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Last week, the International Organization of Securities Commissions (IOSCO) published the final report confirming the amendments to the Code of Conduct Fundamentals for Credit Rating. These changes are intended to address issues relating to the activities of the credit rating agencies and structured finance products, instruments which when backed by US subprime mortgages have created much of the recent global market turmoil.
Amongst the many changes are bans on rating agency analysts making proposals or recommendations regarding the design of structured finance products that they rate, allowing any client to make up more than 10 percent of the CRA’s annual revenue without disclosing the fact, or entering into new products without first setting up relevant evaluation processes. Rating agencies must have processes for reviewing and potentially downgrading a current rating, ensure they have disclosed their methods, and ensure their analysts are both experienced and competent. Analysts who move on to other jobs must be subject to special checks.
Michel Prada, Chairman of IOSCO’s Technical Committee, said “IOSCO’s Code of Conduct aims to improve investor protection, improve the fairness, efficiency and transparency of securities markets and to reduce systemic risk. We have engaged in a frank and constructive dialogue with the CRA industry, issuers and investors and have taken a broad range of views into account in finalizing the changes to our code. I believe that these changes to the Code of Conduct will help to address a number of issues that have arisen as a result of the current credit crisis regarding how the credit ratings for structured finance products are developed by credit ratings agencies and relied upon by issuers and investors.”
It is now up to the rating agencies to demonstrate to regulators and market participants how they will implement the Code of Conduct.
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