Fitch Ratings last week packaged its global CDO and structured credit services into a stand-alone company called Derivative Fitch - a move that is expected to allow the agency's derivatives ratings much needed breathing room from the one-dimensional nature of traditional bond ratings. Derivative Fitch will eventually offer credit ratings on a differentiated scale from the agency's traditional ratings, along with market risk analytics aimed to help to lift the veil of opacity long associated with the market.

"Investors can expect to see a whole new, redefined rating agency," said Kimberly Slawek, a group managing director in Fitch's London office who has been instrumental in Fitch's rash of derivative and CDO developments. The announcement comes on the heels of some 18 months of developments within Fitch's CDO and derivative product offerings, most recently evidenced by an agreement between the rating agency and Markit Partners that will allow Fitch to diversify its derivative pricing and analytics offerings.

Derivative Fitch will consolidate more than 100 employees from the parent agency's global CDO and structured credit ratings groups, along with the related products, analytics and modeling groups associated with those markets.

"Here is what we recognize at Fitch - this market is very different, and everyone ... talks continuously about how different this market is, and how opaque this market is," Slawek said. "There are all sorts of risks that are not measured by the one-dimensional credit rating." As it integrates credit risk and market risk analytics together through the launch of Derivative Fitch, the rating agency will be looking to gain feedback from "key players" as to what the company's rating scale should look like, Slawek said.

The announcement was met with a mix of encouragement and apathy. While at first glance some felt it was more of a marketing effort than a promise of more substance, others were excited at the prospect of Fitch's growth in a market that Standard and Poor's and Moody's Investors Service have dominated. Meanwhile, S&P and Moody's shot back last week by boasting about their staff sizes and longevity in the derivatives market.

"Moody's is offering the same services to the market, but at this point we have not seen the value of splitting derivatives analysts into a separate team," said John Cline, a Moody's spokesman. Moody's has more than 100 derivatives analysts in New York alone, along with more than 50 based around the world, he added. S&P had a similar response.

"S&P's global CDO group is the market leader in the derivatives and CDO space, and we have been focused on these sectors since the markets' inception," said Adam Tempkin, a spokesman for the rating agency, adding that the group has more than 175 analysts.

Slawek said she questions whether the other rating agencies value the market risk present in CDOs, and whether they offer the type of service available since Fitch began rolling out product offerings - such as RAP CD and stability scores - in July.

With the separation of its derivatives unit from the traditional bond rating unit, Fitch appears to be re-branding itself away from the stigma tied to traditional debt rating methodology present in the derivatives community. Rating agencies across the board are working to tailor ratings that have long served the bond market to the rapidly growing credit derivatives market, where such factors as pricing volatility and counterparty risk are demanding modified ratings treatment. S&P last month announced it would begin offering public ratings for credit derivative swaps called "swap risk ratings," a task that required a specially tailored set of ratings. (ASR, 9/18/06)

Both the Bank for International Settlements and the International Monetary Fund have also recently published papers that cite the need for ratings that are better suited to the nature of credit derivatives, excerpts of which Fitch was happy to include in its Derivative Fitch announcement last week.

"The one-dimensional nature of credit ratings based on expected loss or probability of default is not an adequate metric to fully gauge the riskiness of these instruments," the BIS wrote. Further the IMF opined that investor appetite for "increased structural complexity and leverage" over "greater credit risk" is likely to give way to combine credit risk with "other types of risk," a development that will require a "more differentiated rating scale for structured products."

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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