Final answer:
The issuer and credit rating agencies determine CMBS subordination levels, with issuers structuring the CMBS and rating agencies assessing risk. Their interests, which focus on marketability and independent risk evaluation respectively, can be somewhat different and may not always align.
Step-by-step explanation:
The two groups that determine the subordination levels of a Commercial Mortgage-Backed Securities (CMBS) securitization are the issuer (or investment banks) and the credit rating agencies. The issuer's role is to structure the CMBS, which involves creating tranches that have different levels of risk and return. The credit rating agencies evaluate these tranches and assign ratings that reflect the risk of default. While both groups aim to make the securities marketable and to ensure the security sells, their interests can be somewhat different. The issuer may prioritize maximizing profit and selling all tranches, which could lead to higher risk levels being accepted, whereas the credit rating agencies' role is to provide an independent assessment of risk, which should theoretically dissuade them from assigning high ratings to high-risk tranches. However, the financial crisis of 2007-2008 showed that at times there can be conflicts of interest where rating agencies may have financial incentives to rate these tranches higher than may be warranted. Thus, the alignment of interests between these two groups can be complex and is not guaranteed.