Fitch Ratings just announced the launch of Derivative Fitch, which is the first specialist rating agency designed to provide the credit derivatives market with ratings, research, analytics and evaluation services that address the unique risks of the market.
With the credit derivatives market now at the $33 trillion area in notional value outstanding, the market is now a dynamic element of the global financial economy, as many participants use credit derivatives to manage their risk profiles, said Fitch in a release. Fitch added that unlike the traditional bond market, the structural complexity of the credit derivatives market is significantly different as these instruments and securities are affected not only by risk associated with underlying assets but also heightened sensitivities to factors like credit stability and market risk. The rating agency added that while hedge funds have been active participants in this market, traditional institutional investors, such as pension funds, banks, insurance companies and fund managers, are increasingly their participating in this market.
Furthermore, Fitch explained that while the role, use and performance of credit ratings are well defined in the traditional bond markets, credit derivatives investors and members of the global regulatory community have raised questions about whether traditional ratings alone completely address the risks inherent in the credit derivatives market.
Fitch cited the recent paper published by the Bank of International Settlements on credit derivatives that noted that 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.
.'"Credit rating agencies have long played a vital role in helping give investors an informed and valuable third party perspective on credit risk. We've been very successful in the bond markets and today we continue our task of delivering prospective third party ratings, research and evaluation services focused on addressing the specific and expanding needs of the derivatives market, said Fitch Ratings Chief Executive Officer Stephen Joynt.