Fitch Ratings announced that it has started a review of its counterparty criteria for global structured finance transactions.
Recent market turmoil including the insolvency of Lehman Brothers, government seizure or receivership of the main Icelandic banks, as well as a number of instances of government support for distressed global financial institutions has highlighted the need to review the ratings on counterparty risk exposures, the rating agency said.
In some cases, government intervention has either prevented the extent of near-term adverse rating action for financial institutions that may otherwise have seen multiple category rating action or default. In these instances, structured finance transactions affected have not generally seen adverse rating action, despite the heightened risk posed by counterparty exposure, Fitch said.
The review will look will apply to the structured finance and structured credit transactions the agency rates globally.
One of the changes to the existing rating criteria is to raise the threshold of current issuer default rating-based triggers. Another option is to either replace or combine issuer default rating-based triggers with support rating floors that are based on Fitch's opinion of a sovereign's propensity and ability to support a bank.
Also under consideration is a plan to create criteria with a more detailed approach to categorizing the type and extent of counterparty exposure. This could include a focus on transaction specific mitigants of counterparty exposure, as well as the institution acting as counterparty.
The new rating criteria is expected to be published by December, initially in the form of an exposure draft.
Current criteria will continue to be used for both existing and new transactions until the new criteria is implemented.
