Moody's Investors Service announced that it has modified its approach for rating synthetic collateralized debt obligations, moving to Monte Carlo simulation-based models from binomial approaches. In many circles, particularly Europe, the change is a significant one.
Dubbed "correlation-intensive structures," the list of securities affected includes static synthetic CDOs-of-CDOs, CDOs of equity default swaps and CDOs with long and short swaps. Since about 2002, issuance of these securities has boomed, leading all of the ratings agencies to look more closely at how the risks are evaluated. For Moody's, the move to Monte Carlo was a natural one, said Bill May, a managing director at Moody's.