[Federal Register Volume 75, Number 246 (Thursday, December 23, 2010)]
[Notices]
[Pages 80866-80868]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-32280]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63573; File No. 4-622]


Credit Rating Standardization Study

AGENCY: Securities and Exchange Commission.

ACTION: Request for comment.

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SUMMARY: The Securities and Exchange Commission is requesting public 
comment to help inform its study pursuant to Section 939(h) of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 on 
the feasibility and 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.

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

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number 4-622 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number 4-622. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov). Comments are also available for 
Web site viewing and printing in the Commission's Public Reference 
Room, 100 F Street, NE., Washington, DC 20549, on official business 
days between the hours of 10 a.m. and 3 p.m. All comments received will 
be posted without change; we do not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Randall W. Roy, Assistant Director, 
Division of Trading and Markets, at (202) 551-5522; Alan A. Dunetz, 
Branch Chief, Division of Trading and Markets, at (212) 336-0072; Kevin 
S. Davey, Securities Compliance Examiner, at (212) 336-0075; Kristin A. 
Devitto, Securities Compliance Examiner, at (212) 336-0038; Mark M. 
Attar, Branch Chief, Division of Trading and Markets, at (202) 551-
5889; or Raymond A. Lombardo, Branch Chief, Division of Trading and 
Markets, at (202) 551-5755, Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-7010.
    Discussion:
    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010 (the ``Dodd-Frank Act'') 
into law. Under Section 939(h) of the Dodd-Frank Act, the Securities 
and Exchange Commission (the ``Commission'') is required to study the 
feasibility and desirability of: (A) Standardizing credit

[[Page 80867]]

