to respond to its critics by proposing a new rating system for complex debt securities that would rely on numbers rather than letters.
However, the new system would involve the same number of grades – 21 – that spurred some industry executives to ask whether it would confuse investors.
Investors and regulators in the US and Europe have criticised the methods used by ratings agencies such as Moody’s, Standard & Poor’s and Fitch Ratings, following the downgrade of large swatches of highly rated mortgage bonds and related structures, notably collateralised debt obligations.
Critics have said the ratings process must become more transparent given the complexity of structured investment pools. Others say that the model is fundamentally flawed, because issuers of debt and structured products pay an agency for a rating.
Moody’s published five proposals in a letter for investor comment on Monday and will collect and assess opinion from investors until February 29. An analysis of the responses will be provided within the following two to three months.
The rating agency said options for consideration include introducing “a completely new rating scale for structured securities”.
This would involve choosing a ranking from one to 21, rather than assigning the 21 letters that span the gamut of Aaa to C. Moody’s said this would distinguish a structured security, such as a CDO, from a corporate or government bond.
“Many of the ratings-based portfolio governance schemes currently in use by market participants assume that structured and non-structured securities are rated using the same long-term rating scale,” said Moody’s.
By Michael Mackenzie in New York and Stacy-Marie Ishmael in Las Vegas
© Financial Times
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