The Securities and Exchange Board of India (SEBI) new prescribed guidelines include the probability of default (PD) benchmarks in a bid to strengthen the disclosures made by credit rating agencies to enhance the rating standards. More in News
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- Rating agencies will have to adopt a standardised terminology to disclose liquidity indicators like liquid investments, access to credit and cash flows among other factors while rating an instrument.
- The regulator introduced
- Computation of cumulative default rates (CDR), standard operating procedure (SOP) in respect of tracking and timely recognition of default
- The CDR shall be calculated issuer-wise using the marginal default rate approach, using monthly static pools.
- Probability of default (PD) benchmarks
- Credit Rating Agencies, in consultation with SEBI, shall prepare and disclose standardised and uniform PD benchmarks for each rating category on their website, for one-year, two-year and three-year cumulative default rates, both for short-run and long-run
- Further, such uniform and standardised PD benchmarks will have to be disclosed on the website of each CRA on a consolidated basis for all financial instruments rated by a CRA by December 31.
- Rating symbol for instruments having explicit credit enhancement feature
- Disclosure of rating sensitivities in a press release
- The disclosure of factors to which the rating is sensitive is critical for the end-users to understand the factors that would have the potential to impact the creditworthiness of the entity
- Accordingly, in order to improve transparency, the rating agency shall have a specific section on ‘Rating Sensitivities’ in the press release which shall explain the broad level of operating and/ or financial performance levels that could trigger a rating change, upward and downward.
- Disclosure on liquidity indicators and tracking deviations in bond spreads.
- To bring uniformity in terms of disclosures, the capital market watchdog has mandated standardised terminology, superior, strong, adequate, stretched and poor, to describe the liquidity indicators.
- The regulator has also directed CRAs to devise a model to track sharp deviations in the bond spreads of debt instruments when compared to their benchmarks as such deviations have to be treated as a material event.