UBS urged financial market regulators to "take an active role," in rating agency selection as part of an effort to save these firms, in a research report last Tuesday.

The regulators are the only ones that are clear in their desire for conservative, accurate ratings, UBS said. Since regulators have outsourced credit analysis to the agencies, the bank said it is only fair that they have the right to designate which agencies' ratings are acceptable for these purposes. Regulators should also be held accountable for the rating agencies they select, the bank said.

Worldwide financial regulators who use ratings should designate acceptable agencies, review their performance, and add or subtract rating agencies from their approved list as they see fit, UBS said. The selection criteria can include the initial accuracy of ratings and the timeliness of rating changes. Regulators will also be able to choose a certain agency's corporate ratings, but not their structured finance ratings if they feel the later are inferior to those of other rating agencies, UBS analysts said. They added that they would expect regulators to pick one or two rating agencies for each asset type.

While issuers would continue to pay for ratings, they would seek out the ratings of agencies acceptable to regulators, the bank said, fueling appropriate competition.

"A positive competitive environment would prevail, where agencies compete for regulatory approval, rather than the negative competitive environment that now prevails," analysts wrote. "In too many cases, rating agencies compete with one another by offering high stable ratings, and, for securitized products, low credit enhancement requirements."

When a rating agency falls off a regulator's list, its ratings cannot be used for newly-acquired assets. For assets already owned by the investor, the agency's ratings on those assets could be fully grandfathered and treated as if the rating agency was still on the approved list, UBS said.

Other alternatives could be that the agency's rating could be used only if no other approved rating agency rates the asset or the agency's ratings could be notched.

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

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