S&P, a unit of McGraw-Hill Companies Inc, announced 27 steps that it said were aimed at boosting confidence in credit ratings.

Ratings agencies have come under fire for their role in the US subprime crisis, with critics saying they were too slow to downgrade highly rated securities linked to poor quality mortgages. Some argue that the ratings should not have been assigned in the first place.

Ombudsman soon

Regulators and politicians are looking closely at the ratings agencies’ business model, where ratings are paid for by issuers rather than investors, and also the efforts they have made to ensure the accuracy and reliability of ratings. “By further enhancing independence, strengthening the ratings process, and increasing transparency, the actions we are taking will serve the public interest by building greater confidence in credit ratings and supporting the efficient operation of the global credit markets,” S&P President Deven Sharma said in a statement.
Mr Sharma said the aim was to minimise “even the potential for perceived conflicts of interest” and to provide the public with greater understanding of ratings. S&P said it would establish an ombudsman who would look at these potential conflicts, and would engage an external firm to review compliance and governance processes periodically.

Investor guidelines

In addition, lead analysts would periodically be rotated and their work would be reviewed if an analyst left the company to work for an issuer.

In terms of analytics, the agency said it would highlight additional factors not covered by traditional default ratings, such as liquidity, volatility, correlation and recovery.  S&P said its analysis would include the use of “what if” scenarios that would take account of extreme events and would more clearly flag ratings on securitisations and new types of instrument.

The agency said it would also create a user manual and investor guidelines for credit ratings. Other ratings agencies are also scrutinising their procedures.

Moody’s Investors Service this week asked for comment on a series of proposals aimed at shaking up structured finance ratings.