Derivative Fitch has published a final version of its criteria for collateralized commodities obligations ("CCO") called Rating Criteria for Commodities-Linked Credit Obligations. According to the rating agency, the criteria will increase transparency in the market and the understanding of CCO ratings. As part this release, the rating agency has also launched a public Vector CCO model to replace the Beta model released in January. Both the criteria and the model allow market participants to closely replicate Fitch's analysis for CCO transactions. The criteria report talks about the methodology behind Vector CCO, which is the main analytical tool for the quantitative analysis of the reference portfolio. It also covers Fitch's analysis of the other risks in a CCO, including structural risks, charged asset risk and counterparty risks as well as different types of CCO, such as managed CCOs and hybrid CDOs of commodity and credit risk.
"We designed the model to replicate five key risks that we saw in historical data," said Lars Jebjerg, senior director at Derivative Fitch in London . "These are a high frequency of extreme price movements, an occurrence of sudden and large price movements, a tendency for periods of high volatility to follow periods of low volatility, high levels of correlation among similar types of commodities and different levels of volatility across different commodities."