Report to Congress

Credit Rating Standardization Study

As Required by Section 939(h) of the

Dodd-Frank Wall Street Reform and

Consumer Protection Act

___________________________

September 2012

This is a report of the staff of the U.S. Securities and Exchange Commission. The 

Commission has expressed no view regarding the analysis, findings, or conclusions 

contained in this report.
I. Executive Summary

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)1

was enacted on July 21, 2010. Title IX, Subtitle C of the Dodd-Frank Act, consisting of sections 

931 through 939H and titled “Improvements to the Regulation of Credit Rating Agencies,” 

amended the Securities Exchange Act of 1934 (“Exchange Act”) to impose new self-executing 

requirements with respect to credit rating agencies registered with the U.S. Securities and 

Exchange Commission (“Commission”) as nationally recognized statistical rating organizations 

(“NRSROs”), requires that the Commission adopt rules applicable to NRSROs in a number of 

areas, and requires the Commission to conduct certain studies.2

 

Section 939(h)(1) of the Dodd-Frank Act provides that the Commission shall undertake a 

study on the feasibility and desirability of: 

• standardizing credit rating terminology, so that all credit rating agencies issue credit 

ratings using identical terms; 

• standardizing the market stress conditions under which ratings are evaluated; 

• requiring a quantitative correspondence between credit ratings and a range of default 

probabilities and loss expectations under standardized conditions of economic stress; and 

• standardizing credit rating terminology across asset classes, so that named ratings 

correspond to a standard range of default probabilities and expected losses independent of 

asset class and issuing entity.3

 1 Pub. L. 111-203, 124 Stat. 1376, H.R. 4173.

2 See Pub. L. 111-203 §§ 931-939H.

3 See Pub. L. 111-203 § 939(h)(1). Section 938(a) of the Dodd-Frank Act provides, among other things, that 

the Commission shall require, by rule, each NRSRO to establish, maintain, and enforce policies and 

procedures that clearly define and disclose the meaning of any symbol used by the NRSRO to denote a 

credit rating and apply any such symbol in a manner that is consistent for all types of securities and money 

market instruments for which the symbol is used. See Pub. L. 111-203 § 938(a). The Commission has 
2

Section 939(h)(2) of the Dodd-Frank Act provides that the Commission shall submit to 

Congress a report containing the findings of the study and the recommendations, if any, of the 

Commission with respect to the study.4 This report is submitted to Congress pursuant to section 

939(h)(2).5

The Commission solicited public comment regarding the standardization that is the 

subject of this report, and Commission staff carefully reviewed the comments submitted by 

NRSROs, market participants, and others. Commission staff also reviewed publiclyavailable information on, among other things, the credit rating scales of NRSROs, and 

relevant studies and articles. 

As an initial matter, several commenters argued that the Commission currently does 

not have the authority to require credit rating standardization because, by statute, the 

Commission may not regulate the methodologies NRSROs use to determine credit ratings. 

Regarding the subject matter of the study, commenters raised serious concerns about the 

feasibility and desirability of standardization and, in particular, most did not feel that 

standardization would lead to higher levels of accountability, transparency, and competition 

in the credit rating agency industry. Several commenters suggested that requiring increased 

transparency would be a more desirable alternative.

 

proposed rules to implement this mandate. See Nationally Recognized Statistical Rating Organizations, 

Exchange Act Release No. 64514 (May 18, 2011), 76 FR 33420 (Jun. 8, 2011) (“May 2011 Proposing 

Release”) at 76 FR 33480-33481. In addition, pursuant to Section 932(a)(8) of the Dodd-Frank Act, the 

Commission has proposed, among other things, a standard definition of “default” to be used by NRSROs 

for purposes of generating the performance measurement statistics required to be disclosed in Exhibit 1 to 

Form NRSRO. See May 2011 Proposing Release, 76 FR 33433-33445. These rulemaking initiatives are 

discussed in Section V of this report.

4 See Pub. L. 111-203 § 939(h)(2).

5 The Commission approved the submission to Congress of this report. However, any views expressed in the 

report are those of the Commission staff and do not necessarily reflect the views of the Commission or the 

individual Commissioners. 
3

With respect to the specific topics identified in section 939(h)(1) of the Dodd-Frank 

Act,6 the staff found:

• Although NRSROs use similar scales and symbols to denote long-term credit ratings, 

the number of rating scales and the rating symbols used vary widely among NRSROs 

for other types of credit ratings. Standardizing credit rating terminology may 

facilitate comparing credit ratings across rating agencies and may result in fewer 

opportunities for manipulating credit rating scales to give the impression of accuracy. 

Requiring such standardization, however, may not be feasible given the number and 

uniqueness of rating scales and differences in credit rating methodologies used by 

credit rating agencies. Further, requiring standardized credit rating terminology may 

reduce incentives for credit rating agencies to improve their credit rating 

methodologies and surveillance procedures. 

• Standardizing market stress conditions under which ratings are evaluated may not 

allow the stress conditions to be tailored to a particular type of credit rating or to be 

reevaluated and updated as appropriate. Different stress conditions may be 

appropriate for different asset classes.

• Requiring a correspondence between credit rating categories and a range of default 

probabilities and loss expectations could lead to greater accountability among credit 

rating agencies. However, NRSROs do not provide such a correspondence because 

they base their credit ratings on a range of qualitative, as well as quantitative, factors. 

One credit rating agency that is not registered as an NRSRO does provide a 

 6 See the list of topics above.
4

quantitative correspondence between credit rating categories and specified default 

probabilities. 

• Most NRSROs appear to believe that it is desirable for a credit rating agency to have 

a standardized credit rating terminology that applies across at least some asset classes. 

However, some studies suggest that credit ratings have not historically been 

comparable across asset classes.

• Increasing transparency may be more feasible and desirable than implementing the 

standardization that is the subject of this study. In this regard, rulemaking initiatives 

mandated under the Dodd-Frank Act are designed to increase transparency with 

respect to the performance of credit ratings and the methodologies used to determine 

credit ratings.7

 

The staff, based on the findings above, recommends that the Commission not take any 

further action at this time with respect to: (1) standardizing credit rating terminology, so that 

all credit rating agencies issue credit ratings using identical terms; (2) standardizing the 

market stress conditions under which ratings are evaluated; (3) requiring a quantitative 

correspondence between credit ratings and a range of default probabilities and loss 

expectations under standardized conditions of economic stress; and (4) standardizing credit 

rating terminology across asset classes, so that named ratings correspond to a standard range 

of default probabilities and expected losses independent of asset class and issuing entity.8

 In 

addition, given the difficulties commenters identified with respect to implementing the 

standardization that is the subject of the study, the staff believes it would be more efficient to 

 7 See May 2011 Proposing Release. 

8 See Pub. L. 111-203 § 939(h)(1). The staff’s recommendations are based on the findings described in this 

report. These recommendations could change in the future based on new information. 
5

focus on the rulemaking initiatives mandated under the Dodd-Frank Act, which, among other 

things, are designed to promote transparency with respect to the performance of credit ratings 

and the methodologies used to determine credit ratings.

II. Background

The Commission has previously considered the issue of standardizing credit rating 

symbols. In 2003, the Commission issued a concept release seeking comment on various issues 

relating to credit rating agencies.9 One of the questions the Commission posed was, “[s]hould 

each NRSRO use uniform rating symbols, as a means of reducing the risk of marketplace 

confusion?”10 Several commenters who addressed the issue generally supported the idea of 

uniform rating symbols.11 For example, one commenter stated that “[a] basic set of rating 

symbols would provide a useful simplification and we advocate this.”12 On the other hand, one 

credit rating agency commented that mandated uniformity of rating symbols could mislead 

investors into assuming that all NRSRO credit ratings are comparable and involve the same 

analytical judgments, ratings criteria, and methodologies.13 Another commenter suggested that 

rather than mandating uniform rating symbols, the Commission should require each NRSRO to 

annually disclose the definition and historic default rates for the rating symbols it uses.14 As 

discussed below, NRSROs now are required to make such disclosures.

 9 Concept Release: Rating Agencies and the Use of Credit Ratings under the Federal Securities Laws, 

Securities Act Release No. 8236 (Jun. 4, 2003), 68 FR 35258 (Jun. 12, 2003) (“2003 Concept Release”).

10 See 2003 Concept Release, Question 13.

11 The comment letters are available on the Commission’s Internet website at 

http://www.sec.gov/rules/concept/s71203.shtml.

12 Letter from Richard Raeburn, Chief Executive, The Association of Corporate Treasurers, United Kingdom, 

to Jonathan G. Katz, Secretary, Commission (Aug. 8, 2003).

13 Letter from Leo C. O’Neill, President, Standard & Poor’s Ratings Services, to Jonathan G. Katz, Secretary, 

Commission (Jul. 28, 2003).

14 Letter from James A. Kaitz, President and CEO, Association for Financial Professionals, to Jonathan G. 

Katz, Secretary, Commission (Jul. 28, 2003). 
6

In 2005, the Commission proposed a definition of the term “nationally recognized 

statistical rating organization.”15 In that proposal, the Commission stated that it was not 

proposing to standardize the rating symbols used by NRSROs. However, the Commission noted

that, while the symbols used by an NRSRO may technically differ both in form and in meaning 

from those used by other NRSROs, the similarities in NRSROs’ rating symbols and rating 

categories suggested that there was a “market-based standard” for NRSROs’ rating symbols and 

for NRSROs “to have a consistent number of rating categories for distinguishing securities of 

varying risks.”16

The Credit Rating Agency Reform Act of 2006 (“Rating Agency Act”),17 among other 

things, added section 15E to the Exchange Act18 to establish self-executing requirements on 

credit rating agencies registered with the Commission as NRSROs and provided the Commission 

with the authority to implement a registration and oversight program for NRSROs. On June 5, 

2007, the Commission approved rules implementing such a program.19 Section 3(a)(62) of the 

 15 Definition of Nationally Recognized Statistical Rating Organization, Securities Act Release No. 8570 

(Apr. 19, 2005), 70 FR 21306 (Apr. 25, 2005) (“2005 Proposal”). The proposal was not adopted.

16 See 2005 Proposal, 70 FR 21317.

17 See Pub. L. 109-291, 120 Stat. 1327, S. 3850 (Sep. 29, 2006). 

18 15 U.S.C. 78o-7.

19 See Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating 

Organizations, Exchange Act Release No. 55857 (Jun. 5, 2007), 72 FR 33564 (Jun. 18, 2007). The 

implementing rules were Form NRSRO (17 CFR 249b.300) and Rules 17g-1through 17g-6 (17 CFR 

240.17g-1 through 17g-6). The Commission has twice adopted amendments to some of these rules. See

Amendments to Rules for Nationally Recognized Statistical Rating Organizations, Exchange Act Release 

No. 59342 (Feb. 2, 2009), 74 FR 6456 (Feb. 9, 2009); see also Amendments to Rules for Nationally 

Recognized Statistical Rating Organizations, Exchange Act Release No. 61050 (Nov. 23, 2009), 74 FR 

63832 (Dec. 4, 2009). The Commission has also adopted new Rule 17g-7 (17 CFR 240.17g-7) in 

accordance with the Dodd-Frank Act. See Disclosure for Asset-Backed Securities Required by Section 943 

of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Securities Act Release No. 9175

(Jan. 20, 2011), Exchange Act Release No. 63741 (Jan. 20, 2011), 76 FR 4515 (Jan. 26, 2011). In addition, 

in the May 2011 Proposing Release, the Commission proposed for comment rule amendments and new 

rules in accordance with the Dodd-Frank Act and to enhance oversight of NRSROs. 
7

Exchange Act,20 added by the Rating Agency Act, defines a “nationally recognized statistical 

rating organization” as a credit rating agency that, among other things: 

• Issues credit ratings with respect to: (i) financial institutions, brokers, or dealers; (ii) 

insurance companies; (iii) corporate issuers; (iv) issuers of asset-backed securities (as that 

term is defined in 17 CFR 229.1101(c)); (v) issuers of government securities, municipal 

securities, or securities issued by a foreign government; or (vi) a combination of one or 

more categories of obligors described in any of clauses (i) through (v); and 

• Is registered with the Commission under section 15E. 

The Commission has granted NRSRO registration to ten credit rating agencies, one of 

which subsequently withdrew from registration.

21 The following table identifies, as of the date 

of this report, the nine NRSROs, the classes of credit ratings in which they are registered, and the 

date of their initial registration:

 20 15 U.S.C. 78c(a)(62).

