Fitch launches credit derivatives rating agency

By Angela McDaniels

Seattle, Oct. 18 - Fitch Ratings announced on Wednesday the launch of Derivative Fitch, a specialist rating agency designed to provide ratings, research, analysis and evaluation services to the credit derivatives market.

The agency said that the structural complexity of the credit derivatives market makes it quite different from the traditional bond market; credit derivatives are affected not only by risk associated with underlying assets, but also by heightened sensitivities to factors such as credit stability and market risk.

Credit derivatives investors have therefore raised questions about whether traditional ratings completely address the risks inherent in the credit derivatives market, according to an agency release.

"The one-dimensional nature of credit ratings based on expected loss or probability of default is not an adequate metric to fully gauge the riskiness of these instruments," the Bank of International Settlements on credit derivatives said in a recent paper, according to Fitch.

"The rating agencies should adopt a more differentiated rating scale for structured credit products," Fitch quoted the International Monetary Fund as saying.

"Investors have shown a general preference for increased structural complexity and leverage, rather than greater credit risk. Going forward, rather than using more leverage, further innovations are expected to combine credit risk with other types of risk."

In forming Derivative Fitch, the agency will consolidate more than 100 professionals from its global collateralized debt obligation and structured credit ratings groups and related complimentary products, analytics and modeling groups to focus on the credit derivatives market.

In addition to ratings, some of the products and services that will operate under Derivative Fitch include:

• Vector 3.0, a benchmark model for assigning ratings to derivative products;

• Stability Scores, a new service for synthetic collateralized debt obligations that references corporate portfolios and analyzes the prospective stability of credit ratings;

• Risk Analytics Platform for Credit Derivatives, a market risk-assessment service for synthetic collateralized debt obligation;

• Valuspread, a derivatives pricing service that will allow market participants to meet their internal and external regulatory requirements and assists investors in accurately assessing and pricing credit risk; and

• FitchCDx, an internet-based research platform.

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