SEC Looks to Standardize Credit Ratings

Seeking to end the babel of rating terminology, the Securities and Exchange Commission is requesting public comment on the feasibility of forcing credit rating agencies to adhere to a standardized set of terms.

With the efficacy and trustworthiness of credit rating cited as a primary cause for the financial crisis, the study was mandated by Section 939(h) of the Dodd- Frank Wall Street Reform and Consumer Protection Act of 2010. According to the posting in the Federal Register, the study seeks to find desirability of: “Standardizing credit ratings terminology, so that all credit rating agencies issue credit ratings using identical terms; standardizing the market stress conditions under which ratings are evaluated; requiring a quantitative correspondence between credit ratings and a range of default probabilities and loss expectations under standardized conditions of economic stress; and standardizing credit rating terminology across asset classes, so that named ratings correspond to a standard range of default probabilities and expected losses independent of asset class and issuing entity.”

The SEC will accept comments regarding issues related to the study on or before February 7, 2011.