21 On October 13, 2011, Rating and Investment Information, Inc., which had been registered with the 

Commission as an NRSRO since September 24, 2007, furnished the Commission with a notice of 

withdrawal from registration as an NRSRO. The withdrawal became effective on November 27, 2011. See

http://www.sec.gov/news/digest/2011/dig112811.htm.
8

NRSRO Classes of Credit Ratings Initial Registration 

A.M. Best Company, Inc. (“A.M. Best”)

• Insurance companies

• Corporate issuers

• Issuers of asset-backed securities

9/24/2007

DBRS, Inc. (“DBRS”)

• Financial institutions

• Insurance companies

• Corporate issuers

• Issuers of asset-backed securities

• Issuers of government securities

9/24/2007

Egan-Jones Ratings Co. (“EJR”)

• Financial institutions

• Insurance companies

• Corporate issuers

• Issuers of asset-backed securities

• Issuers of government securities

12/21/2007

Fitch, Inc. (“Fitch”)

• Financial institutions

• Insurance companies

• Corporate issuers

• Issuers of asset-backed securities

• Issuers of government securities

9/24/2007

Japan Credit Rating Agency, Ltd. (“JCR”)

• Financial institutions

• Insurance companies

• Corporate issuers

• Issuers of government securities

9/24/2007

Kroll Bond Rating Agency, Inc. (“KBRA”)22

• Financial institutions

• Insurance companies

• Corporate issuers

• Issuers of asset-backed securities

• Issuers of government securities

2/11/2008

Moody's Investors Service, Inc. (“Moody’s”)

• Financial institutions

• Insurance companies

• Corporate issuers

• Issuers of asset-backed securities

• Issuers of government securities

9/24/2007

Morningstar Credit Ratings, LLC (“Morningstar”)23

• Issuers of asset-backed securities 6/23/2008

Standard & Poor's Ratings Services (“S&P”)

• Financial institutions

• Insurance companies

• Corporate issuers

• Issuers of asset-backed securities

• Issuers of government securities

9/24/2007

 22 KBRA was formerly known as LACE Financial Corp.

23 Morningstar was formerly known as Realpoint LLC. 
9

III. Overview of Comments 

The Commission requested public comment to help inform the study mandated under 

section 939(h).24 In particular, the Commission requested comment on each of the topics to be 

addressed under section 939(h) and, in addition, requested commenters’ views on specific 

questions related to each topic. The Commission received sixteen comments; six from 

NRSROs25 and ten from other interested parties, including associations that represent various 

types of securities market participants such as issuers and investors.

26 All comments are 

available on the Commission’s Internet website.27 

In addition to requesting public comment, the Commission staff gathered information 

through a review of publicly-available information on, among other things, the credit rating 

scales and credit rating definitions of NRSROs and a review of relevant studies and articles.

A. Summary of comments

Most commenters stated that it was neither feasible nor desirable to standardize credit 

rating terminology and market stress conditions or to require correspondences between ratings 

and default probabilities and loss expectations. Some of the commenters stated that 

 24 See Credit Rating Standardization Study, Exchange Act Release No. 63573 (Dec. 17, 2010), 75 FR 80866 

(Dec. 23, 2010). 

25 See letter dated Feb. 7, 2011 from A.M. Best (“A.M. Best letter”), letter dated Feb. 7, 2011 from Mary 

Keogh, DBRS (“DBRS letter”), letter dated March 7, 2011 from John S. Olert, Fitch (“Fitch letter”), letter 

dated Feb. 18, 2011 from Farisa Zurin, Moody’s (“Moody’s letter”), letter dated Feb. 4, 2011 from Robert 

Dobilas, Realpoint LLC (“Morningstar letter”), and letter dated Feb. 7, 2011 from Deven Sharma, S&P 

(“S&P letter”). 

26 See letter dated Feb. 4, 2011 from Tom Deutsch, The American Securitization Forum (“ASF letter”), letter 

from Andrew Davidson, Andrew Davidson & Co. (“Davidson letter”), letter dated Feb. 7, 2011 from Lisa 

Pendergast and John D’Amico, The Commercial Real Estate Finance Council (“CREFC letter”), letter 

dated Feb. 7, 2011 from Richard M. Whiting, The Financial Services Roundtable (“FSR letter”), letter 

dated Feb. 7, 2011 from Gail Le Coz, The Institutional Money Market Funds Association (IMMFA letter”), 

letter dated Feb. 7, 2011 from Karrie McMillan, The Investment Company Institute (“ICI letter”), letter 

dated Feb. 7, 2011 from Suzanne C. Hutchinson, The Mortgage Insurance Companies of America (“MICA 

letter”), letter dated Feb. 4, 2011 from John A. Courson, The Mortgage Bankers Association (“MBA 

letter”), letter from Cate Long, Multiple-Markets (“M-M letter”), and letter dated Jan. 11, 2011 from Julia 

Mikulla (“Mikulla letter”).

27 See http://www.sec.gov/comments/4-622/4-622.shtml.
10

standardization would lead to lower levels of competition and quality in the credit rating industry

and would increase reliance on credit ratings. Several commenters suggested that increasing

transparency through enhanced disclosure with respect to credit rating terminology and 

procedures would better serve users of credit ratings.

The six NRSROs that submitted comments did not favor standardization. For example, 

in the opinion of Moody’s, standardization would lead to less diversity of rating opinions and 

would increase the risk of “system-wide disruption.”28 Both S&P and Fitch commented that 

standardization would result in less competition in the ratings industry and might increase 

reliance on credit ratings.29 S&P and DBRS commented that standardization would not be 

desirable because it would eliminate the benefits of having a diversity of rating opinions. DBRS 

further commented that credit ratings are based, in part, on qualitative factors that would be 

difficult to standardize.30 Similarly, Morningstar commented that standardization would prohibit 

credit rating agencies from developing better rating procedures, eliminate innovation and 

competition, and increase costs. 31 Several NRSROs, including DBRS and Fitch, suggested that 

increased disclosure would be a preferable alternative.32

Among the non-NRSRO commenters, a majority were not in favor of standardization for 

many of the same reasons cited by the NRSROs. Andrew Davidson & Co. commented that 

credit ratings are qualitative judgments of rating committees and, therefore, are not amenable to 

 28 See Moody’s letter.

29 See S&P letter and Fitch letter.

30 See DBRS letter.

31 See Morningstar letter.

32 See DBRS letter and Fitch letter.
11

standardization.33 The American Securitization Forum commented that standardization would, 

in addition to depriving investors of a diversity of rating opinions, discourage competition and 

compromise the quality, accuracy, and usefulness of credit ratings in the securitization market.34 

The Mortgage Bankers Association also commented that standardization might lower the quality 

of credit ratings and, further, that it would not improve investors’ understanding of 

securitizations.

35 

The Institutional Money Market Funds Association commented that standardization 

“would negate the need for more than one [credit rating agency]” and that the “absence of a 

competitive market could then result in a subsequent lowering of standards and potentially 

market failure.” 36 The Investment Company Institute commented that standardization could 

lead to less innovation and competition among rating agencies, which could result in fewer rating 

agencies, “less pressure to ensure the quality of ratings,” and “the commoditization of ratings and 

the transformation of credit rating agencies into government approved utilities.”37 The 

Commercial Real Estate Finance Council characterized the concept of standardization as being 

of “questionable merit from a practical perspective.”38 While reporting a split among its 

 33 See Davidson letter. According to its comment letter, Andrew Davidson & Co. is an analytics firm focused 

on structured products. 

34 See ASF letter. According to its comment letter, the American Securitization Forum is an industry 

association comprised of participants in the securitization markets including, issuers, investors, servicers, 

financial intermediaries, credit rating agencies, financial guarantors, legal and accounting firms, and other 

professional organizations involved in securitization transactions. 

35 See MBA letter. According to its comment letter, the Mortgage Bankers Association is an industry 

association comprised participants in the real estate finance markets, including mortgage companies, 

mortgage brokers, commercial banks, thrifts, Wall Street conduits, and life insurance companies. 

36 See IMMFA letter. According to its comment letter, the Institutional Money Market Funds Association is 

an industry association comprised of European money-market funds. 

37 See ICI letter. According to its comment letter, the Investment Company Institute in an industry 

association comprised of U.S. investment companies, including mutual funds, closed end funds, exchange 

traded funds, and unit investment trusts. 

38 See CREFC letter. According to its comment letter, the Commercial Real Estate Finance Council is an 

industry association comprised of participants in the commercial real estate finance markets, including: 
12

members with regard to the merits of standardizing credit rating meanings within asset classes,

the Financial Services Roundtable more generally commented that “the diversity of rating 

methodologies among the different credit rating agencies adds a depth to the analysis of 

securities risks that would be lost if such methodologies were to become to homogenized.”39

On the other hand, one commenter, Julia Mikulla, commented that “[c]redit rating models 

should be standardized and publicly available.”40 Another commenter, Multiple-Markets,

commented that it would be “beneficial” for NRSROs to use comparable symbol sets but that

such use should be voluntary.

41 Finally, the Mortgage Insurance Companies of America, while 

not necessarily endorsing the standardization that is the subject of the study, urged the 

Commission “to play a direct role in establishing standards and ensuring compliance with them 

for new [credit rating agency] methodology and symbology.”42

B. Commission authority

A threshold issue is whether, even if feasible and desirable, the Commission presently 

has the authority to require that credit rating agencies adopt the standardization that is the subject 

of the study. In particular, section 15E(c)(2) of the Exchange Act, added by the Rating Agency 

Act, provides that Commission rules regarding NRSROs “shall be narrowly tailored to meet the 

requirements of [the Exchange Act] applicable to [NRSROs];” and that notwithstanding “any 

 

commercial mortgage-backed security lenders and issuers; loan and bond investors such as insurance 

companies, pension funds and money managers; servicers; credit rating agencies; accounting firms; law 

firms; and other service providers. 

39 See FSR letter. According to its comment letter, the Financial Services Roundtable represents 100 of the 

largest integrated financial services companies providing banking, insurance, and investment products and 

services.

40 See Mikulla letter.

41 See M-M letter. Multiple Markets stated in its comment letter that it has a patent “for the standardization 

of the various alphanumeric credit rating scales for use in market data, trading and portfolio systems for 

retail investors and registered representatives.”

42 See MICA letter. According to its comment letter, the Mortgage Insurance Companies of America is an 

association of the private mortgage insurance industry.
13

other provision of [section 15E] or any other provision of law,” the Commission may not 

“regulate the substance of credit ratings or the procedures and methodologies by which any 

nationally recognized statistical rating organization determines credit ratings.”43 In addition, 

there are credit rating agencies that operate within and outside of the U.S. that are not registered 

with the Commission as NRSROs. These credit rating agencies are not subject to the 

Commission’s NRSRO oversight program and, therefore, any Commission rules mandating 

standardization would not apply to them.

Several commenters raised the issue of authority. For example, S&P commented that 

“[s]tandardizing credit ratings terminology and practices would inevitably require some level of 

regulation directing credit rating agencies as to the rating symbols and terms to use, and defining 

to some extent the parameters within which credit rating agencies must conduct their evaluations. 

It is difficult to see how the Commission could mandate this consistently with the requirement in 

Exchange Act section 15E(c)(2) that the Commission may not ‘regulate the substance of credit 

ratings or the procedures and methodologies by which any [NRSRO] determines credit 

ratings.’”44 Similarly, Fitch commented that the premise of the study “contradicts fundamental 

principles of NRSRO regulations—‘that the Commission may not regulate either the substance 

[of] credit ratings or the procedures and methodologies by which the NRSROs determine credit 

ratings.’”45 DBRS also commented that the mandated standardization that is the subject of the 

study “could violate one of the fundamental principles of NRSRO regulation: that the 

Commission may not regulate either the substance of credit ratings or the procedures and 

 43 See 15 U.S.C. 78o-7(c).

44 See S&P letter.

45 See Fitch letter.
14

methodologies by which NRSROs determine credit ratings.”46 Moody’s commented that rules 

requiring standardization “likely would interfere with the independence of the rating process by 

regulating the substance of rating opinions and methodologies.”47 The Mortgage Bankers 

Association questioned whether “the introduction of standardized terminology would go beyond 

the statutory authority of the Dodd-Frank Act by prescribing elements of ratings 

methodology.”48

Finally, S&P also commented that “[r]egulatory mandates concerning what ratings must

mean and how credit rating agencies go about their work also raise serious First Amendment 

concerns.”49

IV. Discussion of Topics Enumerated in Section 939(h)

As stated above, section 939(h)(1) of the Dodd-Frank Act requires the Commission to 

conduct a study on the feasibility and desirability of: (1) standardizing credit rating terminology, 

so that all credit rating agencies issue credit ratings using identical terms; (2) standardizing the 

market stress conditions under which ratings are evaluated; (3) requiring a quantitative 

correspondence between credit ratings and a range of default probabilities and loss expectations 

under standardized conditions of economic stress; and (4) standardizing credit rating terminology 

across asset classes, so that named ratings correspond to a standard range of default probabilities 

and expected losses independent of asset class and issuing entity. The following sections 

address these questions.

