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Tuesday, May 4, 2010

SEBI Credit Rating Guidelines/Regulations with provisions for unsolicited credit ratings & structured finance products provisions

SEBI Credit Rating Guidelines

Effective use of credit ratings by the users is crucially dependent upon quality and quantity of disclosures made by the Credit Rating Agencies (CRAs).

CRA should publish information about the historical default rates of CRA rating categories and whether the default rates of these categories have changed over time, so that the public can understand the historical performance of each category and if and how rating categories have changed, and be able to draw quality comparisons among ratings given by different CRAs.

The default rates shall be calculated in the following manner:

  • One Year Default Rate is the weighted average of default rates of all possible 1 year static pools in the 5-year period.
  • Cumulative Default Rate: The cumulative default rate (CDR) represents the likelihood of an entity that was rated at the beginning of any multi-year period defaulting at any time during the multi-year period.
  • 3 year cumulative default rate shall be computed as:
    3 year CDR for rating category X = No. of issuers which defaulted over the 3 year period / No. of issuers outstanding at the beginning of the 3 year period.

In case of unsolicited credit ratings, i.e. the credit ratings not arising out of the agreement between a CRA and the issuer, credit rating symbol shall be accompanied by the word “UNSOLICITED” in the same font size.

Obligations in respect of Rating of Structured Finance Products
A CRA may undertake rating of structured finance products, namely, instruments / pay-outs resulting from securitization transactions (under SARFAESI Act, 2002 read with SEBI (POLSDI) Regulations, 2008). In such cases, apart from following all the applicable requirements in case of non-structured ratings, few other additional requirements shall also be complied with.  The rating symbols shall clearly indicate that the ratings are for structured finance products.  A CRA shall also disclose at least once in every six months, the performance of the rated pool, i.e., collection efficiency, delinquencies of the Structured Finance Products.

Source: SEBI CIR/MIRSD/CRA/6/2010 dated 3rd May 2010


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