Moody's Investors Service announced that it will change its ratings methodology for modeling correlations for CDOs backed by structured finance instruments. Specifically, Moody's will now base its correlation assumptions on a proprietary Directional Ratings Transition Matrix to derive a set of asset correlations across structured finance asset types. Previously, Moody's had based its assumptions on default correlations derived from a combination of model-based simulations -- its Diversity Score. "This approach was limited by the lack of available structured finance default data at the time," the agency said in a release.
Moody's opted to revise its structured finance correlation assumptions after migrating to the Monte Carlo Simulation approach used by its CDOROMTM model. The new asset correlations have already been integrated into the latest version of its model, which was officially released last November. Moody's also the agency expects to publish a separate report in the very near future describing how this new information is being integrated.