A. Is it feasible or desirable to standardize credit rating terminology so that all 

credit rating agencies issue credit ratings using identical terms?

 46 See DBRS letter.

47 See Moody’s letter.

48 See MBA letter.

49 See S&P letter.
15

1. Background

Credit rating agencies generally establish rank ordering credit rating scales to 

communicate their opinion of the relative credit risk of a particular obligor or debt instrument. 

Credit rating agencies use symbols to denote credit rating categories, from the highest to the 

lowest ratings, in their rating scales.50 NRSROs are required to publicly disclose the definitions 

of their credit rating categories.51 

A standardized credit rating terminology could include standard rating symbols and 

definitions of each symbol for general categories of credit rating (for example, ratings of longterm obligations) or could include standard rating symbols and definitions for more specific 

classes of credit ratings (for example, ratings of issuers of asset-backed securities). The 

standardized symbols and definitions could be those currently used by one or more credit rating 

agencies or they could be an entirely new set of symbols or definitions.

 50 As used throughout this study, the term credit rating “category” refers to a distinct level in a rating scale 

represented by a unique symbol, number, or score. For example, AAA, AA, A, and BBB each would be a 

category in a rating scale. Some NRSROs also use modifiers to denote gradations within a category. A.M. 

Best, EJR, Fitch, JCR, KBRA, Morningstar, and S&P use “+” or “-” modifiers; DBRS uses “high” or “low” 

modifiers; and Moody’s uses “1,” “2,” or “3” modifiers. For example, AA+, AA, and AA- would be three 

gradations within the AA category with AA+ being the highest gradation and AA- being the lowest 

gradation in terms of relative creditworthiness. If a rating scale has gradations within a category, the 

category and each gradation would constitute a “notch” in the rating scale. For example, the symbols AA+, 

AA, and AA- would each represent a notch in the rating scale.

51 The instructions to Exhibit 1 to Form NRSRO require an NRSRO to “define the credit rating categories, 

notches, grades, and rankings” used by the NRSRO. Rule 17g-1(i) requires NRSROs to make Form

NRSRO and Exhibits 1 through 9 publicly available. All NRSROs make this information available on their 

websites. As of the date of this report, the links to Form NRSRO were as follows: A.M. Best, 

http://www.ambest.com/nrsro/index.html; DBRS, http://dbrs.com/about/regulatoryAffairs; EJR, 

http://www.egan-jones.com/nrsro.aspx; Fitch, http://www.fitchratings.com/web/en/dynamic/aboutus/regulatory-disclosures-and-commentary.jsp; JCR, http://www.jcr.co.jp/english/nrsro/index.html; KBRA, 

http://www.krollbondratings.com/regulatory.php; Moody’s, http://v3.moodys.com/Pages/reg001002.aspx; 

Morningstar, https://ratingagency.morningstar.com/RPLogin.aspx; S&P, 

http://www.standardandpoors.com/ratings/form-nrsro/en/us.
16

As discussed above, the Commission stated in 2005 that similarities in the scales and 

symbols used by NRSROs “suggests the existence of a market-based standard.”52 The following 

table illustrates that this observation continues to hold true with respect to rating scales used by 

NRSROs for long-term obligations:

53

A.M. Best DBRS EJR Fitch JCR KBRA Moody’s Morningstar S&P

Aaa AAA AAA AAA AAA AAA Aaa AAA AAA

Aa AA AA AA AA AA Aa AA AA

A A A A A A A A A

Bbb BBB BBB BBB BBB BBB Baa BBB BBB

Bb BB BB BB BB BB Ba BB BB

B B B B B B B B B

Ccc CCC CCC CCC CCC CCC Caa CCC CCC

Cc CC CC CC CC CC Ca CC CC

C C C C C C C C

D D D D D D SD/D

Rs R

Total number of notches54

23 26 22 19 20 22 21 20 22

The definitions of the symbols used by NRSROs to denote the categories in their longterm rating scales generally consist of a qualitative description of the degree of credit risk 

 52 See 2005 Proposal, 70 FR 21317.

53 Some NRSROs have various long-term rating scales. Fitch, for example, has long-term rating scales for 

issuer credit ratings, corporate finance obligations, and structured, project, and public finance obligations. 

Unless stated otherwise, the information in this section is taken from the current Form NRSROs of the nine 

NRSROs.

54 As stated above, A.M. Best, EJR, Fitch, JCR, KBRA, Morningstar, and S&P use “+” or “-” modifiers; 

DBRS uses “high” or “low” modifiers; and Moody’s uses “1,” “2,” or “3” modifiers to denote 

subcategories. Categories that are shaded contain such subcategories.
17

associated with the symbol.55 For example, DBRS’s highest long-term rating, “AAA,” is 

defined as: “Highest credit quality. The capacity for the payment of financial obligations is 

exceptionally high and unlikely to be adversely affected by future events.” On the other hand, a 

DBRS rating of “B” is defined as: “Highly speculative quality. There is a high level of 

uncertainty as to the capacity to meet financial obligations.” A.M. Best defines its highest longterm rating – which is in the “aaa” category in its rating scale – as “Exceptional—assigned to an 

issuer where, in our opinion, the issuer has an exceptional ability to meet the terms of its 

obligations.” A.M. Best defines a rating in the “b” category in its rating scale as: “Marginal—

assigned to an issuer where, in our opinion, the issuer has marginal credit characteristics, 

generally due to a modest margin of principal and interest payment protection and extreme 

vulnerability to economic changes.”

The following table compares the definitions used by NRSROs for the AAA, BBB, and B 

categories:

AAA BBB B

A.M. Best Exceptional - Assigned to an issuer 

where, in our opinion, the issuer has 

an exceptional ability to meet the 

terms of its obligations.

Good - Assigned to an issuer 

where, in our opinion, the 

issuer has a good ability to 

meet the terms of its 

obligations; however, the 

issuer is more susceptible to 

changes in economic or 

other conditions.

Marginal - Assigned to an issuer 

where, in our opinion, the issuer has 

marginal credit characteristics, 

generally due to a modest margin of 

principal and interest payment 

protection and extreme vulnerability 

to economic changes.

DBRS Highest credit quality. The capacity 

for the payment of financial 

obligations is exceptionally high and 

unlikely to be adversely affected by 

future events.

Adequate credit quality. The 

capacity for the payment of 

financial obligations is 

considered acceptable. May 

be vulnerable to future 

events.

Highly speculative credit quality. 

There is a high level of uncertainty as 

to the capacity to meet financial 

obligations.

EJR An obligation rated “AAA” has the 

highest rating assigned by Egan 

Jones. The obligor’s capacity to meet 

its financial commitment on the 

obligation is extremely strong.

An obligation rated “BBB” 

exhibits adequate protection 

parameters. However, 

adverse economic conditions 

or changing circumstances 

are more likely to lead to a 

weakened capacity of the 

An obligation rated “B” is more 

vulnerable to non-payment than 

obligations rated “BB” but the 

obligor currently has the capacity to 

meet its financial commitment on the 

obligation. In the event of adverse 

business, financial, or economic 

 55 Definitions of NRSROs’ long-term rating categories are provided in Appendix A to this report. 
18

obligor to meet its financial 

commitment on the 

obligation.

conditions, the obligor is not likely to 

have the capacity to meet its financial 

commitment on the obligation.

Fitch Highest credit quality - ‘AAA’ 

ratings denote the lowest expectation 

of credit risk. They are assigned only 

in cases of exceptionally strong 

capacity for payment of financial 

commitments. This capacity is 

highly unlikely to be adversely 

affected by foreseeable events.

Good credit quality - ‘BBB’ 

ratings indicate that 

expectations of credit risk 

are currently low. The 

capacity for payment of 

financial commitments is 

considered adequate but 

adverse business or 

economic conditions are 

more likely to impair this 

capacity.

Highly speculative - ‘B’ ratings 

indicate that material credit risk is 

present.

JCR The highest level of capacity of the

obligor to honor its financial 

commitment on the obligation.

An adequate level of 

capacity to honor the 

financial commitment on the 

obligation. However, this 

capacity is more likely to 

diminish in the future than in 

the cases of the higher rating 

categories.

A low level of capacity to honor the 

financial commitment on the 

obligation, having cause for concern.

KBRA Determined to have almost no risk of 

loss due to credit-related events. 

Assigned only to the very highest 

quality obligors and obligations able 

to survive extremely challenging 

economic events.

Determined to be of medium 

quality with some risk of 

loss due to credit-related 

events. Such issuers and 

obligations may experience 

credit losses during stress 

environments.

Determined to be of very low quality 

with high risk of loss due to creditrelated events. These issuers and 

obligations contain many 

fundamental shortcomings that create 

significant credit risk.

Moody’s Obligations rated Aaa are judged to 

be of the highest quality, with 

minimal credit risk.

Obligations rated Baa are 

subject to moderate credit 

risk. They are considered 

medium grade and as such 

may possess certain 

speculative characteristics.

Obligations rated B are considered 

speculative and are subject to high 

credit risk.

Morningstar A rating of ‘AAA’ is the highest 

letter-grade rating assigned by 

Morningstar.

Securities rated ‘AAA’ have an 

extremely strong ability to make 

timely interest payments and 

ultimate principal payments on or 

prior to a rated final distribution 

date.

A rating of ‘BBB’ indicates 

the securities should be able 

to meet their obligation to 

make timely payments of 

interest and ultimate 

payment of principal on or 

prior to a rated final 

distribution date, but that 

ability could be impacted by 

adverse changes in 

circumstances or conditions, 

such as adverse business or 

economic conditions.

A rating of ‘B’ indicates a default has 

not yet occurred but the securities are 

vulnerable to a challenging or 

changes in environment, conditions 

or circumstances. Securities rated ‘B’ 

are more vulnerable to nonpayment 

of timely interest and ultimate 

payment of principal on or prior to a 

rated final distribution date than 

higher rated securities.

S&P An obligor rated 'AAA' has 

extremely strong capacity to meet its 

financial commitments. 'AAA' is the 

highest issuer credit rating assigned 

by Standard & Poor's.

An obligor rated 'BBB' has 

adequate capacity to meet its 

financial commitments. 

However, adverse economic 

conditions or changing 

circumstances are more 

likely to lead to a weakened 

capacity of the obligor to 

meet its financial 

commitments.

An obligor rated 'B' is more 

vulnerable than the obligors rated 

'BB', but the obligor currently has the 

capacity to meet its financial 

commitments. Adverse business, 

financial, or economic conditions 

will likely impair the obligor's 

capacity or willingness to meet its 

financial commitments.
19

NRSROs also may indicate, through issuing “rating outlooks” or “rating trends,” that the

rating of an obligor or issuer is at a higher than usual risk of change. The outlook may be 

described using terms such as “positive,” “stable,” “negative,” or “developing.” To indicate the 

potential for a more immediate rating change, the NRSRO may issue a “rating watch” or “credit 

watch,” or the rating may be placed on a “watchlist” or “under review.” For example, Moody’s 

states that it “supplements its long-term ratings with additional credit signals that provide 

information on our developing views on credit risk.”56 Moody’s further states that it “may 

assign an Outlook (Positive, Negative, Stable) to a rated obligation” to indicate its view 

“regarding the likely direction of an issuer’s rating over the medium term” and that “a rating will 

be placed on Watchlist to indicate that the rating is on review in the short term for upgrade, 

downgrade, or occasionally with ‘direction uncertain.’”

NRSROs use a separate rating scale for short-term obligations. With the exception of 

S&P and EJR, each NRSRO has a unique short-term rating scale. The following table compares 

the rating scales used by the eight NRSROs that issue ratings on short-term obligations.