ratings terminology, so that all credit rating agencies issue credit 
ratings using identical terms; (B) standardizing the market stress 
conditions under which ratings are evaluated; (C) requiring a 
quantitative correspondence between credit ratings and a range of 
default probabilities and loss expectations under standardized 
conditions of economic stress; and (D) 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. Not later than one year after the 
date of enactment of the Dodd-Frank Act, the Commission must submit to 
Congress a report containing the findings of the study and the 
recommendations, if any, of the Commission with respect to the study.
    Request for Comment:
    The Commission believes that submissions by interested parties with 
a wide range of views, including those of investors who use credit 
ratings, portfolio managers, credit rating agencies, investment firms, 
underwriters, issuers, regulators and the academic community, will 
provide valuable information as it conducts the study required by 
Section 939(h) of the Dodd-Frank Act. Accordingly, the Commission 
requests commenters' views on each of the topics to be addressed in the 
Commission's study under Section 939(h) of the Dodd-Frank Act. In 
particular, the Commission seeks commenters' views in response to the 
following questions:
    (1) Is it feasible and desirable to standardize credit ratings 
terminology, so that all credit rating agencies issue credit ratings 
using identical terms?
    a. Do commenters agree that the term ``credit ratings terminology'' 
as used in Section 939(h) of the Dodd-Frank Act refers to the symbols 
and numbers credit rating agencies use to denote credit ratings and the 
definitions and meanings they promulgate for those symbols and numbers? 
If not, what other (or additional) credit rating terminology should 
this study focus on? Commenters who identify other terminologies should 
indicate for all subsequent questions whether they are discussing the 
other terminologies or ratings symbols and numbers and their 
corresponding definitions and meanings.
    b. Are there credit rating terminologies used by different credit 
rating agencies that are currently comparable? If so, please identify 
and explain how they are comparable.
    c. Identify differences in the credit rating terminologies used by 
credit rating agencies. What is the significance of these differences?
    d. What issues do commenters encounter when they seek to compare 
ratings from different credit rating agencies?
    e. Some credit rating agencies employ multiple credit rating scales 
designed to distinguish between different types of issues and/or 
issuers. For example, a credit rating agency may employ different 
credit rating symbols for ratings of long term securities, short term 
securities, money market funds, claims paying abilities of insurance 
companies, and issues and/or issuers in different jurisdictions. Do 
commenters believe that some types of credit rating symbols used by 
credit rating agencies are more or less suitable to standardization? Is 
it feasible or desirable to use a single credit rating scale for all 
types of issues and issuances? Should a standardized credit rating 
scale include separate symbols for different types of credit ratings? 
If so, what separate credit symbols should be included in the 
standardized credit rating terminology? Alternatively, should credit 
rating terminologies for some types of issues or issuers not be 
standardized? If so, for which types of issuers or issuances?
    f. The credit ratings of some credit rating agencies address 
probability of default while the ratings of other credit rating 
agencies address expected loss. Other rating scales may address other 
metrics such as, for example, distance to distress (e.g., with respect 
to the public finance ratings of some credit rating agencies). Do 
commenters believe that it is more or less desirable to have credit 
ratings of different credit rating agencies address different risks? 
Why?
    g. Some credit rating agencies employ credit rating modifiers 
including, for example, ``credit watch'' and ``rating outlook'' to 
indicate a view as to the likelihood that a credit rating may change. 
Do commenters believe that it is feasible or desirable to include such 
credit rating modifiers in a standardized credit rating terminology? 
Why?
    h. If commenters believe that standardizing credit ratings 
terminology is desirable and feasible:
    i. What level of detail should be included in the standardized 
credit rating terminology?
    ii. What mix of quantitative and qualitative factors should be 
referenced in each rating definition?
    iii. Should a standardized credit rating terminology address 
likelihood of default, expected loss, or some other metric?
    iv. Some credit rating agencies issue a number of broad categories 
of credit ratings that can be further delineated using identifiers 
(e.g., pluses and minuses) to allow additional gradations of ratings. 
How many gradations of credit quality should be included in a 
standardized terminology for credit ratings?
    v. Should a standardized credit rating terminology employ a 
separate terminology for certain asset classes (e.g., for structured 
finance ratings)? Are there asset classes or types of ratings, such as 
short term or financial strength ratings, where a separate terminology 
should be considered?
    vi. What organizations or combination of organizations should be 
responsible for developing and administering the standardized credit 
rating terminology? For example, should the Commission develop and 
administer the standardized terminology? Should an independent board or 
organization be formed to develop and administer the standardized 
terminology?
    vii. What time period should be allowed for credit rating agencies 
to map their existing ratings to a new credit rating terminology, or 
for private contracts and investment management agreements that 
reference credit ratings to be changed to refer to the standardized 
terminology?
    viii. Do commenters believe that it would be more desirable for 
credit rating agencies to retain their existing credit rating 
terminologies and make publicly available detailed information on how 
each credit rating agency's ratings can be mapped to a standardized 
terminology? Or would it be more desirable if the credit rating agency 
used only the standardized terminology?
    (2) Is it feasible and desirable to standardize the market stress 
conditions under which credit ratings are evaluated?
    a. Under what market stress conditions are credit ratings currently 
evaluated?
    b. To what degree do commenters believe that credit rating agencies 
currently identify the market stress conditions under which credit 
ratings are evaluated? To the extent these market stress conditions are 
identified by credit rating agencies, do commenters believe that the 
market stress conditions used by different credit rating agencies at 
comparable credit rating levels are similar? If so, how are they 
similar? If not, how do they differ?
    c. Do commenters believe that market stress conditions can be 
defined in a consistent manner across different industry sectors and 
geographic regions?
    d. Do commenters believe that standardized market stress conditions

[[Page 80868]]

