NEW YORK, Feb 25 (IFR) - A U.S. securities regulation enacted last year to combat credit ratings shopping and encourage open and transparent flow of issuers' collateral information to all rating agencies is having the opposite effect, according to securitization specialists.
The U.S. Securities and Exchange Commission's Rule 17g-5 was meant to increase openness among rating agencies in the United States, but it has introduced a system so formal and regimented that both raters and issuers are scared to speak frankly about transactions.
People are so concerned about litigation and risks that the operational review and ratings process has become a lot more complicated, said Rui Pereira, head of U.S. residential mortgage-backed securities at Fitch. Any questions about a deal must be e-mailed, and sent ahead of time.
Rule 17g-5, which went into effect early last June, demands that credit rating agencies hired to rate structured deals share confidential loan-level arranger-provided information with all other U.S. recognized rating agencies on a password-protected website.
Verbal conversations -- even a quick phone chat or a text message -- must be recorded and documented on the password-protected website.
Communication is ridiculous, said a senior analyst from another rating agency. I call an issuer with a question and he says, 'I can't answer that. E-mail that question to me and I'll get back to you.' It was so easy in the past. You just get on the phone to discuss it. With 17g-5, you eventually get the information you want, but it takes the longest way to get there.
The intent was to encourage more equitable flow of information, level the ratings playing field, and promote unsolicited ratings on asset-backed securities transactions.
It hasn't worked. Not one rating agency has issued an unsolicited rating since the SEC rule went into effect.
Rule 17g-5 has created a cost for issuers, (as well as) inefficiencies in executing transactions in as timely a manner as possible, said John Bella, a managing director of ABS at Fitch. The rule was put in place to encourage other (rating agencies) to opine, but no one is doing that. It is creating an unnecessary burden.
It is too costly for agencies to offer an unsolicited rating if they are not getting compensated for it, especially for smaller start-up companies. What's more, the new system has delayed the entire issuance process and frustrated agencies that do have the mandate to rate an offering, experts said.
The rating shopping issue was just one target of 17g-5. It was also designed to remedy the cozy relationship between structured finance rating analysts and bank arrangers that existed at the peak of the market, which led to accusations that the rating agencies wrongly helped structure deals.
The raters have long insisted that the interplay between banks and analysts was an iterative process that was beneficial to investors in the long run because it allowed free flow of information and, therefore, more accurate assessments.
However, critics said that the agencies instead helped issuers and banks get the best execution on deals, with little regard for the accuracy of ratings. Moreover, issuers were able to shop around for the agency that would put a Triple-A stamp on their transaction, encouraging a competitive race to the bottom between the raters.
(Editing by Leslie Adler)