57

A.M. Best DBRS EJR Fitch JCR KBRA Moody’s S&P

AMB-1 R-1 A-1 F1 J-1 K1 P-1 A-1

AMB-2 R-2 A-2 F2 J-2 K2 P-2 A-2

AMB-3 R-3 A-3 F3 J-3 K3 P-3 A-3

AMB-4 R-4 B B NJ B NP B

D R-5 B-1 C C B-1

D B-2 RD D B-2

B-3 D B-3

C C

D D

 56 See Moody’s letter.

57 Source: Internet websites of the NRSROs. The highest category for A.M. Best, EJR, Fitch, JCR, KBRA, 

and S&P can be modified with a plus sign. DBRS’s R-1 and R-2 categories can be modified by the terms 

“high,” “middle,” and “low.” Morningstar does not issue ratings on short-term obligations. 
20

In addition to rating scales for long-term and short-term obligations, NRSROs also 

publish a variety of other types of credit ratings and assessments using various scales and 

measures. Each of the three largest NRSROs has dozens of rating scales. For example, Fitch, 

among other rating scales, has rating scales for bank ratings (A, B, C, D, E, and F); international 

fund volatility ratings (V-1. V-2, V-3, V-4, V-5, V-6, and V-NR); short-term insurer financial 

strength ratings (F1, F2, F3, B, and C); and asset management ratings (M1 through M5). Fitch 

also publishes Structured Finance Loss Severity Ratings (LS-1 through LS-5), which provide “an 

assessment of the relative loss severity of an individual tranche within a structured finance 

transaction, in the event that the tranche experiences a default.” These ratings are assigned to 

tranches in the B category and above.58 

Moody’s, among other rating scales, has rating scales for short-term municipal 

obligations (MIG1, MIG 2, MIG 3, and SG), speculative grade liquidity ratings (SGL-1 through 

SGL-4), bank financial strength ratings (A, B, C, D, and E), national scale short-term ratings (for 

example, for Brazil: BR-1 through BR-4), mutual fund market risk ratings (MR1 through MR5), 

and hedge fund operational quality ratings (OQ1 through OQ5). Moody’s also publishes loss 

given default assessments, which are “opinions about expected loss given default on fixed 

income obligations expressed as a percent of principal and accrued interest at the resolution of 

the default.” The highest such assessment is “LGD1,” which represents a loss range of between 

0 and 10%. The lowest assessment is “LGD6,” which represents a loss range of between 90%

and 100%.59

 58 See Exhibit 1 to Fitch’s latest Form NRSRO.

59 See Exhibit 1 to Moody’s latest Form NRSRO.
21

S&P, among other rating scales, has structured finance servicer evaluations (Strong, 

Above Average, Average, Below Average, Weak), fund volatility ratings (S1 through S6), shortterm insurer financial strength ratings (A-1, A-2, A-3, B, C, and R), bank fundamental strength 

ratings (A, B, C, D, E, and NR), and national short-term ratings (for example, for Mexico: mxA1, mxA-2, mxA-3, mxB, mxC, and mxD).60

Differences in rating symbols, scales, and definitions among NRSROs may reflect 

differences in approaches to analyzing credit risk. For example, Moody’s states that its credit 

ratings “address the probability that a financial obligation will not be honored as promised (i.e., 

probability of default, or “PD”), and any financial loss suffered in the event of default.”61 The 

firm further states that its “analysis of these two factors together forms the basis of [Moody’s] 

expected loss (“EL”) approach to credit risk.”62 On the other hand, S&P states that it may focus 

more (although not exclusively) on likelihood of default.”63 This difference is reflected in the 

definitions of Moody’s and S&P’s rating categories. Moody’s lowest long-term corporate 

obligation credit rating is “C,” which is defined as obligations that are “the lowest rated class of 

bonds and are typically in default, with little prospect for recovery of principal and interest.” 

The next highest rating “Ca” is defined as obligations that are “highly speculative and are likely 

in, or very near, default, with some prospect of recovery of principal and interest.” On the other 

hand, S&P’s lowest rating is “D,” which is defined as obligations “in payment default.” The 

next highest rating – “C” – is defined as obligations that are “currently highly vulnerable to 

 60 See Exhibit 1 to S&P’s latest Form NRSRO.

61 See Moody’s letter.

62 See Moody’s letter.

63 See S&P letter.
22

nonpayment.”64 Consequently, Moody’s has two potential categories for assigning a credit 

rating to a defaulted corporate issuer to differentiate “some” prospect from “little” prospect of 

recovery of principal and interest. Empirical evidence suggests that differences in approaches to 

analyzing credit risk could result in different credit ratings assigned to the same obligation.65

2. Discussion

A few commenters expressed some level of support for standardizing credit rating 

terminology. For example, the Mortgage Insurance Companies of America urged the 

Commission to “play a direct role in establishing standards and ensuring compliance with 

them for new [credit rating agency] methodology and symbology....”66 The Institutional 

Money Market Funds Association commented that although “variance in the symbologies 

used . . . should be retained,” it does support “consistent levels of granularity” in ratings so 

that, for example, what constitutes the two highest rating categories is consistent across rating 

agencies (currently, Fitch and S&P use a “+” modifier in their highest category for short-term 

fixed income ratings, while Moody’s does not).67

In addition, in a comment in response to the Commission’s general solicitation of 

comment on Title IX, Subtitle C of the Dodd-Frank Act, two commenters submitted a paper 

which states that rating agencies often change the meaning of their credit rating symbols and that 

 64 See Exhibit 1 to Moody’s latest Form NRSRO and Exhibt 1 to S&P’s latest Form NRSRO.

65 A 2010 study by Livingston, Wei, and Zhou compared the U.S. corporate bond ratings of Moody’s and 

S&P and found that their ratings were different for 48% of the bonds examined. In most cases, however, 

where there was a difference, the ratings were within one notch and there were very few observations of 

differences that were more than two notches apart. On average, the ratings of the two NRSROs were 

within 0.14 notches of each other. The study included nearly 14,000 fixed rate U.S. domestic, nonfinancial

public companies issued between 1983 and 2008. See Miles Livingston, Jie (Diana) Wei, & Lei Zhou, 

Moody’s and S&P Ratings: Are They Equivalent? Conservative Ratings and Split Rated Bond Yields, 42 J. 

Money, Credit and Banking 1267 (2010).

66 See MICA letter.

67 See IMMFA letter.
23

they may be tempted to “manipulate the ratings scale to preserve the impression of accuracy.”68 

The authors stated that “a government authority such as the SEC, for example, should define a 

ten-level (C)redit (R)isk scale, say, CR1, CR2, . . . CR10 based on clearly spelled out risk 

parameters....”69 The paper further states that credit risk could be measured, for example, using 

the probability of default of the asset, or a combination of probability of default and loss given 

default.70

Most commenters that addressed the issue, however, did not believe that standardizing 

credit rating terminology was feasible or desirable. Among the NRSRO commenters, there were 

no supporters of such standardization. Morningstar, for example, commented that standardized 

rating symbols would have the same meaning across credit rating agencies only if the rating 

agencies used standardized rating methodologies, including surveillance policies and procedures,

and that standardizing rating methodologies could create disincentives for credit rating agencies 

to improve their methodologies.71 Similarly, A.M. Best commented that standardized 

terminology could reduce transparency and the quality of credit ratings and prevent the firm from 

providing “detailed and informative surveillance and reports.”72 S&P commented that “because 

the nature of their opinions varies, rating agencies should be encouraged to adopt distinctive 

symbols.”73 

 68 See Arturo Cifuentes & Jose Miguel Cruz, White Paper on Rating Agency Reform, Department of 

Industrial Engineering, University of Chile, May 2010. The comment letter containing this paper is 

available on the Commission’s Internet website at http://www.sec.gov/comments/df-title-ix/credit-ratingagencies/creditratingagencies-5.pdf. 

69 Id.

70 Id.; see also the discussion below concerning the Commission’s proposal to prescribe a standard definition 

of “default” for purposes of the credit rating performance measurement statistics that NRSROs must 

disclose in Exhibit 1 to Form NRSRO.

71 See Morningstar letter. 

72 See A.M. Best letter.

73 See S&P letter.
24

The majority of non-NRSRO commenters that addressed the issue also did not support 

standardization of credit rating terminology. For example, the American Securitization Forum

commented that “different credit ratings terminology appropriately reflects the differences that 

exist among quantitative models and qualitative assessments” among credit rating agencies and 

that “standardization of ratings terminology could suggest to investors that there is a uniformity 

of views that is neither intended nor desired . . . uniformity would compromise the quality, 

accuracy and usefulness of credit ratings.”74 The Commercial Real Estate Finance Council

commented that “any comparisons of ratings across rating agencies may be more easily 

facilitated for investors through transparency in reports accompanying ratings.”75

Multiple-Markets commented that although it would be “beneficial for NRSROs to use 

comparable symbol sets so their ratings may be used in conjunction with other NRSROs,” it 

does not believe that “NRSROs should be mandated by legislation or Commission rulemaking to 

use identical symbol sets.”76 Instead, it believes that “[i]t should be voluntary for NRSROs to 

either adopt comparable symbol sets or map their ratings to a standardized scale.”77 

In sum, the staff found that although NRSROs use similar rating scales and symbols 

to denote long-term credit ratings, the number of rating scales and the rating symbols used 

vary widely among NRSROs for other types of credit ratings. Standardizing credit rating 

terminology may facilitate comparing credit ratings across rating agencies and may result in 

fewer opportunities for manipulating credit rating scales to give the impression of accuracy. 

 74 See ASF letter.

75 See CREFC letter.

76 See M-M letter. Multiple-Markets stated in its comment letter that investors often use credit ratings from 

two or more NRSROs, so that an NRSRO that chooses a symbol set that does not compare to other 

NRSROs might “find the audience for its opinions diminished as the investor would have to map the 

nonstandard symbols to the scales of the dominant NRSROs.” 

77 Id.
25

Requiring such standardization except for long term ratings, however, may not be feasible 

given the number and uniqueness of rating scales and differences in credit rating 

methodologies used by credit rating agencies. Further, requiring standardized credit rating 

terminology may reduce incentives for credit rating agencies to improve their credit rating 

methodologies and surveillance procedures. Consequently, the staff recommends that the 

Commission not take any further action at this time with respect to standardizing credit rating 

terminology, so that all credit rating agencies issue credit ratings using identical terms.78

B. Is it feasible or desirable to standardize the market stress conditions under 

which ratings are evaluated?

1. Background

NRSROs typically assess an obligor’s ability to withstand future economic or market 

stress and expect higher rated obligors to be able to withstand greater stress. For example, S&P

states that it “uses a common set of general macro-economic stress scenarios as part of 

calibrating its criteria across different sections.”79 S&P defines the scenarios broadly—by 

reference to gross domestic product, unemployment, and equity markets—and does not use those 

stress scenarios as part of its analysis of individual issuers and obligations.80 Obligors rated at 

Fitch’s highest rating categories should be able to withstand a “Great Depression type scenario,” 

which it defines in terms of unemployment and gross domestic product levels.81 Morningstar 

“constantly reevaluates historical benchmarks to use to develop stress conditions and whether its 

stress levels should be updated for changes in market conditions or other changes warranted by 

 78 See Pub. L. 111-203 § 939(h)(1). 

79 See S&P letter.

80 Id.

81 See Fitch Ratings, Ratings Comparability (Jun. 21, 2010).
26

the analysis of historical or empirical data.”82 Moody’s takes into account “a common, central

macro-economic scenario and alternative risk scenarios that are developed by [Moody’s] MacroEconomic Board on a semi-annual basis.”83 

There are a number of approaches that could be used to standardize market stresses. One 

approach might be to define particular macro-economic conditions that obligors would need to 

be able to withstand at different credit rating categories in the credit rating scale. These 

conditions might be developed in cooperation with economists and might include references to 

historical events and/or economic variables including, for example, unemployment levels and 

gross domestic product. Under this approach, each rating agency would consider how best to 

incorporate these conditions into its rating methodologies.

A second approach to standardizing market stresses might involve standardization of 

some or all of the particular stresses to be used in methodologies for specific asset classes. 

Standardized scenarios, however, could require the creation and mapping out of thousands of 

assumptions to achieve relevancy for each asset class, industry, geographic region, and rating 

category and notch within the rating scale.

2. Discussion

One commenter, the Mortgage Insurance Companies of America, pointed to “robust” 

stress tests for large banks “stipulated” by the Board of Governors of the Federal Reserve System 

in 2009 that addressed “both idiosyncratic and market factors.”84 It recommended that this 

model be adopted for credit rating agencies.85 In particular, it commented that “[s]tandard

 82 See Morningstar letter.

83 See Moody’s letter.

84 See MICA letter.

85 Id.
27

assumptions should be applied to all claims paying insurers, asset classes and issuers for factors 

germane to them (e.g., leverage ratios, loss reserves, etc.), with these idiosyncratic factors then 

judged in the broader context of market events such as various unemployment scenarios and 

house price appreciation or depreciation.86 The stress scenarios used to evaluate claims paying 

ability should be published and should reflect actual economic events.”87 It further commented 

that the Commission “should play a strong role not only in stipulating ongoing stress tests that 

are updated as idiosyncratic and/or market factors change, but also ensure [credit rating agency] 

compliance with these criteria and provide useful disclosures of test results.”88

Most commenters, however, were not in favor of standardizing market stress conditions. 

