Notching: Poles apart

The debate over the practice of ‘notching’, or adjusting, the ratings of underlying assets of collateralized debt obligations continues to show little sign of resolution, despite numerous efforts from the rating agencies, sell-side research analysts and economics consultancy Nera (National Economic Research Associates).

In order to rate a collateralized debt obligation (CDO), a rating agency requires each of the securities in the underlying pool of assets to be rated by that agency. However,

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