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• Market Risk(Volatility) Ratings(1995) <br /> Background. State and local governments have long relied on credit ratings as an <br /> independent analytical source to gauge the credit risk of an investment option. <br /> However, credit risk analysis alone is not sufficient to safeguard against the assumption <br /> of other risk components, including market, interest rate, and liquidity risks. Through <br /> the securitization and structuring process,AAA rated securities and funds also may <br /> carry extreme market and other risks that are wholly unaddressed by credit ratings. <br /> Rating agencies now provide market risk ratings that evaluate the volatility of the <br /> security under a wide range of potential interest rate and mortgage prepayment <br /> scenarios. <br /> Risk components, such as interest rate,prepayment, credit, spread and liquidity, and <br /> currency risks are analyzed to assess how aggressively a fund uses derivatives and <br /> leveraging, and what risks their use presents to fund managers and investors in the <br /> fund. Results indicate the degree of potential variability in the prospective fund <br /> performance. Historical performance and volatility of fund returns relative to <br /> appropriate benchmarks also are evaluated. <br /> When applied to individual collateralized mortgage obligations (CMOs), market risk <br /> ratings provide a useful benchmark to governmental entities as they establish guidelines <br /> for prudent management of derivative investments. <br /> • Recommendation. The Government Finance Officers Association (GFOA) <br /> encourages state and local governments to augment information they receive from <br /> brokers,dealers, or advisors with independent research when conducting due diligence <br /> of potential investments. Information sources include historical trading ranges, trend <br /> and volume data, brokerage firm research,cash flow and present value analysis, and <br /> credit ratings and research. <br /> • GFOA encourages investment in only those CMOs and funds that seek market <br /> risk ratings from rating agencies to provide comprehensive disclosure of risks to public <br /> investors. Although volatility ratings currently are not mandatory, public investors may <br /> wish to consider limiting their investments to CMOs and funds that have received <br /> favorable volatility ratings from a nationally recognized rating agency. <br /> • <br />