Among the NRSROs that addressed the issue, Morningstar, for example, commented that “[i]f 

stress levels were standardized, [credit rating agencies] would have no incentive to review and 

evaluate, and attempt to develop more accurate, stress levels” and that this “would reduce 

competition among [credit rating agencies].” 89 Morningstar further commented that potential 

liability issues might render credit rating agencies unwilling to issue ratings based on 

standardized stresses with which they disagree and that stress conditions need to be constantly 

reevaluated.90 Moody’s commented that “if [credit rating agencies] are required to use the same 

market stress scenarios, this could require them to base their ratings on factors that they do not 

consider most relevant to the rating in question.”91 S&P commented that its analysis uses 

projections or forecasts of sector-specific economic factors (for example, projected oil prices 

 86 Id.

87 Id.

88 Id.

89 See Morningstar letter.

90 Id.

91 See Moody’s letter.
28

may be important for an energy producer or an airline, while population growth may be 

important for a school district), so that it would not be feasible or useful to develop standardized 

scenarios for the thousands of issuers and issues it rates.

92 In S&P’s opinion, credit rating 

agencies may reasonably differ in how they associate industry- or sector-specific stress factors 

with macro-level stresses.93

Commenters that are not NRSROs also were opposed to standardization of market stress 

conditions. For example, the Commercial Real Estate Finance Council commented that 

“standardization of market stress conditions . . . would be unworkable and undesirable, 

particularly for commercial mortgages, because commercial real estate is so strongly influenced 

by local conditions” and that “[s]tandardizing market stress conditions (or other parts of rating 

methodology, for that matter) will prevent [credit rating agencies] from innovating, and will also 

make it difficult for [credit rating agencies] to improve the rating process.”94 The American 

Securitization Forum commented that “uniformity of market stress conditions . . . may 

undermine the value that different [credit rating agencies] bring to credit ratings through the 

application of differing economic views and models.”95 The Institutional Money Market Funds 

Association commented that the “establishment of minimum standards and the reliance upon 

such as the input into a rating decision would provide insufficient flexibility to the rating process, 

which would be unable to adapt and reflect changes in markets, instruments and criteria.”96 The 

Mortgage Bankers Association commented that “standardizing economic and market stress 

conditions would have a homogenization effect on the proprietary ratings methodologies that 

 92 See S&P letter.

93 Id.

94 See CREFC letter.

95 See ASF letter.

96 See IMMFA letter.
29

NRSRO’s [sic] use to compete and distinguish themselves against each other” and harmonization 

for market and stress conditions would prevent NRSROs from controlling key data inputs for 

their ratings models.”97 Multiple-Markets commented that defining market stress conditions 

across different industry sectors and geographic regions would be “difficult and require constant 

monitoring and adjustment. Generally regulators would always be playing catch-up.”98

In sum, the staff found, based on the comments received, that standardizing market 

stress conditions under which ratings are evaluated may not allow the stress conditions to be 

tailored to a particular type of credit rating or to be reevaluated and updated as appropriate. 

Different stress conditions may be appropriate for different asset classes. Consequently, the 

staff recommends that the Commission not take any further action at this time with respect to 

standardizing the market stress conditions under which ratings are evaluated.99

C. Is it feasible or desirable to require a quantitative correspondence between 

credit ratings and a range of default probabilities and loss expectations under 

standardized conditions of economic stress?

1. Background

NRSROs’ credit ratings are generally intended to indicate the relative degree of credit 

risk of an obligor or debt instrument rather than reflect a measure of a specific default 

probability or loss expectation. For example, according to S&P, “ratings should not be 

viewed as assurances of credit quality or exact measures of the likelihood of default.”100 

Similarly, Fitch states that “[c]redit ratings are opinions on relative credit quality and not a 

 97 See MBA letter.

98 See M-M letter.

99 See Pub. L. 111-203 § 939(h)(1). 

100 See, S&P, Guide to Credit Rating Essentials, 

http://img.en25.com/Web/StandardandPoors/SP_CreditRatingsGuide.pdf.
30

predictive measure of specific default probability.”101 Fitch also commented that “[r]atings 

are intended to be rank orderings and reflect judgment, debate, and the output of a committee 

process, not precise mathematical equations.102 Moody’s commented that its rating system is 

a “relative (or ordinal), rather than an absolute (or cardinal) ranking system.”103 Rather than 

assigning a specific expected loss or expected loss range to an obligation, Moody’s

commented that its ratings communicate that it believes that a higher-rated security “likely 

has a lower expected loss” than a lower-rated one.104 

However, one credit rating agency that is not registered as an NRSRO, Rapid Ratings, 

does seek to provide a correspondence between credit rating categories and specified default 

probabilities. Rapid Ratings publishes “Financial Health Ratings,” which use 62 financial ratios, 

each of which is weighted according to “its significance in predicting success and failure in each 

global industry.”105 Rapid Ratings states that its Financial Health Rating scores are highly 

correlated with probabilities of default, and it provides tables correlating Financial Health Ratios 

(as well as S&P and Moody’s rating categories) with estimated probabilities of default.106 

According to its “Rating Equivalency Scale,” for example, the highest category of Financial 

Health Ratings, 95-100, “Minimal Risk of non-payment and insolvency,” is correlated with an 

 101 See, Fitch, Definitions of Ratings and Other Forms of Opinion, 

http://www.fitchratings.com/web_content/ratings/fitch_ratings_definitions_and_scales.pdf.

102 See Fitch letter.

103 See Moody’s letter.

104 Id.

105 See Rapid Ratings, Financial Health Ratings, http://www.rapidratings.com/page.php?35.

106 See Rapid Ratings, Sample Financial Health Ratings: Ford Motor Co. (2011), 

http://www.rapidratings.com/images/custom/ford_motor_co,_11_07_2011.fhr.pdf. According to its tables, 

the estimated probabilities of default “for each rating notch represent a seventeen year average (1991-2007) 

and may be adjusted by Rapid Ratings customers to reflect temporal assumptions.” Rapid Ratings states 

that “While we are confident that there is a reasonable degree of accuracy across the rating levels that we 

have aligned, the approach is not scientific and it could be argued that there are other similar or proximate 

alignments that might also be acceptable.”
31

estimated probability of default of .0006%, an S&P rating of AAA, and a Moody’s rating of Aaa. 

Its eighth highest category, 60-64, “Moderate Risk that can worsen with market conditions,” is 

correlated with a .42% estimated probability of default, an S&P rating of BB+, and a Moody’s 

rating of Ba1. Rapid Ratings uses a “proprietary quantitative system” to produce its ratings.107 

In contrast to the approach used by Rapid Ratings, NRSROs generally use qualitative, as 

well as quantitative, analysis to derive their credit ratings, though the balance between the two

can vary widely among NRSROs and among different classes of credit ratings within an 

NRSRO. As explained by S&P, analysts may consider qualitative factors because quantitative 

factors may not capture all risks.

108

For example, S&P states that when it assigns ratings on corporate entities, the 

quantitative side of the analysis focuses primarily on financial analysis and may include an 

evaluation of an obligor’s accounting principles and practices, as well as key financial indicators 

such as profitability, leverage, cash flow adequacy, liquidity, and financial flexibility; while on 

the qualitative side, the analytical focus includes country risk, industry characteristics, and 

entity-specific factors and also reflects S&P’s meetings with corporate management, operating 

and financial plans, management policies, and other credit factors that have an impact on the 

rating.109

DBRS states that in forming an opinion of a corporation’s credit risks, a DBRS analyst 

will prepare a business risk profile and a financial risk profile.110 The business risk profile 

 107 See Rapid Ratings, http://www.rapidratings.com/page.php?23.

108 See, e.g., S&P, Principles of Credit Ratings (Feb.16, 2011).

109 See S&P, 2008 Corporate Criteria: Our Rating Process (Apr. 16, 2008).

110 See DBRS, General Rating Methodology for Non-Financial Companies (Nov. 2008), 

http://www.dbrs.com/research/224480/general-rating-methodology-for-non-financial-companiesarchived.pdf.
32

includes a qualitative analysis of the effectiveness of the firm’s management team, the 

competitive environment of its industry, the regulatory environment, and the effectiveness of the 

firm’s corporate governance. The financial risk profile is a quantitative analysis that focuses on 

earnings, cash flow, and financial flexibility. Moody’s ratings are determined by majority vote 

in rating committees, and Moody’s states that its ratings ultimately are subjective opinions of the 

members of the committee.111

2. Discussion

The Mortgage Insurance Companies of America commented that credit rating 

agencies should be required to disclose the probabilities of default and losses given default 

“on which ratings are based under the stress scenarios used to determine creditworthiness 

ratings.”112 

Further, one observer has suggested that for regulatory purposes, NRSRO ratings 

should link letter grades to specific estimates of the probability of default and expected loss 

given default.113 The author believes that regulators should require that all credit rating 

agencies wishing to qualify as NRSROs submit ratings for regulatory purposes that link letter 

grades to specific numerical estimates of the probability of default and the expected loss 

given default. He argues that regulators can specify regulatory limits and capital 

requirements that are linked to estimated probabilities of default and losses given default 

(which have concrete meaning), rather than vaguely defined letter grades. He further argues 

 111 See Moody’s letter.

112 See MICA letter.

113 Charles W. Calomiris, The Debasement of Ratings: What’s Wrong and How We Can Fix It, 

http://www0.gsb.columbia.edu/faculty/ccalomiris/RatingAgenciesE21.pdf. 
33

that once ratings are objectified in this way, rating agencies could be held accountable for 

their ratings.114

However, commenters generally were not in favor of requiring a quantitative 

correspondence between credit ratings and a range of default probabilities and loss expectations 

under standardized conditions of economic stress. For example, Morningstar commented that

“although there is a correlation between a rating and the related quantitative modeling results of 

the probability of default, loss given default or other risks . . . that correlation may not be 

constant based on qualitative analysis of other factors.”115

Moody’s commented that “any prescribed, quantitative correspondence between credit 

ratings and a range of default probabilities or expected losses would produce a simplistic 

measure” because “establishing a single quantitative interpretation is difficult.”116 Moreover, 

Moody’s commented that a single-dimensioned definition likely would result in greater ratings 

volatility, which could adversely affect the stability of the financial system.117 

S&P commented that “it is impractical to adopt a quantitative correspondence between 

credit ratings and default probabilities or expected losses” and assessing default probabilities 

conditional on specific scenarios is unrealistic in that it both connotes a false precision and 

marginalizes other dimensions of credit quality.118 S&P argued that other factors, such as 

payment priority, can significantly influence creditworthiness.

119 

 114 Id. at 10-11. 

115 See Morningstar letter.

116 See Moody’s letter.

117 Id.

118 See S&P letter.

119 Id.
34

Among commenters that are not NRSROs, the American Securitization Forum

commented that “the application of different methodologies makes the standardization of 

quantitative correspondence between credit ratings and a range of default probabilities or loss 

expectations difficult, if not impossible.”120

In sum, the staff found that one credit rating agency that is not registered as an 

NRSRO does provide a quantitative correspondence between credit rating categories and 

specified default probabilities. Requiring a quantitative correspondence between credit rating 

categories and a range of default probabilities and loss expectations could lead to greater 

accountability among credit rating agencies. However, NRSROs currently base their ratings 

on a range of qualitative, as well as quantitative, factors. Requiring a quantitative 

correspondence between credit rating categories and specified default probabilities could 

interfere with the methodologies NRSROs use to determine credit ratings by requiring them 

to give less affect to qualitative factors. For the reasons discussed above, the staff 

recommends that the Commission not take any further action at this time with respect to 

requiring a quantitative correspondence between credit ratings and a range of default 

probabilities and loss expectations under standardized conditions of economic stress.

121

D. Is it feasible or desirable to standardize credit rating terminology across 

asset classes so that named ratings correspond to a standard range of default 

probabilities and expected losses independent of asset class and issuing 

entity?

