Standard & Poor's Corp. on Monday indentified 800 derivative and hybrid securities to which it will attach its new "r" symbol, including $100 million of Citicorp debt.
The advent of a new "r" designation is just one example of the trend toward greater disclosure of derivatives risk to investors in the wake of widely publicized losses on the instruments in the first half of this year.
As Congress and regulators study the need for greater disclosure or regulation, S&P is using the "r" symbol to alert investors to the risk of dramatic fluctuations in returns due to changes in the financial markets against which the derivative instruments are indexed. But S&P officials emphasized that that new symbol does not affect the credit ratings of the issues.
Hedging Role
"We don't mean to imply that we are unduly concerned about the role of options and derivatives," Leo C. O'Neill, president of S&P's ratings group, said at a press conference.
"There is a role for them in hedging risk," he said. "Our paramount goal in establishing the 'r' symbol is to ensure that investors, large and small, understand that our ratings define and illuminate the degree of credit risk but do not speak to other significant risks."
Mr. O'Neill said 24 classes of issues were identified as needing an "r" symbol, representing nearly $25 billion in securities.
"As the market for these securities broadens," he said, "more individual investors will be attracted to the market. Institutional investors know the risks, but individuals don't."
Other Risk Measures
S&P officials said they intend to develop market risk measures that quantify noncredit risk. The ratings agency aims to develop a systematic approach to quantifying market risk for individual securities.
Nearly 600 of the 800 outstanding issues that were assigned the "r" symbol are mortage-backed securities.
The securities include some whose principal or interest is indexed to equities, commodities, or currencies; certain swaps and options; interest-only and principal-only mortgage securities and leveraged inverse floaters that do not move parallel to an index.
Among the issues to receive an "r" are $100 million of Citicorp adjustable cumulative preferred stock, which are rated BBB. Also given the "r" designation were $831.5 million of A-plus-rated Merrill Lynch issues tied to various indexes.
"We are trying to differentiate those securities with significant volatility if held to maturity from those without," said S&P general counsel Joanne Rose.
No Guarantees
The ratings agency also pointed out that the absence of an "r" is not meant to imply that there is no risk involved in the obligation.
S&P does not plan to assign an "r" to an issue that is indexed to a commonly used interest rate such as the London interbank offered rate or the cost of funds index.
Ms. Rose noted that the new notation will be a fluid listing that will depend on market attitudes.
"As instruments get better known in the market and the risks are reflected appropriately in pricing," she said, "we may over time remove 'r's from certain kinds of instruments. As new instruments are created, we may add new categories."
