The New York Clearing House Association L.L.C.

July 31, 2003

Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Solicitation of Comments on the Use of Credit Ratings
under the Federal Securities Laws (File No. S7-12-03) 

Dear Mr. Katz:

The New York Clearing House Association L.L.C. ("The Clearing House")1 appreciates the opportunity to respond to Release No. 34-47972 (the "Release"), in which the Securities and Exchange Commission (the "Commission") solicits comments on various issues relating to credit rating agencies. Our comments focus on the first two sets of issues identified by the Commission: (1) whether credit ratings should continue to be used for regulatory purposes under the federal securities laws; and (2) the process for determining which credit rating agencies should be used.

I. Continued Recognition of Credit Rating Agencies.

The Clearing House strongly supports the Commission's continued recognition and designation of nationally recognized statistical rating organizations ("NRSROs") in its rules. As the Commission points out in the Release, its NRSRO designations are used and relied upon by a wide variety of public and private sector organizations. A decision to terminate the Commission's long-standing practice of designating NRSROs would not merely create the inconvenience of requiring these organizations to develop new arrangements. More importantly, it would threaten the reliability and credibility which the Commission's designation provides.

The Clearing House member banks are particularly interested in the resolution of this issue because federal and state banking regulators use rating information from NRSROs as benchmarks to help monitor the eligibility and risk of investments held by banks. As one example, when calculating an aspect of the current risk-based capital requirements, federal banking regulators specifically require banks to utilize the ratings of an entity recognized by the Division of Market Regulation of the Commission as an NRSRO. 2 Federal banking regulators have recognized that the reliance by investors on these ratings exerts market discipline on the NRSROs and gives their ratings market credibility.3 The availability of recognized, independent credit rating agencies is likely to become even more important under Basel II, as rigid risk-based categories are replaced by a capital scheme with greater flexibility. Under this new approach, external credit assessments may be used for a wide variety of loans, securities and derivatives.

II. Process for Designating Additional NRSROs.

A. Formal Process.

We support the establishment of a formal process for designating additional NRSROs. Established standards for NRSRO designation would assist each rating agency in determining whether it could qualify as an NRSRO and in identifying what changes, if any, it must make to achieve NRSRO status. We also respectfully submit that the Commission should render a decision on an NRSRO application within a designated period following receipt of all required information. In our view, these changes would streamline the NRSRO application process.

B. Criteria for Additional Designated Rating Agencies.

The Clearing House believes that the Commission's criteria for designation of additional rating agencies should not be diluted, in terms of performance and expertise, from those applied to the current NRSROs. The current NRSROs provide invaluable service to investors and regulators alike, and credibility attached to the Commission's designations must be preserved.

C. Rating Agencies with Special Expertise.

The Clearing House strongly supports a Commission designation process under which a rating agency could be designated for specific types of products, geographic areas (including foreign countries or groups of foreign countries) or industry sectors. Such designated rating agencies could be referred to as "SRSROs", specialized recognized statistical rating organizations. These more specialized rating agencies could be of particular interest to investors, financial institutions and regulators who value their expertise. As financial markets continue to evolve, reliance on rating agencies that focus on specialized instruments or specific industries is likely to increase.

In this context, we recommend that the Commission solicit comments from the public on the credibility and reliability of the ratings issued by each rating agency seeking SRSRO designation. Where a rating agency has expertise in a limited geographic area or a specific product or industry sector, input from investors and financial institutions that have relied, or expect to rely, on information from that rating agency could be very useful to the Commission.

One specific area where we believe that the Commission should consider SRSRO status is the insurance industry. Specifically, the Securities Valuation Office of the National Association of Insurance Commissioners ("NAIC") is widely accepted by industry participants and regulators as an issuer of credible and reliable ratings.4 Insurance companies rely heavily on these ratings for their portfolio investments. The SVO currently rates approximately 225,000 securities of about 28,000 issuers. Additionally, A.M. Best issues ratings on an insurance company's ability to meet its financial obligations to security holders when due and on its financial strength and ability to meet ongoing obligations to policyholders. Ratings of these investments and insurance companies may not be available from the NRSROs currently designated by the Commission.

* * *

The Clearing House appreciates the opportunity to comment on Release No. 34-47972 and would be pleased to discuss any of the points raised in this letter in more detail. Should you have any questions, please contact Norman Nelson at (212) 612-9205.

Very truly yours, Jeffrey P. Nuebert

1 The member banks of The Clearing House are: Bank of America, National Association; The Bank of New York; Bank One, National Association; Citibank, N.A.; Deutsche Bank Trust Company Americas; Fleet National Bank; HSBC Bank USA; JPMorgan Chase Bank; LaSalle Bank National Association; Wachovia Bank, National Association; and Wells Fargo Bank, National Association.
2 Risk Based Capital Guidelines; Capital Adequacy Guidelines; Capital Maintenance: Capital Treatment of Recourse, Direct Credit Substitutes and Residual Interests in Asset Securitizations. 66 Fed. Reg. 59614, at 59625 (2001). This final rule was adopted by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision.
3 Id.
4 NAIC is an organization comprised of insurance regulators from the 50 states, the District of Columbia and the four U.S. territories.