The SEC will soon relax rules requiring money market managers to invest only in short-term debt of a certain credit rating. The SEC hopes this will diminish the role of credit ratings in determining how much capital investment banks are required to hold. WSJ:
The renewed effort is part of a wide-ranging regulatory push in the U.S. and Europe amid the credit crunch that has devastated many banks and investors. Major rating services — Moody’s Corp.’s Moody’s Investors Service, McGraw-Hill Cos.’ Standard & Poor’s and Fimalac SA’s Fitch Ratings — have been blamed by some for underestimating the risk of default on hundreds of billions of dollars of mortgage debt.
Debt markets have ceded control of risk assessment to an oligopoly of credit ratings agencies. The problem? High barriers to entry make the market extremely uncompetitive, and a web of conflicts complicates relationships between counterparties and the ratings agencies. The idea is that if more investors and managers did their homework, risk management and assessment would become decentralized, which would result in debt markets with a more balanced risk profile:
As the current credit crisis has unfolded, regulators have grown concerned that the reliance on ratings in various market rules gives investors a sense of false comfort, discouraging them from doing their own research when assessing the riskiness of bonds in their portfolios. By diminishing the role of ratings, they hope to reverse that.