(The following statement was released by the rating agency)
Jan 07 - In its updated rating criteria for derivative product companies (DPCs) published
today, Fitch Ratings clarified that it will look to the DPC's stand-alone credit strength, as
well as the sponsor's, when rating DPCs engaging in standardized, liquid derivatives.
A DPC's ratings may be de-linked from the rating of the sponsor at a certain
level, termed a 'ratings floor.' A ratings floor of 'A' will apply for
continuation DPCs that are well-capitalized and appropriately structured,
whereas a ratings floor of 'AA' may assigned to termination DPCs. Fitch's new
criteria applies to DPCs that are separate legal and operating entities and
benefit from capital and structural protections that seek to make them legally,
financially, and operationally distinct from their sponsor. DPCs are typically
wholly owned subsidiaries of financial services companies who serve as a DPC's
sponsor. The criteria addresses DPCs that intermediate or guarantee 'plain
vanilla' derivative transactions on behalf of the sponsor.
The DPC's final rating will also reflect the credit strength of the sponsor, if
the sponsor is a higher rated entity. The DPC's final rating is expected to be
the higher of the DPC's stand-alone rating floor or one notch above the
sponsor's long-term issuer default rating. The rating is expected to migrate
with the sponsor's rating until the rating floor is reached in most cases.
Ratings linkage to the sponsor may continue at rating levels below the proposed
rating floors where a DPC shows weakness in capital level, structure or
DPCs face counterparty, market and liquidity risk as the main financial risk
factors. These risk factors are addressed via the DPCs capitalization,
collateral posting arrangements, and hedging/unwind mechanisms. Well-defined
counterparty and portfolio diversification limits help serve to identify and
control these risks. Distinct and well-defined governance standards and
operating procedures also play an important role in achieving legal and
operational separateness from the sponsor.
Fitch's rating criteria also addresses considerations for DPCs acting act as a
counterparty or guarantor for structured finance (SF) transactions. Derivatives
associated with SF transactions, even liquid derivatives with standardized
terms, raise certain unique issues when analyzing DPCs. Likewise, a DPC's
particular structure and trigger events should not negatively impact the SF
transaction, relative to Fitch's SF counterparty criteria.
This criteria does not apply to more bespoke derivatives, including those that
may be associated with SF transactions such as balance guaranteed swaps or swaps
with highly customized reference rates. Fitch will continue to dialogue with the
market to assess various proposals that are designed to intermediate more
The criteria report, titled 'Derivative Product Company Rating Criteria' (Jan.
7, 2012), is available at 'www.fitchratings.com' or by clicking on the link.
Link to Fitch Ratings' Report: Derivative Product Company Rating Criteria