1. Background

NRSROs have stated that their credit ratings are, over time, generally comparable across 

asset classes. S&P, for example, commented that it “strives to make its rating symbols reflect a 

 120 See ASF letter.

121 See Pub. L. 111-203 § 939(h)(1). 
35

broadly comparable view of creditworthiness wherever they appear . . . maximizing 

comparability makes [S&P]’s ratings more useful to investors” so that when S&P “assigns a 

given rating symbol to multiple issuers, it intends to connote roughly the same opinion of 

creditworthiness, irrespective of whether the issuers are a Canadian mining company, a Japanese 

financial institution, an Illinois school district, a British mortgage-backed security, or a sovereign 

nation.”122 Similarly, Morningstar commented that “it is both feasible and desirable to have a 

single rating scale for structured finance products, corporate debt securities and municipal 

bonds.”123 The Commercial Real Estate Finance Council commented that “[a]s investors 

presently understand credit ratings, a [credit rating agency’s] particular rating is comparable 

across asset classes because the underlying assessment is the same regardless of asset class—that 

is, the likelihood that the bond obligations will be repaid in accordance with their terms.”124

However, the authors of a 2011 study state that for credit ratings issued between 1980 

and 2010, credit ratings have not historically been comparable across asset classes and that 

“relative to traditional corporate bond ratings [for industrials and transportation firms], municipal 

and sovereign issuers have been rated more harshly and structured products have been rated 

more generously.”125 The authors state that their results do not necessarily imply that ratings 

should be (or even could be) standardized across asset classes. However, they believe the results 

imply that reliance on ratings without standardization likely results in over-allocation of 

regulated funds in higher risk assets with under-allocation to less risky assets such as municipal 

bonds. The authors also noted that in their sample, “corporates rated AAA defaulted more 

 122 See S&P letter.

123 See Morningstar letter.

124 See CREFC letter (footnote omitted).

125 See Jess Cornaggia, Kimberly J. Cornaggia, & John Hund, Credit Ratings across Asset Classes: A≡A?

(2011), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1909091.
36

frequently than municipal bonds with a single A rating.”126 Another commentator stated that as 

of December 2005, one large credit rating agency published data showing that the five-year 

probability of default for Baa-rated collateralized debt obligation tranches had a 20% five-year 

probability of default, while Baa-rated corporate debt had a 2% five-year probability of 

default.127 

2. Discussion

Although they felt that such standardization was desirable, NRSROs generally were 

opposed to mandating the standardization of credit ratings across asset classes. S&P, for 

example, commented that “[w]hile each credit rating agency should pursue such comparability

[across asset classes] in our view, we do not believe that mandating standardized ratings 

terminology across rating agencies furthers this goal . . . such standardization is not desirable and 

ultimately would reduce the usefulness of credit information provided to the market by rating 

agencies.”128

Realpoint commented that although “it is both feasible and desirable to have a single 

rating scale for structured finance products, corporate debt securities and municipal bonds,” with 

appropriate levels of disclosure of rating procedures so that investors can better understand the 

ratings and compare ratings of assets of different asset classes, “standardization is not the 

answer.”129

 126 Id.

127 See Charles W. Calomiris, The Debasement of Ratings: What’s Wrong and How We Can Fix It, at 4. See

also Regulation no. 1060/2009 of the European Parliament and the Council of 16 September 2009 on credit 

rating agencies, Article 10.3 (requiring credit rating agencies located in the European Union to ensure that 

rating categories that are attributed to structured finance instruments are clearly differentiated using an 

additional symbol that distinguishes them from rating categories used for any other entities, financial 

instruments or financial obligations). 

128 See S&P letter.

129 See Realpoint letter.
37

According to Fitch, “differences among sectors and structures make it impractical to 

aspire to achieve comparability on [loss given default] within all its long-term ratings” and 

“long-term ratings in different sectors and regions have and will demonstrate varying levels of 

transition, default, and recovery, depending on the historical period considered or the impact of 

systemic or idiosyncratic factors on a given rated entity.”130

Commenters that are not NRSROs generally did not support mandated standardization 

across asset classes. The American Securitization Forum commented that requiring credit rating 

agencies “to apply a singular risk analysis to different asset classes may ignore or downplay 

asset-specific credit risks and may compromise the quality and accuracy of credit ratings

applicable to an asset class.”131

Multiple-Markets commented that standardizing credit rating terminology across asset 

classes “might be difficult to do immediately since there may not be enough ratings history for 

every class of securities.”132 Multiple-Markets also commented that any “cross asset 

standardization should be done by each NRSRO. It would be difficult to impose this by rule 

from the Commission.”133 Finally, Multiple-Markets commented that because underwriters and 

issuers are continually developing new structures for fixed income securities, “it would be hard 

to fix and standardize the credit rating process.”134 

The Mortgage Insurance Companies of America commented that there should be separate 

ratings for traditional mortgage-backed securities and structured finance instruments as “[f]ailure

to differentiate ratings for structured finance would repeat past history, in which certain 

 130 See Fitch, Ratings Comparability (Jun. 21, 2010).

131 See ASF letter.

132 See M-M letter.

133 Id.

134 Id.
38

structured instruments were represented as largely consisting of a single asset class or risk 

bucket, but in fact resulted in very different risk.”135

In sum, although most NRSROs appear to believe that it is desirable for a credit rating 

agency to have a standardized credit rating terminology that applies across at least some asset 

classes, the staff found that credit ratings historically have not been comparable across asset 

classes and it may not be feasible to attain this comparability. Consequently, the staff 

recommends that the Commission not take any further action at this time with respect to 

standardizing credit rating terminology across asset classes, so that named ratings correspond to 

a standard range of default probabilities and expected losses independent of asset class and 

issuing entity.136

 Further, it is important that users of credit ratings understand the limits to 

achieving comparability and that there are potential ways to assess whether the credit ratings of a 

particular credit rating agency are comparable across asset classes. For example, one potential 

way to assess comparability is to review the performance statistics of credit rating agencies. 

NRSROs are required to publish performance statistics for each class of credit rating for which 

they are registered with the Commission.136 As discussed in more detail below, the Commission 

has taken steps to enhance this disclosure requirement to make the disclosures more comparable 

across NRSROs.137

V. Alternatives to standardized approaches

One alternative to requiring standardization of rating symbols and definitions is for 

NRSROs to publish a mapping of their ratings to a standardized scale while also maintaining 

 135 See MICA letter.

136 See Pub. L. 111-203 § 939(h)(1). 

136 See Exhibit 1 to Form NRSRO.

137 See May 2011 Proposing Release, 76 FR 33433-33452.
39

their own rating scales. For example, Multiple-Markets believes that it is “desirable and often 

feasible to map the alphanumeric scales of most NRSROs to a standardized symbol set.”138

Commenters identified transparency as another alternative to standardization. Moody’s, 

for example, commented that transparency can help users of credit ratings to evaluate the 

performance of credit rating agencies and to determine whether a particular rating system or 

opinion is useful to their credit analysis, as well as to foster “competition based on quality in the 

[credit rating agency] industry without intruding upon the independence of [credit rating agency] 

decisions.”139 The Institutional Money Market Funds Association commented that “[w]here 

differences exist in the rating process, the criteria considered or the quantitative definition of the 

rating, greater benefit can be provided to the market and the users of ratings via further 

enhancements to the transparency and clarity of the rating process.”140 The Mortgage Bankers 

Association suggested that the Commission “compile and place in a publicly available website, a 

document that contains a side by side listing of NRSRO rating definitions and economic and 

market stress conditions in their ratings models [so that investors could] identify the NRSRO

whose methodology and approach was most appropriate.”141 The Commercial Real Estate 

Finance Council commented that “a more productive approach is to support initiatives designed 

to ensure that investors have the information they need to make informed investment 

decisions.”142 Similarly, the American Securitization Forum commented that “measures . . . that 

 138 See M-M letter.

139 See Moody’s letter.

140 See IMMFA letter.

141 See MBA letter.

142 See CREFC letter.
40

foster transparency of methodology used to derive credit ratings for ABS [asset-backed 

securities] will . . . better serve investors.”143

The Commission has recently proposed requiring that NRSROs provide enhanced public 

disclosure regarding their credit ratings, the performance of their credit ratings, and the 

methodologies they use to determine credit ratings. Many of these proposals were mandated by 

the Dodd-Frank Act. In particular, section 932(a)(8) of the Dodd-Frank Act added sections 

15E(q), (r), and (s) to the Exchange Act.

144 These sections of the Exchange Act contain 

provisions designed to enhance transparency in the credit rating industry.145 Under section 

15E(q), the Commission must issue rules requiring an NRSRO to make clear, informative public 

disclosure of certain information on its initial credit ratings and any subsequent changes to the 

credit ratings, for the purpose of allowing users of credit ratings to evaluate the accuracy of 

ratings and compare the performance of ratings by different NRSROs.146 

In substantial part in response to this mandate, the Commission has proposed

significantly enhancing the requirements for generating and disclosing this information by 

amending the instructions for Exhibit 1 to Form NRSRO and amending Rule 17g-1, Rule 17g-2, 

and Rule 17g-7.147 Currently, the Commission’s rules require NRSROs to publish two types of 

information about the performance of their credit ratings: (1) performance statistics;

148 and (2) 

 143 See ASF letter.

144 See Pub. L. 111-203 § 932(a)(8).

145 15 U.S.C. 78o-7(q), (r), and (s).

146 See 15 U.S.C. 78o-7(q).

147 See May 2011 Proposing Release, 76 FR 33433-33452.

148 See the instructions for Exhibit 1 to Form NRSRO. This type of disclosure shows the performance of an 

NRSRO’s credit ratings in the aggregate. Performance statistics consist of the percent of rated obligors, 

securities, and money market instruments in each category of credit rating in the NRSRO’s rating scale 

that, over a given time period, were downgraded or upgraded to another credit rating category or went into 

default. The goal is to provide a mechanism for users of credit ratings to compare the performance of 

credit ratings across NRSROs.
41

ratings histories.149 The Commission has proposed to amend the instructions for Exhibit 1 to 

standardize the production and presentation of transition and default performance statistics, 

which would prescribe a standard definition of “default” for purposes of the credit rating 

performance measurement statistics that applicants for registration as NRSROs and NRSROs 

must disclose in Exhibit 1.

150 In addition, the Commission is proposing to add new paragraph 

(b) to Rule 17g-7, which would broaden the scope of credit ratings subject to the public 

disclosure requirements and would increase the scope of information that must be disclosed 

about a rating action.151

Section 15E(r), among other things, requires the Commission to issue rules requiring an 

NRSRO to have procedures to notify users of credit ratings of the version of a procedure or 

methodology used with respect to a particular credit rating, when a material change is made to a 

procedure or methodology, when a significant error is identified in a procedure or methodology 

that may result in credit rating actions, and of the likelihood of a material change resulting in a 

change in current credit ratings.152 To implement section 15E(r), the Commission has proposed

paragraph (a) of new Rule 17g-8, which would, among other things, require an NRSRO to have 

 149 See 17 CFR 240.17g-2(d). This type of disclosure consists of the credit rating history of an obligor, 

security, or money market instrument rated by an NRSRO. A credit rating history includes the initial credit 

rating and all subsequent modifications to the credit rating (such as upgrades, downgrades, and placements 

on watch) and the dates of such actions. The goal is to allow users of credit ratings to compare how 

different NRSROs rated an individual obligor, security, or money market instrument and how and when 

those ratings were changed over time. The disclosure of ratings histories also is designed to provide “raw 

data” that can be used by third parties to generate independent performance statistics such as transition and 

default rates.

150 See May 2011 Proposing Release, 76 FR 33433-33445. Under the proposed definition, an obligor, 

security, or money market instrument would have to be classified as having gone into default if either or 

both of the following conditions are met: (1) The obligor failed to timely pay principal or interest due 

according to the terms of an obligation during the applicable period or the issuer of the security or money 

market instrument failed to timely pay principal or interest due according to the terms of the security or 

money market instrument during the applicable period; or (2) The applicant or NRSRO classified the 

obligor, security, or money market instrument as having gone into default using its own definition of 

“default” during the applicable period.

151 See May 2011 Proposing Release, 76 FR 33446-33451.

152 See 15 U.S.C. 78o-7(r).
42

policies and procedures with respect to the procedures and methodologies the NRSRO uses to 

determine credit ratings that are reasonably designed to ensure that the NRSRO promptly 

publishes on an easily accessible portion of its website material changes to the procedures and 

methodologies, the reason for the changes, and the likelihood the changes will result in changes 

to any current ratings and significant errors identified in a procedure or methodology that may 

result in a change in current credit ratings; and that it discloses the version of a credit rating 

procedure or methodology, used with respect to a particular credit rating.153 

Section 15E(s), among other things, requires the Commission to issue rules requiring an 

NRSRO to accompany the publication of each credit rating with a form that discloses

information relating to the credit rating that is easy to use and helpful for users of credit ratings 

to understand the information contained in the report and is comparable across types of 

securities.

