The Mortgage Bankers Association has praised the Securities and Exchange Commission (SEC) for issuing proposed credit ratings agency reform measures that would promote transparency, accountability, and credibility. Even though MBA opposes different types of ratings for structured finance versus other investment products, we appreciate the agency's recognition of the controversial nature of this issue by considering under a separate track, the proposal to require structured securities to have a unique identifier or enhanced disclosure information.
"We recognize that credit rating agencies play a pivotal role in the investment community by making assessments about financial services providers and financial instruments used in the secondary mortgage market," said Kieran P. Quinn, CMB, MBA's Chairman. "We are pleased the SEC's recognizes the valuable impact ratings agencies have on the relationship between issuers and investors."
The first part of the proposal significantly increases the scope and depth of disclosures credit ratings agencies would be required to make. For example, ratings agencies would be required to publicly disclose the information it uses to determine a rating on a structured product. The proposal also would require rating agencies to disclose the way they rely on the due diligence of others to verify the assets underlying a structured product. The Proposal's first part also includes measures to decrease opportunities for ratings agency conflicts of interest. For example, ratings agencies would be prohibited from structuring the same products that they rate. MBA has long supported efforts such as these to increase transparency and credibility of credit ratings.
The second part of the proposal would require credit rating agencies to differentiate structured products ratings from bond ratings, either through the use of different symbols, or by issuing a report disclosing the differences between ratings of structured products and other securities. MBA believes separate ratings for structured products vs. bonds will add further confusion and disruption to secondary market transactions. We will advocate that this portion of the proposal be withdrawn or modified. The SEC's vote on this portion of the proposal was not unanimous, and SEC board members opposing the proposal referenced MBA's position. We are planning to review the Proposal upon its public issuance and will submit formal comments during the comment period of 30 days after their publication in the Federal Register.
"MBA is pleased that the SEC has agreed to review the differentiation of structured rating under a separate approval track because it will allows for the separate consideration of constructive rating agency reforms while at the same time maintaining MBA's strong opposition to the proposed structured rating's identifier," said Sternin.
MBA will work with the SEC and other industry participants to try and address concerns about separate ratings approaches for structured securities.
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