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Following last week’s publications of the IOSCO changes to the code of conduct for credit rating agencies (Chase Cooper News, 2nd June), this week the three top rating agencies accepted the second blast of the shotgun from New York’s Attorney General and yesterday signed an agreement that enforces greater independence from the firms that they rate.
As reported in Reuters yesterday afternoon in New York, the three top credit rating agencies, Moody’s, Standard & Poor’s and Fitch, signed an agreement with Attorney General Andrew Cuomo which changes the ways that fees for reviewing mortgage-backed securities are charged. Investment banks will also have to provide more detailed data on loan pools for reviews prior to the issuance of ratings.
Cuomo said that under the old fee system, the agencies had a financial incentive to assign high ratings because they only received fees if a deal was completed. Under the agreements, the firms will receive payments for service even if a deal is not completed. "These are reforms that are going to have a dramatic effect on the market," Cuomo said at a news conference.
Deven Sharma, President of rating agency Standard & Poor’s, said that “Standard & Poor’s remains steadfast in our commitment to transparency, openness, and strengthening the governance of the ratings process, and we are pleased these principles lie at the heart of today’s agreement. Our commitment to these principles goes beyond today’s agreement. Standard & Poor’s continues to make significant progress in implementing our own 27 action steps announced in February, designed to enhance independence, strengthen the ratings process, improve investor education and increase transparency. We continue to believe that the more our customers, investors and other market participants know about how we do our work, the better.”
Last week’s IOSCO code, which will become the standard for all rating agencies worldwide, made specific conditions on the treatment of structured finance products, concentrations of business and competences of analysts. Next week, the US’s SEC is expected to propose changes that could include requiring the agencies to create a separate rating scale for their structured finance products.
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