DEFINITION of 'Notching'

When rating agencies reduce their ratings on structured financial collateral based on ratings from another agency without rating the collateral themselves. Notching arises when collateral, such as mortgage backed securities (MBS), and other asset backed securities (ABS) are included within investment vehicles that are rated, such as collateralized debt obligations (CDOs).


A study by Greenberg Quinlan Rosner Research in early 2002 found that 67% of senior executives, working in structured finance, oppose the practice of notching, because they feel that it undermines competition. They feel that the two largest rating agencies employ notching to maximize their market share and undermine competition.

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