The Pfandbrief 2011 | 2012

explain the new assumptions and the model now being used. Are the agencies acting too early
and unnecessarily unsettling market participants, or do their activities comply with the applicable
rules? The agencies are required by Article 8, paragraph 6 of the EU Regulation to make
a public announcement if they change their methodologies or models. In addition, they must
announce how many ratings they expect to be affected by the changes.
Making Consultations Mandatory
Clearly, there are varying interpretations of the Regulation’s wording concerning the correct
timing of announcements. From the issuer’s point of view, an agency should not already implement
rating measures or announce possible measures if it has only just begun to consider
changes to the underlying methodology or the models being used. The previous examples suggest
that the agencies see things differently. Therefore, the Regulation should clearly state that
a rating agency may make an announcement only if its internal deliberations have moved far
enough along that they can be disclosed to market participants.
Likewise, the Regulation should stipulate that agencies need to give interested market participants
an opportunity to comment before definitively implementing new methods or models.
This would, for example, enable investors to contribute, thereby avoiding misunderstandings.
In addition, this would give market players time to adjust to the reforms.
Increasing the Transparency of the Models Used
In terms of rating agency transparency, the Regulation needs to be amended, too. Although
the existing Regulation contains a series of rating agency transparency requirements, one
thing has not changed in the process: the methodologies and especially the models used are
not logically or consistently comprehensible to third parties, i.e. to issuers, investors and other
market participants; plausibility tests are virtually impossible using the general model descriptions
given. This means that one of the main objectives of the Regulation has not been fully
accomplished so far.
Naturally, rating agencies are reluctant to fully disclose their models, as they do not wish to
divulge their know-how; moreover, they are afraid of losing contracts. Nevertheless, investors
and issuers have a right to know how the models work. Which detailed assumptions are used?
How do these assumptions affect the model’s calculations? How are certain data incorporated
into the models? For example, knowing the simulated default probabilities of cover assets
would be critical in analysing Pfandbriefe. What kind of default histories for cover assets are
used by the agency? What are the assumptions based on?
For issuers and investors, more detailed disclosure requirements for the rating agencies
would be desirable. Investors will only be in a position to reach an informed opinion if they are
able to understand how a rating was arrived at. At the same time, they can draw conclusions
for their own analyses based on the identified strengths and weaknesses of individual methodologies
and models, thereby becoming less dependent on the rating agencies’ assessments.
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