Standard & Poor's rates counterparty risk with derivatives market in mind.

WASHINGTON -- Standard & Poor's Corp. is providing a counterparty rating service aimed at helping derivatives market participants better measure a company's ability to honor its financial obligations.

The rating agency said it has assigned a counterparty risk rating to 400 global financial institutions, which include banks, broker-dealers, derivative product companies, financial companies, and other financial sector entities.

"We started in the financial services market because that's where we thought it was most needed," said Marilyn Prout, Standard & Poors's director of financial institutions.

In the coming months, the rating agency will expand the list as more institutions are assigned or request counterparty ratings. Prout said Standard & Poor's has developed the criteria to assign counterparty ratings of pension funds.

Meanwhile, the new rating service will provide an overall rating for an institution, rather than a rating for that institution's specific instruments. The new rating product, spurred by the growth of the over-the-counter derivatives market as well as other credit-sensitive transaction markets, would note the general creditworthiness or default probability of a rated company.

"The need for a rating that conveys a company's creditworthiness rather than comments on a specific debt instrument is a requirement for the counterparty market," the rating agency said in a special report.

"In light of that need, S&P has introduced this new rating to allow market participants to measure accurately a company's overall ability to honor its financial obligations, regardless of transaction type," the rating agency said.

The new ratings differ from traditional debt ratings in that they solely reflect credit factors relating to a company's performance and not credit factors related to any specific instrument of that company.

The rating agency said its new rating service will give global financial market participants a rating that provides an independent assessment of creditworthiness, even for a company that does not issue debt in the public or private markets.

In addition to providing a new rating language for the trading markets, the counterparty ratings will also allow active market participants that don't issue debt in the marketplace to be rated.

"The growth of trading activity by pension funds, mutual funds, hedge funds, and others has caused concern among market participants about these entities' creditworthiness," Standard & Poor's said. "These entities can now receive ratings which allow them to convey credit strength to their counterparties."

The process for determining a counterparty rating is similar to that by which a traditional debt rating is determined, the rating agency said.

While the counterparty rating reflects a company's overall ability to pay its obligations, Standard & Poor's said it will continue to rate specific obligations of all types, including derivatives if requested, and issue a rating that addresses the company's obligation to pay the specific obligation.

Meanwhile, Moody's Investors Service said this week it is assigning counterparty ratings to 11 U.S. issuers in the electric utility industry. It said its rating actions are part of an existing program to assess the creditworthiness of U.S. corporations entering into financial and commodity derivatives transactions.

"Over the next several months, Moody's plans to expand its counterparty ratings system to include all U.S. corporates," Moody's said.

In April, Moody's established its counterparty rating service. At that time, the rating agency assigned its rating to about 300 financial institutions.

The agency later assigned ratings to 66 industrial counterparties, and will continue with its plans to assign counterparty ratings to derivatives market participants in all industries, said Nikolas Ivanov, an associate analyst in Moody's counterparty ratings group.

"We're thinking of expanding the counterparty rating to pension funds and mutual funds," Ivanov said.

The rating agency's public finance derivatives group is also considering counterparty ratings for municipal issuers, another Moody's analyst said.

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