are equally relevant to the evaluation of all asset classes or issuers? 
For example, are there some asset classes or issuers where the relative 
degree of idiosyncratic risk versus systemic risk differs? If so, are 
market stress conditions less relevant, for example, to asset classes 
and issuers where there is a higher level of idiosyncratic risk?
    e. If commenters believe that it is feasible and desirable to 
standardize the market stress conditions under which credit ratings are 
evaluated:
    i. What parameters should be defined in these market stress 
conditions? For example, unemployment rates, declines in GDP and 
financial market declines are widely referenced indicators of market 
stress. What other parameters do commenters believe should be defined?
    ii. How should market stress conditions differ across different 
industry sectors and geographic regions?
    iii. Should these stress conditions reference specific historical 
market stresses such as, for example, the Great Depression or the 2008 
financial crisis?
    iv. Should each credit rating level have its own specifically 
defined stress conditions?
    (3) Is it feasible and desirable to require a quantitative 
correspondence between credit ratings and a range of default 
probabilities and loss expectations under standardized conditions of 
economic stress?
    a. To what extent do credit rating agencies or others assign a 
quantitative correspondence between credit ratings and a range of 
default probabilities and loss expectations?
    i. To what extent do commenters believe that the correspondence is 
similar for comparable ratings from different credit rating agencies?
    ii. To what extent do commenters believe that the correspondence is 
similar across industry sectors and geographical regions?
    iii. To what extent do commenters believe that the correspondence 
is constant throughout the economic cycle?
    iv. To what extent do commenters believe that the correspondence 
has been constant over time? For example, do commenters believe that 
the range of default probabilities and loss expectations corresponding 
to the credit ratings of different credit rating agencies have become 
more or less conservative over time?
    b. Does the ability to assign a correspondence between credit 
ratings and a range of default probabilities and loss expectations in a 
sector vary depending on the degree to which a rating methodology for 
that sector is more or less quantitative in nature? Are there other 
factors, such as the quality or amount of historical performance data 
or structural complexity that may make it more or less difficult to 
assign a correspondence between credit ratings and a range of default 
probabilities and loss expectations?
    c. Does the likelihood of rating transitions for similarly rated 
assets vary among asset classes? If so, how should variation in the 
likelihood of rating transitions be addressed when a quantitative 
correspondence is assigned between credit ratings and a range of 
default probabilities and loss expectations?
    d. Is there a role for market-based measures such as credit spreads 
or option-based approaches (i.e., Merton-type models which provide a 
distance to default measure based on equity prices) in determining a 
correspondence between credit ratings and a range of default 
probabilities and loss expectations?
    e. If commenters believe that requiring a quantitative 
correspondence between credit ratings and a range of default 
probabilities and loss expectations under standardized conditions of 
economic stress is feasible and desirable:
    i. What factors should be considered in determining the range of 
default probabilities and loss expectations associated with each 
rating? Should specific time horizons be specified for each default 
probability and loss expectation range? If so, how many different time 
horizons should be specified for each credit rating, and what are 
appropriate time horizons?
    ii. The ratings of some credit rating agencies primarily address 
probability of default while others address expected loss. Should 
credit rating agencies be allowed to choose whether their ratings 
address one or the other? Should a single rating address both 
probability of default and loss expectation or should default 
probabilities and loss severity be addressed separately?
    iii. What are the views of commenters on how the accuracy of the 
quantitative correspondence assigned by a given credit rating agency 
between its credit ratings and a range of default probabilities and 
loss expectations should be measured?
    (4) Is it feasible and desirable to standardize credit rating 
terminology across asset classes, so that named credit ratings 
correspond to a standard range of default probabilities and expected 
losses independent of asset class and issuing entity?
    a. To what degree do commenters believe that credit ratings are 
currently comparable across asset classes? For example, do commenters 
believe that credit ratings of structured finance products or municipal 
securities are comparable to credit ratings in other sectors?
    b. In cases where credit rating agencies currently use the same 
credit rating terminology for multiple asset classes, what is the view 
of commenters on the adequacy and transparency of the procedures credit 
rating agencies use to achieve comparability?
    c. What mix of quantitative and qualitative factors should be 
considered when standardizing credit rating terminology across asset 
classes, so that named credit ratings correspond to a standard range of 
default probabilities and expected losses?
    i. To what degree should standardization be based on quantitative 
factors such as, for example, historical performance metrics including 
rating transition and default studies? What other quantitative factors 
should be considered?
    ii. To what degree should standardization be based on qualitative 
factors such as, for example, analyst judgment regarding the 
comparability of credits from different sectors? What other qualitative 
factors should be considered?
    d. Are there asset classes where the risk characteristics of the 
asset class, limitations on the quality of data, structural complexity, 
limitations on historical performance data, or other factors make it 
more difficult to apply to that asset class a standardized credit 
rating terminology which applies to other asset classes and issuers so 
that named ratings correspond to a standard range of default 
probabilities and expected losses?
    All interested parties are invited to submit their views, in 
writing, on these questions.

    By the Commission.

    Dated: December 17, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-32280 Filed 12-22-10; 8:45 am]
BILLING CODE 8011-01-P