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CMSA opposes separate credit rating system for structured finance products

The Commercial Mortgage Securities Association has responded to the International Organisation of Securities Commissions' consultation on the role and modus operandi of rating agencies by urging Iosco and its members not to create a separate rating system for structured finance and related products.

The CMSA was responding to a request for comment on Iosco's technical committee consultation report on the role of credit rating agencies in structured financial markets. The association offers recommendations for increasing the transparency of credit rating agency methodologies relating to commercial mortgage-backed securities, but raises concerns about using separate rating symbols for the entire structured finance market.

'CMSA supports Iosco's recommendations to deal with issues such as how credit rating agencies should avoid or mitigate potential conflicts of interest and improve the transparency of the ratings process,' says CMSA president Leonard W. Cotton, who is vice-chairman of Centerline Capital Group.

'We urge caution, however, when implementing any recommendations that would create or encourage separate ratings schemes for structured finance vehicles and corporate or municipal debt.'

The association approves the recommendation of the Iosco task force on credit rating agencies not to require that structured finance products be rated on a different scale from corporate and municipal bonds. However, the CMSA has expressed concern about the statement in the report that a credit rating agency should disclose whether it uses a separate set of rating symbols for structured finance products, and its reasoning for doing so or otherwise.

The association fears that such a disclosure requirement could result in separate rating schemes becoming a de facto rule or best practice in the industry, to the detriment of investors and the capital finance markets, including commercial real estate.

'The CMSA strongly believes that a separate ratings scale could make the structured products market even more volatile by adding to investor confusion,' says chief executive Dottie Cunningham.

'It would force investors to revise their investment policies to incorporate the new rating structure and develop a new analytical and monitoring infrastructure to interpret the new ratings. These unintended consequences could increase costs for investors and further erode liquidity, to the detriment of borrowers and the capital markets.'

As an alternative to requiring that agencies justify their decisions regarding rating symbols, the CMSA recommends that they should issue additional analysis about the potential risk characteristics of rated bond loan pools, as well as providing transparency about the underlying methodology used in determining rating assessments.

The CMSA is an international trade association dedicated to promoting the strength, liquidity, and viability of commercial real estate capital market finance with more than 400 member companies worldwide, including universal and investment banks, rating agencies, insurance companies, service providers and investors.

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