The Securities Industry and Financial Markets Association's (SIFMA) credit rating agency task force expressed concern regarding the implications of a proposal presented by the Securities and Exchange Commission (SEC) last week at an open meeting hosted by the commission.

SIFMA's global investor-led task force argued in a letter to the three SEC commissioners that the proposal, which would alter existing credit rating scales, is capable of producing potential albeit unintentional adverse market consequences.

A potential undesirable consequence of the credit rating modifier proposal is impaired capital raising for loans, mortgages and credit cards. It could also lead to the sudden sale of structured finance securities at fire-sale prices into an already highly illiquid market, a release from SIFMA said.

Though the credit agency task force recognizes SEC's focus on transparency and disclosure, "ratings modifiers are not the answer," said task force co-chair Boyce Greer. "What's needed is greater transparency in the analytics and credit evaluation that underlie the rating."

SIFMA's task force voiced concerns that the ratings modification sounds appealing, but that they do not hit at the crux of the problem underlying the ratings.

However, SIFMA members also voiced their appreciation of the SEC's careful consideration of "unintended consequences that such a change might trigger before the commission adopts any final rules," according to task force co-chair Deborah Cunningham.

The task force instead recommends that the focus be on the credit rating agencies enhancing disclosure of collateral credit quality characteristics as an alternative solution.

A release from the American Securitization Forum on the day of the SEC announcement revealed Executive Director George Miller's views on the SEC's credit rating agency reform proposals: "The ASF supports efforts to improve and enhance the transparency, accountability and competition of the ratings process," Miller said. "We appreciate the SEC's focus on restoring market confidence in credit ratings and look forward to sharing our detailed views on these proposals during the formal comment period."

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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