Fitch Ratings intends to have expanded disclosure of representations, warranties and enforcement mechanisms in its global structured finance rating reports starting Sept. 26.
This is to comply with the Securities and Exchange Commission’s (SEC) adoption of Rule 17g-7 under the Dodd-Frank Act. The rule mandates Nationally Recognized Statistical Rating Organizations (NRSROs) to include in credit report, and for ABS offerings, a description of the reps and warranties and enforcement mechanisms (RW&E) that are available to buysiders. The rating agency will also compare them to the RW&E of ‘similar securities’.
Fitch as an NRSRO will apply this to all global structured finance deals that are now identified with the ‘sf’ modifier, such as almost all global ABS, RMBS, CMBS and structured credit products. The expanded disclosure will form part of all presale and new issue reports.
In a report due this September, Fitch will describe the RW&Es it usually sees in most deals. The report will include a description of the reps and warranties that address several factors.
The first are the characteristics of the underlying asset-pool, including the deal parties; the underlying assets' security interests and the remedies that noteholders have.
The ’typical’ asset-level RW&Es, according to Fitch, will be listed on a country-by-country basis for each major asset class. The ‘typical’ RW&Es were derived by reviewing the documentation of recent deals that the rating agency views as representative for each asset class. The securities issued in these recent deals are the ‘similar securities’ that Fitch will use as the basis for comparison in the firm's deal-level reports.
The presale and new-issue reports published after Sept. 26, according to Fitch, will include the full disclosure of the deal’s RW&Es taken directly from the offering’s documentation. Furthermore, the rating agency will comment in the presale or new-issue report how the deal-level RW&Es compare to the ‘typical’ RW&Es for that asset class that is described in the report and highlight added or omitted RW&Es. Thus buyers will have more of an understanding of how the deal’s RW&Es compare to similar securities’ RW&Es.
Meanwhile, DBRS has commented on the proposed SEC rules on NRSROs designed to implement the Dodd-Frank Act.
The rating agency said that in the current rule making, the SEC proposes considerable additions to and revisions of the comprehensive regulatory regime established under the Credit Rating Agency Reform Act of 2006.
Most of these proposed rules, the rating agency said, are specifically mandated by the Dodd-Frank Act, with little room for discretionary input by the SEC. Even though the rating agency DBRS accepts the need for some regulatory change, DBRS is compelled to note that the Dodd-Frank Act's approach to NRSROs has inherent contradictions that might impede and not promote investor protection.
"DBRS is committed to producing high-quality credit ratings and to conducting its business with integrity and transparency," the rating agency said. "To this end, DBRS supports a robust, yet sensible, NRSRO regulatory regime that fosters high industry standards and enables investor and market education, while respecting each rating agency's right to determine credit ratings in accordance with procedures and methodologies of its own choosing.
It also said that even though credit ratings are only one tool to be used in making investment decisions, the tool is an important one.
