Ratings-DataMedium

3 min read · 492 words

What the seat actually does

Three businesses that look unrelated and share one property: they publish a number that other people's rules point at. A credit rating, an index level and a benchmark price are all opinions or constructions, and all three move real money because somebody's mandate, capital charge or contract refers to them.

That is what makes them infrastructure rather than research. A rating agency's letter is explicitly an opinion, and an insurer's capital requirement changes when it changes. An index is a set of rules, and hundreds of funds must trade when those rules add a name. The influence does not come from being right; it comes from being referenced.

• Credit ratings — an opinion on the likelihood of being paid. See reading one.
• Indices — construction rules, review dates and the rebalance that follows. See what an index really is.
• Benchmarks and reference rates, which sit inside contracts.
• Market data, sold to everybody who needs a price and cannot make one.

A day, and where it goes

• Reviews — issuers whose rating is under consideration, and the committee that decides.
• Index events — additions, deletions and corporate actions that change a weight.
• Methodology questions, which are consultations because changing a rule moves portfolios.
• Data quality, since a wrong price propagates into every system that consumes it.

What it is measured on

• Whether ratings ordered defaults correctly — published default studies are the industry's own scorecard.
• Index replicability. A benchmark nobody can actually track is a benchmark that measures nothing.
• Assets referencing the index, which is the commercial measure.
• Stability. A methodology that changes often is one nobody can build a mandate on.

What it touches on this site

• What a rating tells you — the question and the playbook.
• What an index is — the question and the seat that tracks it.
• Who is forced by it — insurance investment at a rating boundary, and every asset class's who is forced section.
• When it goes wrong — 2008, where the letter and the risk were not the same thing.

How it goes wrong

• The issuer pays for the rating. The conflict is structural and no amount of process removes it entirely.
• A rating used as a threshold rather than as an opinion, which converts a downgrade into a forced sale.
• Index rules that are front-run. Everybody knows what will be added and when, so the trade happens before the fund can make it.
• A benchmark that can be influenced by the people who submit to it.

Concepts to master

• A rating is an ordering, not a probability, and it says nothing about how much is recovered.
• An index is a rulebook. Every level it prints is the output of decisions somebody made.
• Being referenced is the power — see reading a market number.
• Tracking a rule has a cost — see index and ETF management.