(Co-authored by Malay Bansal and John Joshi, this article explores the important issue of reform to the ratings process, and is not intended to express any opinion or view on merit, or lack thereof, of investing in rating agency companies or their owners.)
The issuer-paid model for ratings is widely seen as one of the most significant aspects of the process that needs to be reformed. Yet, no good solution to reform for this process has emerged. Part of the reason for that are three widely held misconceptions.
Issuers select which NRSROs will rate their deals, and they pay the rating agencies rating their deals. Many blame this dynamic for causing a conflict for the agencies, and enabling ratings-shopping by issuers. This is perhaps seen as the biggest problem in the current ratings system. Dodd-Frank and other rules in the U.S. and Europe are trying to reform the process. Some
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