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Yesterday, the International Organization of Securities Commissions (IOSCO), the global securities regulators association, published proposed changes to the behaviour of rating agencies in its consultation report “The Role of Credit Rating Agencies In Structured Finance Markets”. The Technical Committee that issued this report is well represented at international regulatory level with Christopher Cox of the SEC being vice-Chairman and Hector Sants of the SFA being on the committee together with the lead regulators from all the major investment centres – so this is no toothless body! Comments on this report are invited from the public up to the 25th April.
Michel Prada, President of the French regulator, the Autorité des Marchés Financiers, and Chairman of IOSCO’s Technical Committee, said: “IOSCO, having completed its review of its Code of Conduct Fundamentals for Credit Rating Agencies, is proposing significant changes to the current code. These changes are required in order to ensure that investors and the financial markets can have confidence that CRAs are producing clear, well-researched ratings, free from bias which can be easily understood by their users. The role played by credit rating agencies in the development of the market for structured finance products has raised serious issues for regulators globally, and I believe that these changes to IOSCO’s Code of Conduct will contribute to addressing some of the issues that the current crisis has exposed in relation to the ratings system.”
The report proposes making changes designed to ensure objective reviewing and potentially downgrading of ratings for structured finance products, independent reviews, to identify when backing data is lacking or possibly inaccurate, and to report when the complexity of the product casts doubt on the validity of the rating. There will be restrictions on the amount of work a rating agency can take from any one firm, and on analysts leaving to join a security issuer with whom the rating agency has had dealing. There will also be increases in the information given to investors, the financial benefit the agency receives and disclosure on the methodology used in the rating.
This week, in a separate but sub-prime related area, the UK’s regulator, the FSA, published the results of its internal review into its handling of the Northern Rock affair, where it accepts a lack of engagement, inadequate oversight, insufficient resources, and a “lack of intensity”. Chief Executive Sants has announced a major overhaul in the way that the FSA regulates the big banks.
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