The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010 and contains numerous provisions relating to many parts of the financial services industry. Among them, Dodd-Frank included significant new regulation of Nationally Recognized Statistical Ratings Organizations (NRSROs) and mandated the creation of an Office of Credit Ratings as part of the Securities and Exchange Commission. These regulations have added numerous compliance, disclosure, and regulatory requirements for all NRSROs, including Morningstar Credit Ratings.
More recently, six federal agencies finalized a new rule in October 2014 requiring issuers of commercial mortgage-backed securities (CMBS) and other asset-backed securities to retain an economic interest equivalent to at least 5% of the credit risk of the underlying assets. This “risk retention” requirement is scheduled to go into effect on December 24, 2016.
In theory, requiring issuers to retain a portion of the risk of securitized assets should discourage risky lending. However, it would also increase the cost of borrowing and limit issuance volume. We believe that uncertainty related to these regulations has already had a negative effect on CMBS issuance volumes as issuers have been trying to interpret the new rules and figure out how to comply with them.
President-elect Trump’s transition team, including the nominee for Treasury Secretary, has indicated the new administration wants to “strip back” parts of Dodd-Frank. However, while the new administration has made some general statements about Dodd-Frank, it’s too early to tell which changes it might prioritize. At this point, it is unclear if any potential changes to Dodd-Frank might include a reversal of the Dodd-Frank provisions for NRSROs in general or the scheduled risk retention requirements in particular.
In the short term, we don’t expect any significant changes to the Dodd-Frank regulations related to credit ratings. Longer term, a potential unwinding of some regulations related to credit ratings would create a more positive environment for our credit ratings business, but it’s not clear if or when that might happen.