Standard & Poor's has announced the categories of debt instruments which ratings will have a structured finance identifier.
The use of an identifier was required under the new European regulation on Credit Rating Agencies (Regulation (EC) No 1060/2009). The identifier or symbol will apply to all relevant structured finance ratings globally by early September.
In mid-Febuary, the rating agency announced its intention to give all ratings on structured finance instruments an added identifier in line with the regulation, and at that time indicated that it would consider the instruments it thinks will require the identifier.
S&P considered both the definition of a "structured finance instrument" referred to in the regulation (Capital Requirements Directive 2006/48/EC) and the principles it thinks the European Union intended to establish in the regulation.
S&P will deem the following types to be structured finance instruments under the regulation, and will therefore apply an identifier to their ratings:
All single and multi-tranched CDOs and credit default swaps (CDS), except "single-name CDS";
All RMBS, including debt backed by mortgages issued by the Japan Housing Finance Agency;
All insurance securitizations with more than one tranche of debt;
All project financings with more than one tranche of debt;
All enhanced equipment trust certificates (EETCs) with more than one tranche of debt;
All corporate securitizations with more than one tranche of debt; and
All gas prepay transactions with more than one tranche of debt.
S&P said in a release that it decided these categories after consultation with market participants as well as an internal review of the instruments that this requirement could potentially impact.
The definition of structured finance instrument, as referenced in the regulation, is as follows: "(36) 'securitization' means a transaction or scheme, whereby the credit risk associated with an exposure or pool of exposures is tranched, having the following characteristics:
(a) payments in the transaction or scheme are dependent upon the performance of the exposure or pool of exposures; and
(b) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme."
Some instruments to which the agency will apply the identifier may not correspond to commonly-held views of structured finance instruments, S&P said.
Additionally, S&P will not apply the identifier to certain instruments that are commonly referred to by the market as structured finance.
To provide transparency, the rating agency will soon be publishing a separate report explaining the principles and assumptions that guided its decision.
As the agency announced in February, it will apply the identifier irrespective of where the structured finance instrument is issued, or where the issuer, originator, or assets are located.