SEC plan could substantially alter B-Ds' calculation of net capital

The U.S. Securities and Exchange Commission is seeking comment on a rule that would let broker- dealers use internal assessments instead of outside ratings in gauging credit risk for meeting net capital requirements. SEC commissioners voted 5-0 today to propose a measure that would strip references to credit ratings from standards that determine how much liquidity broker-dealers must maintain to cover their obligations. The proposal is part of a Dodd-Frank Act requirement to replace ratings in federal regulations with an “appropriate” standard for gauging risk. (Click on the following link to see a list of B-Ds with the most -- and least -- net excess capital). Dodd-Frank, the regulatory overhaul enacted in July, sought to ban references to credit ratings after lawmakers faulted inflated grades from firms such as Moody's Corp. and McGraw-Hill Cos.' Standard & Poor's unit for fueling the housing bubble before the 2008 credit crisis. “Dodd-Frank has given us a mandate to change our rules so that we no longer rely on ratings as a proxy for credit standing,” SEC Chairman Mary Schapiro said in prepared remarks before the vote. “We are seeking not the simplest alternative but instead are trying to provide tailored responses that reflect the underlying purpose of each rule, and we are conscious of potential costs to market participants.” Today's proposal would revise provisions of the Securities Exchange Act of 1934 affecting how broker-dealers may reduce the value deducted from less-risky assets such as commercial paper, preferred stocks and nonconvertible debt when figuring their net capital. “Each firm with proprietary positions in these instruments would need to look at a variety of factors, and they would need to have and document procedures for doing so,” Schapiro said. Letting brokers use their own assessments could pose a different type of risk than that posed by credit ratings, SEC Commissioner Luis Aguilar said in prepared remarks. “The proposed subjective standard will be much more difficult to police than the current objective standard that references credit ratings,” Aguilar, a Democrat, said before voting to release the measure for comment. “It does not appear that we have been able to identify an appropriate substitute for credit ratings.” --Bloomberg News--