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S&P Overhauling Ratings Process, Vows Transparency

CNBC.com and Reuters
Thursday, 7 Feb 2008 | 8:08 AM ET

Standard & Poor's is changing in the way it rates risk, implementing an overhaul that runs the gamut from governance procedures to public education to quell increasing scrutiny of the bond-rating firm's analytical integrity.

In an announcement Thursday morning, S&P said it will appoint an external ombudsman that will monitor potential conflicts of interest and processes across the agency's businesses. The 27-step plan includes efforts to examine the accuracy of ratings and to look at elements such as security valuations and liquidity, traditionally not part of ratings analysis.

S&P also plans to hire an outside firm to review ratings compliance and governance policies and will update models and enhance its traditional credit ratings with examinations of other risk factors.

The efforts, according to a company spokesman, are aimed at maintaining public trust as well as looking ahead to future demands.

"These actions are consistent with our commitment to continuous improvement," S&P President Deven Sharma said in a statement. "Our goal is not only to enhance specific processes but also to minimize even the potential for perceived conflicts of interest and provide the public a greater understanding of how our rates are determined, what they mean, and how market trends affect them."

In the area of public education, S&P plans to create a user manual to explain the ratings process and will broaden distribution of its analyses via the Internet and media. Similar efforts also will be directed toward market participants as the firm vowed greater transparency in its process.

Part of that process will include "what-if" scenarios in reports aimed at helping assess company risk profiles.

S&P also said it will rotate lead rating analysts after five years of following the same company, government bond issuer, or structured-finance arranger.

The new practice, which will be phased in, should prevent professional or personal relationships from affecting ratings, company officials said.

"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," Sharma said.

The move comes as the other two leading rating agencies -- Moody's and Fitch -- overhaul their procedures in the wake of the credit turmoil, which has forced the three agencies to downgrade tens of thousands of securities in recent weeks.

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