GLOBAL - The US-based Commercial Mortgage Securities Association (CMSA) has criticised proposals from the International Organisation of Securities Commission (IOSCO) to create a separate ratings regime for mortgage-backed securities (MBS) as "adding to investor confusion".

Proposals were issued by the IOSCO's technical committee in March in a document entitled The Role of Credit Rating Agencies in Structured Finance Markets, in the wake of the credit crunch and the impact structured finance products, suggesting among other things a separate ratings system for such packaged bond offering because.

One of IOSCO's reasons for such a move was it was unclear whether the structured finance products were still sufficiently understood by the credit ratings agencies (CRAs), in situations where "rather than offering investors a share in the cash-flow of the issuer as an enterprise, the issuer offers investors a share in the cash-flow of the enterprise's own assets" but without the risk of each assets included being segregated according to the risk they present.

At present, commercial and residential mortgage-backed securities offerings are rated in tranches, depending on their level of risk, in the same way as corporate bonds would be, because ratings are based on whether the issuer will be able to pay back the money borrowed.

But once added to structured products, the actual risk of products is less clear, so IOSCO's suggestion is to introduce separate symbols for the entire structured finance market.

That consultation closed last week, however, the international group CMSA is unhappy with such suggestions, albeit it recognises issues such as how to deal with credit ratings agencies' potential conflicts of interest.

"CMSA strongly believes that a separate ratings scale could make the structured products market even more volatile by adding to investor confusion,' said Dottie Cunningham, chief executive of CMSA.

"It would force investors to revise their investment policies to incorporate additional analysis about the potential risk characteristics of rated bond loan pools, as well as new and targeted transparency related to the underlying rating methodology that is being employed in determining rating assessments."

CMS seems happy the IOSCO did not suggest structured finance MBS offerings be rated on a different scale to corporate and municipal bonds but argued if ratings agencies were expected to disclose whether or not it uses a separate set of ratings symbols for rating structured finance products, the impact is likely to be a de facto use of symbols - a move which CMSA claimed would be "to the detriment of investors and the capital finance market, including commercial real estate".

Instead, it argued RCAs should be required to issued additional analysis on the potential risks of rated bond pools along with enhanced transparency about their methodology when determining risk assessment for those ratings.

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