Fitch Ratings announced it extended the consultation period for its proposed new structured finance counterparty risk criteria.
The agency has received substantial response and a number of market participants have requested additional time to submit their feedback. Originally scheduled to close on May 1, the consultation period will now close on May 29.
The agency announced new proposals for counterparty risk criteria reflecting concerns that structural mechanisms based around counterparty triggers alone may not be sufficient to isolate securitization transactions from the credit risk of the counterparties on which they rely. The agency is seeking market feedback on the new proposals.
The new criteria options address the potential interaction between rating triggers and so-called "cliff risk" which has been highlighted by recent bank failures. This relationship can itself undermine the effectiveness of rating triggers as a mitigant, as the extent of actions that have to be taken on trigger breaches can further impact the counterparty's credit profile in the near term.
Fitch is planning to update its structured finance counterparty criteria to reflect the market's significant evolution in recent months. After extensive internal discussion as well as analysis, the rating agency has published an exposure draft where it outlines a number of possible options through which counterparty risk could be addressed in the rating of structured finance transactions.
Given generally increased counterparty risk for structured finance transactions, Fitch believes that existing structural protections based around rating triggers need to be either supplemented or replaced.