The proposed changes to the Standard & Poor's counterparty criteria make them generally more lenient, Royal Bank of Scotland (RBS) analysts said in a report released today.

"Only a few months since the rating impact on securitization transactions was finally settled, they have announced a limited review of these criteria," RBS analysts stated. "The proposed changes would give the criteria greater flexibility to take into account different rating trigger levels in the underlying contracts."

The counterparties that agree to transfer their obligations at higher rating levels benefit from less stringent mark-to-market and collateralization requirements, RBS analysts said.

Restructuring the existing swap to allow a lower rating threshold is an acceptable remedy to limit a counterparty downgrade, although this would require stronger collateral requirements, RBS analysts explained. The collateral requirements would also be reduced for lower rated securities in certain circumstances because of reductions in their volatility buffer requirements.

S&P released the proposed changes on Nov. 21. The rating agency is requesting comments on a proposed expansion to its methodology and assumptions for assessing counterparty risk. This happens almost a year since the firm announced its new counterparty and supporting obligations rating methodology.

Updates to S&P's counterparty and supporting obligations rating methodology changes became effective Jan. 18. The new counterparty rating criteria established a more precise link between the rating of an issue and the counterparty's rating based on the type of support provided by the counterparty.

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