154 The form must contain specific types of qualitative and quantitative information.155 

In response, the Commission has proposed adding new paragraph (a) to Rule 17g-7, which 

would require an NRSRO when taking a rating action to publish a form containing information 

about the credit rating resulting from or subject to the rating action and any certification of a 

provider of third-party due diligence services received by the NRSRO that relates to the credit 

rating.156

Finally, section 938(a) of the Dodd-Frank Act provides that the Commission shall 

require, by rule, each NRSRO to establish, maintain, and enforce written policies and procedures 

that: (1) assess the probability that an issuer of a security or money market instrument will 

 153 See May 2011 Proposing Release, 76 FR 33452-33455.

154 See 15 U.S.C. 78o-7(s).

155 Id.

156 See May 2011 Proposing Release, 76 FR 33456-33457.
43

default, fail to make timely payments, or otherwise not make payments to investors in 

accordance with the terms of the security or money market instrument; (2) clearly define and 

disclose the meaning of any symbol used by the NRSRO to denote a credit rating; and (3) apply 

any symbol described in item (2) in a manner that is consistent for all types of securities and 

money market instruments for which the symbol is used.157 Section 938(b) of the Dodd-Frank 

Act provides that nothing in section 938 shall prohibit an NRSRO from using distinct sets of 

symbols to denote credit ratings for different types of securities or money market instruments.158 

The Commission has proposed implementing section 938(a) of the Dodd-Frank Act by proposing 

paragraph (b) of new Rule 17g-8.

159 

The staff believes that increasing transparency is more feasible and desirable than 

implementing the standardization that is the subject of this study. In this regard, the rulemaking 

initiatives described above in response to the Dodd-Frank Act are designed to increase 

transparency with respect to the performance of credit ratings and the methodologies used to 

determine credit ratings. Consequently, the staff believes that it is appropriate to focus the 

Commission’s efforts and resources on these rulemaking initiatives under the Dodd-Frank Act, 

rather than pursuing the standardization items identified in section 939(h)(1) of the Dodd-Frank 

Act. 

VI. Conclusion 

Commenters, including NRSROs and other market participants, raised serious concerns 

about the feasibility and desirability of the standardization that is the subject of this study and, in 

 157 See Pub. L. 111-203 § 938(a).

158 See Pub. L. 111-203 § 938(b).

159 See May 2011 Proposing Release, 76 FR 33480-81.
44

particular, most did not feel that such standardization would lead to higher levels of 

accountability, transparency, and competition in the credit rating agency industry. Even if such 

a regime were feasible and desirable, however, commenters questioned whether the Commission 

would have the authority to implement it.

For all the reasons discussed above, the staff recommends that the Commission not take 

any further action at this time with respect to: (1) standardizing credit rating terminology, so that 

all credit rating agencies issue credit ratings using identical terms; (2) standardizing the market 

stress conditions under which ratings are evaluated; (3) requiring a quantitative correspondence 

between credit ratings and a range of default probabilities and loss expectations under 

standardized conditions of economic stress; and (4) standardizing credit rating terminology 

across asset classes, so that named ratings correspond to a standard range of default probabilities 

and expected losses independent of asset class and issuing entity.160 In addition, given the 

difficulties commenters identified with respect to implementing the standardization that is the 

subject of the study, the staff believes it would be more efficient to focus on the rulemaking 

initiatives mandated under the Dodd-Frank Act, which, among other things, are designed to 

promote transparency with respect to the performance of credit ratings and the methodologies 

used to determine credit ratings.

 160 See Pub. L. 111-203 § 939(h)(1). 
45

Appendix A – NRSRO Long-term Rating Category Definitions.

Source: Exhibit 1 to Form NRSRO

A.M. Best

A.M. Best’s long-term rating scale for insurance company issuer credit ratings (A.M. Best has 

another scale for non-insurance company ratings) is an independent opinion of an issuer/entity’s 

ability to meet its ongoing senior financial obligations. Ratings from "aa" to "ccc" may be 

enhanced with a "+" (plus) or "-" (minus) to indicate whether credit quality is near the top or 

bottom of a category.

aaa Exceptional - Assigned to an issuer where, in our opinion, the issuer has 

an exceptional ability to meet the terms of its obligations.

aa Superior - Assigned to an issuer where, in our opinion, the issuer has a 

superior ability to meet the terms of its obligations.

a Excellent - Assigned to an issuer where, in our opinion, the issuer has an 

excellent ability to meet the terms of its obligations.

bbb Good - Assigned to an issuer where, in our opinion, the issuer has a good 

ability to meet the terms of its obligations; however, the issuer is more 

susceptible to changes in economic or other conditions.

bb Fair - Assigned to an issuer where, in our opinion, the issuer has fair credit 

characteristics, generally due to a moderate margin of principal and 

interest payment protection and vulnerability to economic changes.

b Marginal - Assigned to an issuer where, in our opinion, the issuer has 

marginal credit characteristics, generally due to a modest margin of 

principal and interest payment protection and extreme vulnerability to 

economic changes.

ccc, cc Weak - Assigned to an issuer where, in our opinion, the issuer has weak 

credit characteristics, generally due to a minimal margin of principal and 

interest payment protection and/or limited ability to withstand adverse 

changes in economic or other conditions.

C Poor - Assigned to an issuer where, in our opinion, the issuer has poor 

credit characteristics, generally due to a minimal margin of principal and 
46

interest payment protection and/or limited ability to withstand adverse 

changes in economic or other conditions.

rs (used for the long term issuer credit ratings scale only) 

Regulatory Supervision/Liquidation - Assigned to an issuer where, in our 

opinion, the issuer has been placed under a significant form of regulatory 

supervision, control or restraint - including cease and desist orders, 

conservatorship or rehabilitation, but not liquidation - that prevents 

conduct of normal, ongoing insurance operations.

D (used in the corporate and the ABS scales) 

Assigned to issues in default on payment of principal, interest or other 

terms and conditions, or when a bankruptcy petition or similar action has 

been filed.

DBRS

The DBRS long-term rating scale provides an opinion on the risk that an issuer will fail to satisfy 

its financial obligations in accordance with the terms under which an obligation has been issued. 

All rating categories other than AAA and D also contain subcategories “(high)” and “(low)”. The 

absence of either a “(high)” or “(low)” designation indicates the rating is in the middle of the 

category.

AAA Highest credit quality. The capacity for the payment of financial 

obligations is exceptionally high and unlikely to be adversely affected by 

future events.

AA Superior credit quality. The capacity for the payment of financial 

obligations is considered high. Credit quality differs from AAA only to a 

small degree. Unlikely to be significantly vulnerable to future events.

A Good credit quality. The capacity for the payment of financial obligations 

is substantial, but of lesser credit quality than AA. May be vulnerable to 

future events, but qualifying negative factors are considered manageable.

BBB Adequate credit quality. The capacity for the payment of financial 

obligations is considered acceptable. May be vulnerable to future events.
47

BB Speculative, non investment-grade credit quality. The capacity for the 

payment of financial obligations is uncertain. Vulnerable to future events.

B Highly speculative credit quality. There is a high level of uncertainty as to 

the capacity to meet financial obligations.

CCC / CC / C Very highly speculative credit quality. In danger of defaulting on financial 

obligations. There is little difference between these three categories, 

although CC and C ratings are normally applied to obligations that are 

seen as highly likely to default, or subordinated to obligations rated in the 

CCC to B range. Obligations in respect of which default has not 

technically taken place but is considered inevitable may be rated in the C 

category.

D A financial obligation has not been met or it is clear that a financial 

obligation will not be met in the near future or a debt instrument has been 

subject to a distressed exchange. A downgrade to D may not immediately 

follow an insolvency or restructuring filing as grace periods or extenuating 

circumstances may exist.

EJR

An Egan Jones’s credit rating is a current opinion of the creditworthiness of an obligor. Egan 

Jones bases its long term ratings on the following factors: 

1. Likelihood of payment – capacity and willingness of the obligor to meet its financial 

commitment in accordance with the terms of the obligation. 

2. Nature and provisions of the obligation.

3. Protection afforded by, and relative position of, the obligation in the event of the 

bankruptcy, reorganization, or other arrangements under the laws of the bankruptcy and 

other laws affecting creditors.

The credit rating definitions are expressed in terms of default risk. Ratings from “AA” to “CCC” 

may be modified with a plus (“+”) or minus (“-“) sign to show relative standing within the rating 

category.
48

AAA An obligation rated “AAA” has the highest rating assigned by Egan 

Jones. The obligor’s capacity to meet its financial commitment on the 

obligation is extremely strong. 

AA An obligor rated “AA” differs from the highest rated obligations only by a 

small degree. The obligor’s capacity to meet its financial commitment on 

the obligation is very strong. 

A An obligation rated “A” is somewhat more susceptible to the adverse 

affects of changes in the circumstances and economic conditions than 

obligations in higher rated categories. However, the obligor’s capacity to 

meet its financial commitment is still strong. 

BBB An obligation rated “BBB” exhibits adequate protection parameters. 

However, adverse economic conditions or changing circumstances are 

more likely to lead to a weakened capacity of the obligor to meet its 

financial commitment on the obligation.

BB An obligation rated “BB” is less vulnerable to non-payment than other 

speculative issues. However, it faces major ongoing uncertainties or 

exposure to adverse business, financial, or economic conditions that could 

lead to the obligor’s inadequate capacity to meet its financial commitment. 

B An obligation rated “B” is more vulnerable to non-payment than 

obligations rated “BB” but the obligor currently has the capacity to meet 

its financial commitment on the obligation. In the event of adverse 

business, financial, or economic conditions, the obligor is not likely to 

have the capacity to meet its financial commitment on the obligation.

CCC An obligation rated “CCC” is currently vulnerable to non-payment and is 

dependent upon favorable business, financial, and economic conditions for 

the obligor to meet its financial commitment on the obligation. 

CC An obligation rated “CC” is currently highly vulnerable to nonpayment. 

C A subordinate debt or preferred stock obligation rated “C” is currently 

highly vulnerable to nonpayment. A “C” rating may be used to cover a 
49

situation where a bankruptcy petition has been filed or similar action 

taken, but payments in this obligation are being continued. 

D An obligation rated “D” is in payment default. The “D” rating category is 

used when payments on an obligation are not made on the date due even if 

the applicable grace period has not expired, unless Egan Jones believes 

such payments will be made during such grace period. The “D” rating will 

also be used upon the filing of a bankruptcy petition or the taking of 

similar actions. 

Fitch

Ratings of individual securities or financial obligations of a corporate issuer address relative 

vulnerability to default on an ordinal scale. In addition, for financial obligations in corporate 

finance, a measure of recovery given default on that liability is also included in the rating 

assessment. The modifiers “+” or “-” may be appended to a rating to denote relative status 

within major rating categories. Such suffixes are not added to the ‘AAA’ obligation rating 

category, or to corporate finance obligation ratings in the categories below ‘B’.

AAA Highest credit quality - ‘AAA’ ratings denote the lowest expectation of 

credit risk. They are assigned only in cases of exceptionally strong 

capacity for payment of financial commitments. This capacity is highly 

unlikely to be adversely affected by foreseeable events.

AA Very high credit quality - ‘AA’ ratings denote expectations of very low 

credit risk. They indicate very strong capacity for payment of financial 

commitments. This capacity is not significantly vulnerable to foreseeable 

events.

A High credit quality - ‘A’ ratings denote expectations of low credit risk. 

The capacity for payment of financial commitments is considered strong. 

This capacity may, nevertheless, be more vulnerable to adverse business 

or economic conditions than is the case for higher ratings.

BBB Good credit quality - ‘BBB’ ratings indicate that expectations of credit 

risk are currently low. The capacity for payment of financial commitments 
50

is considered adequate but adverse business or economic conditions are 

more likely to impair this capacity.

BB Speculative - ‘BB’ ratings indicate an elevated vulnerability to credit risk, 

particularly in the event of adverse changes in business or economic 

conditions over time; however, business or financial alternatives may be 

available to allow financial commitments to be met.

B Highly speculative - ‘B’ ratings indicate that material credit risk is present.

CCC Substantial credit risk - ‘CCC’ ratings indicate that substantial credit risk 

is present.

CC Very high levels of credit risk - ‘CC’ ratings indicate very high levels of 

credit risk.

C Exceptionally high levels of credit risk - ‘C’ indicates exceptionally high 

levels of credit risk.

Defaulted obligations typically are not assigned ‘D’ ratings, but are instead rated in the ‘B’ to ‘C’ 

rating categories, depending upon their recovery prospects and other relevant characteristics. 

