Analysis of Financial Market Institutes Failures and Reforms

The assignment addresses the failure of Residential Mortgage Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs), which misled investors regarding their credit ratings. This misrepresentation led to a significant loss for investors, particularly impacting superannuation savings. Post-Global Financial Crisis, credit rating agencies implemented changes such as public performance benchmarks aimed at reducing the sophistication gap between arrangers and investors, thereby encouraging more diligent investor behavior. Despite these efforts, concerns remain about preventing future misleading ratings due to insufficient litigation risk enforcement and over-reliance on ratings by investors. The reference material includes studies by Fong et al. (2014) and Xia (2014), which provide insights into the discipline of credit rating agencies and improvements in information quality.

Running head: FINANCIAL MARKET INSTITUTES
Financial Market Institutes
Name of the Student
Name of the University
Authors Note
Course ID

1FINANCIAL MARKET INSTITUTES
Table of Contents
Answer to question A:................................................................................................................2
Answer to question B (i):...........................................................................................................2
Answer to question B (ii):..........................................................................................................2
Reference list:.............................................................................................................................3

2FINANCIAL MARKET INSTITUTES
Answer to question A:
Residential Mortgage Back Securities and collateralized debt obligations are
examples of products that were considered as the failure since the investors were misled in
regard to the credit ratings offered for the issued products. As a result of this there was a
reduced needs of funding on the part of the issuers (Fong et al., 2014). The failure of
Residential Mortgage Back Securities and collateralized debt obligations resulted the
investors in losing some proportion of their savings related to superannuation that accounted
to a loss of $25 million to $30 million.
Answer to question B (i):
Following the Global Financial Crisis, the credit rating agencies have adopted certain
changes to address the failures. The credit rating agencies have public performance
benchmarks scale for credit rating structured which would ultimately narrow the
sophistication gap among the arrangers and investors that empowers the investors to perform
their own value analysis and gauge into the false ratings. Increased amount of investors
vigilance is helpful in promoting more competitive pricing strategies for higher quality debt
and determine the tenacious incentives operating in the present work market. Credit rating
agencies on their part will be more likely to volunteer their work so that it can accommodate
greater public security.
Answer to question B (ii):
Accordingly, these changes are yet to go far enough in preventing the probability of
the future product failure based on the misleading credit agencies. Arguably, litigation risk is
considered as the way of imposing standards on the credit rating agencies to prevent the
recurrence offences. Global developments in this area seems to emphasis on the approach of

3FINANCIAL MARKET INSTITUTES
discouraging the over-dependence on the ratings by the investors at the time of making
investments decision.

4FINANCIAL MARKET INSTITUTES
Reference list:
Fong, K. Y., Hong, H. G., Kacperczyk, M. T., & Kubik, J. D. (2014). Do security analysts
discipline credit rating agencies?.
Xia, H. (2014). Can investor-paid credit rating agencies improve the information quality of
issuer-paid rating agencies?. Journal of Financial Economics, 111(2), 450-468.