Tag Archives: credit ratings

Leveraging Technology to Reduce Credit Ratings Reliance

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In our previous blog post we talked about ending the over reliance on the ratings agencies as the sole source of information for making critical investment decisions. To gain a comprehensive, 3D version of a market, a sector or even an individual asset, which let’s face it is exactly what clients are paying for, we believe it’s important the industry looks at a broad set of data in addition to the AAA rating.

But with the volume of data now available and the required speed to market, taking a multi-source approach can cause quite the operational headache.

Manually compiling and filtering data for these purposes is very costly and time consuming. And, it’s not a problem that can be overcome simply by adding more people to the process – it’s about arming the people you have with the tools that allows them to harness more information more effectively.

Not surprisingly, technology can bring relief and a solution that can consolidate, compare and contrast a multitude of disparate data sources and deliver these in a consistent and validated manner to multiple consuming systems. This is the only way to arm market participants with relevant and necessary information.

Indeed, the fundamental things that deliver value in the long-term, such as research, analysis and due diligence are fuelled by access to accurate, accessible and accurate information…Triple A, but not just in the conventional sense.

These are the components that ultimately drive value across a trading or investment business to create unique intelligence that generates alpha. However, the capability to efficiently pull a wide variety of data from more than one source demands investment in appropriate infrastructure. Without it, market participants are trading with limited intelligence.

The Case for Reducing Over Reliance on Credit Ratings

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Credit Rating StampThe recent financial crisis has made credit rating agencies the target of greater scrutiny. There is no denying that closer attention needs to be paid to the business models of the big three agencies and, the push for greater transparency around these organizations is certainly justified.

However, by placing the blame solely on credit agencies, the industry is ignoring a much bigger issue: how financial services firms have become dependent on credit ratings as a single source of data for making key trading and investment decisions.

Over reliance can be a dangerous game in any situation, let alone when the markets can move drastically at the drop of a hat (or rating), and there is increasing pressure from regulators and investors to obtain the best possible outcomes for clients under best execution requirements.

So we suggest looking at a credit rating assessment as just one piece of the puzzle. Comparing multiple data sources and importantly, critically analyzing the results, is the only way to achieve a truly accurate assessment of investments.

Indeed, credit rating analysis should be checked against sales data, historical data and pre-payment information as well as data from niche providers to create well-rounded, validated intelligence that can properly inform decision-making.

It’s time for firms to consider the steps that need to be taken to end the over reliance on the ratings agencies that has characterized the industry for too many years.