This approach better aligns obligations that have comparable overall expected loss but varying 

vulnerability to default and loss. 

JCR

JCR's long-term ratings are gradings that enable comparisons to be made of obligors' capacity to 

honor the financial commitments on obligations of more than one year as contracted. A plus (+) 

or minus (-) sign may be added to the rating symbols from ‘AA’ to ‘B’, to indicate relative 

standing within each of those rating categories.

AAA The highest level of capacity of the obligor to honor its financial 

commitment on the obligation.

AA A very high level of capacity to honor the financial commitment on the 

obligation.

A A high level of capacity to honor the financial commitment on the 

obligation.
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BBB An adequate level of capacity to honor the financial commitment on the 

obligation. However, this capacity is more likely to diminish in the future 

than in the cases of the higher rating categories.

BB Although the level of capacity to honor the financial commitment on the 

obligation is not considered problematic at present, this capacity may not 

persist in the future.

B A low level of capacity to honor the financial commitment on the 

obligation, having cause for concern.

CCC There are factors of uncertainty that the financial commitment on the 

obligation will be honored, and a possibility of default.

CC A high default risk.

C A very high default risk.

D In default.

KBRA

Kroll Bond Rating Agency assigns credit ratings to issuers and their obligations using the same 

rating scale. In either case, KBRA’s credit ratings are intended to reflect both the probability of 

default and severity of loss in the event of default, with greater emphasis on probability of 

default at higher rating categories. For obligations, the determination of expected loss severity is, 

among other things, a function of the seniority of the claim. Generally speaking, issuer-level 

ratings assume a loss severity consistent with a senior unsecured claim. KBRA appends an (sf) 

indicator to ratings on structured finance obligations. KBRA may append + or – modifiers to 

ratings in categories AA through CCC to indicate, respectively, upper and lower risk levels 

within the broader category.

AAA Determined to have almost no risk of loss due to credit-related events. 

Assigned only to the very highest quality obligors and obligations able to 

survive extremely challenging economic events. 

AA Determined to have minimal risk of loss due to credit-related events. Such 

obligors and obligations are deemed very high quality. 
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A Determined to be of high quality with a small risk of loss due to creditrelated events. Issuers and obligations in this category are expected to 

weather difficult times with low credit losses. 

BBB Determined to be of medium quality with some risk of loss due to creditrelated events. Such issuers and obligations may experience credit losses 

during stress environments.

BB Determined to be of low quality with moderate risk of loss due to creditrelated events. Such issuers and obligations have fundamental weaknesses 

that create moderate credit risk.

B Determined to be of very low quality with high risk of loss due to creditrelated events. These issuers and obligations contain many fundamental 

shortcomings that create significant credit risk.

CCC Determined to be at substantial risk of loss due to credit-related events, or 

currently in default with high recovery expectations. 

CC Determined to be near default or in default with average recovery 

expectations. 

C Determined to be near default or in default with low recovery 

expectations. 

D In default. 

Moody’s

Moody’s long-term ratings are opinions of the relative credit risk of financial obligations with an 

original maturity of one year or more. They address the possibility that a financial obligation will 

not be honored as promised. Such ratings use Moody’s Global Scale and reflect both the 

likelihood of default and any financial loss suffered in the event of default. Moody’s appends 

numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The 

modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the 
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modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end 

of that generic rating category.

Aaa Obligations rated Aaa are judged to be of the highest quality, with 

minimal credit risk. 

Aa Obligations rated Aa are judged to be of high quality and are subject to 

very low credit risk. 

A Obligations rated A are considered upper-medium grade and are subject to 

low credit risk. 

Baa Obligations rated Baa are subject to moderate credit risk. They are 

considered medium grade and as such may possess certain speculative 

characteristics. 

Ba Obligations rated Ba are judged to have speculative elements and are 

subject to substantial credit risk. 

B Obligations rated B are considered speculative and are subject to high 

credit risk. 

Caa Obligations rated Caa are judged to be of poor standing and are subject to 

very high credit risk. 

Ca Obligations rated Ca are highly speculative and are likely in, or very near, 

default, with some prospect of recovery of principal and interest. 

C Obligations rated C are the lowest rated class and are typically in default, 

with little prospect for recovery of principal or interest. 

Morningstar

A Morningstar letter-grade credit rating is only an opinion on the ability of the collateral to

support timely interest payments and to repay principal by the rated final distribution date 

according to the terms of the transaction and subject to the various qualifications, caveats and 

considerations enumerated in the respective ratings letters, pre-sale report, deal report and/or 

Morningstar’s website. Morningstar also provides finer gradations of the ratings ranging from 

‘AA’ to ‘CCC’ by adding a plus or minus sign to indicate relative strength within the rating 

categories
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AAA A rating of ‘AAA’ is the highest letter-grade rating assigned by 

Morningstar.

Securities rated ‘AAA’ have an extremely strong ability to make timely 

interest payments and ultimate principal payments on or prior to a rated 

final distribution date.

AA A rating of ‘AA’ indicates the securities have a very strong ability to make 

timely interest and ultimate principal payments on or prior to a rated final 

distribution date.

A A rating of ‘A’ indicates the securities have a strong ability to make timely 

interest and ultimate principal payments on or prior to a rated final 

distribution date, but that ability could be influenced by adverse changes 

in circumstances or conditions, such as adverse business or economic 

conditions.

BBB A rating of ‘BBB’ indicates the securities should be able to meet their 

obligation to make timely payments of interest and ultimate payment of 

principal on or prior to a rated final distribution date, but that ability could 

be impacted by adverse changes in circumstances or conditions, such as 

adverse business or economic conditions.

BB A rating of ‘BB’ indicates the securities should be able to meet their 

obligation to make timely payments of interest and ultimate payment of 

principal on or prior to a rated final distribution date in the absence of 

various adverse circumstances or conditions such as adverse business or 

economic conditions. The vulnerability of securities rated ‘BB’ to the 

previously mentioned conditions is greater than higher rated securities.

B A rating of ‘B’ indicates a default has not yet occurred but the securities 

are vulnerable to a challenging or changes in environment, conditions or 

circumstances. Securities rated ‘B’ are more vulnerable to nonpayment of 

timely interest and ultimate payment of principal on or prior to a rated 

final distribution date than higher rated securities.
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CCC A rating of ‘CCC’ indicates a material likelihood of default in the long 

term (generally, twenty-four months or longer). Forecasted or actual losses 

may erode, but have not yet eliminated, credit support provided by 

subordinate securities.

CC and C Beginning in 2009, no ratings are issued by Morningstar in the ‘CC’ or ‘C’ 

category.

D A rating of ‘D’ indicates a default has occurred or there is a substantial 

likelihood of default in the short term (generally, within twenty-four 

months). Forecasted losses are expected to reduce and/or actual losses 

have reduced the principal balance of the ‘D’ rated security. 

N.R. (non-rated) A ‘N.R.’ designation is issued by Morningstar for situations where 

Morningstar (i) is not rating the security and (ii) in accordance with 

Morningstar policies and procedures, determines to expressly provide a 

N.R. designation.

S&P

A Standard & Poor's issuer credit rating is a forward-looking opinion about an obligor's overall 

financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on 

the obligor's capacity and willingness to meet its financial commitments as they come due. The 

ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign to 

show relative standing within the major rating categories.

AAA An obligor rated 'AAA' has extremely strong capacity to meet its financial 

commitments. 'AAA' is the highest issuer credit rating assigned by 

Standard & Poor's.

AA An obligor rated 'AA' has very strong capacity to meet its financial 

commitments. It differs from the highest-rated obligors only to a small 

degree.

A An obligor rated 'A' has strong capacity to meet its financial commitments 

but is somewhat more susceptible to the adverse effects of changes in 
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circumstances and economic conditions than obligors in higher-rated 

categories.

BBB An obligor rated 'BBB' has adequate capacity to meet its financial 

commitments. However, adverse economic conditions or changing 

circumstances are more likely to lead to a weakened capacity of the 

obligor to meet its financial commitments.

BB, B, CCC, and CC Obligors rated 'BB', 'B', 'CCC', and 'CC' are regarded as having significant 

speculative characteristics. 'BB' indicates the least degree of speculation 

and 'CC' the highest. While such obligors will likely have some quality 

and protective characteristics, these may be outweighed by large 

uncertainties or major exposures to adverse conditions.

BB An obligor rated 'BB' is less vulnerable in the near term than other lowerrated obligors. However, it faces major ongoing uncertainties and 

exposure to adverse business, financial, or economic conditions which 

could lead to the obligor's inadequate capacity to meet its financial 

commitments.

B An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the 

obligor currently has the capacity to meet its financial commitments. 

Adverse business, financial, or economic conditions will likely impair the 

obligor's capacity or willingness to meet its financial commitments.

CCC An obligor rated 'CCC' is currently vulnerable, and is dependent upon 

favorable business, financial, and economic conditions to meet its 

financial commitments.

CC An obligor rated 'CC' is currently highly vulnerable.

R An obligor rated 'R' is under regulatory supervision owing to its financial 

condition. During the pendency of the regulatory supervision the 

regulators may have the power to favor one class of obligations over 

others or pay some obligations and not others. Please see Standard & 

Poor's issue credit ratings for a more detailed description of the effects of 

regulatory supervision on specific issues or classes of obligations.
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SD and D An obligor rated 'SD' (selective default) or 'D' has failed to pay one or

more of its financial obligations (rated or unrated) when it came due. A 'D' 

rating is assigned when Standard & Poor's believes that the default will be 

a general default and that the obligor will fail to pay all or substantially all 

of its obligations as they come due. An 'SD' rating is assigned when 

Standard & Poor's believes that the obligor has selectively defaulted on a 

specific issue or class of obligations, excluding those that qualify as 

regulatory capital, but it will continue to meet its payment obligations on 

other issues or classes of obligations in a timely manner. A selective 

default includes the completion of a distressed exchange offer, whereby 

one or more financial obligation is either repurchased for an amount of 

cash or replaced by other instruments having a total value that is less than 

par.

NR An issuer designated NR is not rated.
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Appendix B—S&P’s Economic Stress Scenarios

Source: S & P’s Internet website at: 

http://www.standardandpoors.com/prot/ratings/articles/en/us/?articleType=HTML&assetID=124

5319385017 

‘AAA’ stress scenario. An issuer or obligation rated 'AAA' should be able to withstand an 

extreme level of stress and still meet its financial obligations. A historical example of such a 

scenario is the Great Depression in the U.S. In that episode, real GDP for the U.S. declined by 

26.5% from 1929 through 1933. U.S. unemployment peaked at 24.9% in 1933 and was above 

20% from 1932 through 1935. U.S. industrial production declined by 47% and home building 

dropped by 80% from 1929 through 1932. The stock market dropped by 85% from September 

1929 to July 1932 (as measured by the Dow Jones Industrial Average). The U.S. experienced 

deflation of roughly 25%. Real GDP did not recover to its 1929 level until 1935. Nominal GDP 

did not recover until 1940. We consider conditions such as these to reflect extreme stress. The 

'AAA' stress scenario envisions a widespread collapse of consumer confidence. The financial 

system suffers major dislocations. Economic decline propagates around the globe.

'AA' stress scenario. An issuer or obligation rated 'AA' should be able to withstand a severe 

level of stress and still meet its financial obligations. Such a scenario could include GDP declines 

of up to 15%, unemployment levels of up to 20%, and stock market declines of up to 70%.

'A' stress scenario. An issuer or obligation rated 'A' should be able to withstand a substantial 

level of stress and still meet its financial obligations. In such a scenario, GDP could decline by as 

much as 6% and unemployment could reach up to 15%. The stock market could drop by up to 

60%.

'BBB' stress scenario. An issuer or obligation rated 'BBB' should be able to withstand a 

moderate level of stress and still meet its financial obligations. A GDP decline of as much as 3% 

and unemployment at 10% would be reflective of a moderate stress scenario. A drop in the stock 

market by up to 50% would similarly indicate moderate stress.

'BB' stress scenario. An issuer or obligation rated 'BB' should be able to withstand a modest 

level of stress and still meet its financial obligations. For example, GDP might decline by as 

much as 1% and unemployment might reach 8%. The stock market could drop by up to 25%.
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'B' stress scenario. An issuer or obligation rated 'B' should be able to withstand a mild level of 

stress and still meet its financial obligations. Scenarios in which GDP is flat or declines by as 

much as 0.5% and unemployment is in the area of 6% or less could be viewed as mild stress 

scenarios. A flat stock market or a drop by up to 10% would be another indicator of such a 

scenario.