The Securities and Exchange Commission (SEC) issued a press release today announcing that it had requested
for public comment on the feasibility of a system in which a public or private utility or a self-regulatory organization would assign a nationally recognized statistical rating organization (NRSRO) to determine credit ratings for structured finance products.
The SEC’s effort is mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Structured finance products are securities with unconventional and complex payoff structures. They often have high fees, high transaction costs, and are priced well above their fair market price, see for example Henderson and Pearson (2011).
A proper and objective system of assigning credit ratings to structured products is critical for investors who cannot otherwise measure the overall risks of these products. One of the risks is credit risk – the risk that the issuer or borrower fails to make payments to the investor or lender. Structured products depend on the solvency of the issuer, as was very clear when Lehman Brothers collapsed. SLCG has written several papers on the topic including a paper that describes structured products after the collapse of Lehman Brothers.
Investors can use our dedicated website for other in-depth analyses of a variety of security products and markets.