The Securities and Exchange Board of India (Sebi) on Thursday prescribed guidelines including probability of default (PD) benchmarks in a bid to strengthen the disclosures made by credit rating agencies to enhance the rating standards.
As reported by The Economic Times, the guidelines prescribe that rating agencies will need to prepare and disclose standardized and uniform PD benchmarks for each rating category, for one-year, two-year and three-year cumulative default rates, both for the short run and long run.
The regulator also introduced computation of cumulative default rates (CDR), standard operating procedure (SOP) in respect of tracking and timely recognition of default, probability of default (PD) benchmarks, rating symbol for instruments having explicit credit enhancement feature, disclosure of rating sensitivities in press release, disclosure on liquidity indicators and tracking deviations in bond spreads.
The CDR shall be calculated issuer-wise using the marginal default rate approach, using monthly static pools.
The PD benchmark for AAA papers shall be zero for 1, 2 and 3 year default rate with a tolerance level of 1 percent.
In the case of AA papers, it will be zero for 1 and 2 year default rate with a tolerance level of 2 per cent, while for A-rated papers, it will be zero for 1- year default rate with a tolerance level of 3 per cent.
The regulator also introduced disclosure of rating sensitivities in the press releases.
Accordingly, in order to improve transparency, the ratings 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.
The ratings agencies may treat sharp deviations in bond spreads of debt instruments vis-à-vis relevant benchmark yield as a material event, while reviewing material events, the regulator said.