Europe: consultation on credit rating agencies

The European Commission has issued a consultation document as part of its work developing proposals with regard to the regulation of credit rating agencies. According to the Commission: 

The policy response currently being developed ... is likely to involve a legislative framework for credit rating agencies comprising both a set of legal obligations to be complied with by CRAs as well as independent external oversight. Addressees of the rules proposed by the Commission will be all existing (and prospective) credit rating agencies with business operations having significant market impact in Europe. The proposed directive / regulation will aim to achieve the following
objectives:

• Appropriate management of conflicts of interest.
  
• Improvements in quality of output.
  
• Increased transparency of CRAs' activities.
  
• Establishment of a supervisory and enforcement regime on the territory of the EU."
  

The consultation period ends on 5 September 2008. Further information is available here.

Europe: consultations on derivatives and short selling

The European Commission has published two consultation papers on draft legislation as part of its work on reforming financial regulation. The first concerns derivatives and market infrastructures: see here (pdf). The second concerns short selling and credit default swaps: see here (pdf). FAQs in respect of these consultations are available here and here.

USA: credit rating agencies - SEC report

Some more on credit rating agencies, following the developments noted in the previous post. The USA's Securities and Exchange Commission has published a "Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies". In the associated press release the SEC noted:

The SEC staff's examinations found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002. The examinations uncovered that none of the rating agencies examined had specific written comprehensive procedures for rating RMBS and CDOs. Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately"

For further information see:
SEC Report | SEC press release | SEC proposals: June 11 and July 1 |

Europe: European Council supports proposal for credit rating agency regulation

European Internal Market Commissioner McCreevy's proposals for the regulation of credit rating agencies were noted earlier today (see here). The likelihood of these proposals becoming law has increased following endorsement by the Council of the European Union. In a press release published today, the Council stated:

The Council welcomes the revision by IOSCO of its Code of Conduct at the international level, and CESR's and ESME's reports on rating agencies. The Council considers that the revisions to the IOSCO Code of Conduct provide a minimum benchmark for the actions that credit rating agencies should take to address concerns about their activities in the market for structured products. In this context, the Council takes note of the additional steps undertaken in this field by the rating agencies to better address the governance concerns and improve transparency concerning the value and limitations of the ratings.

However, the Council shares the Commission view that the current initiatives do not fully address the challenges posed, that further steps, are needed and that regulatory changes might be necessary. The Council supports the objective of introducing a strengthened oversight regime for rating agencies and notes in this regard the preliminary views by the Commission as well as the proposals by CESR and ESME. The Council supports an enhanced European approach and the objective of strengthening international cooperation to ensure a stringent implementation of internationally approved principles. To this end, and without prejudice to consideration of its practical application, the Council supports the principle envisaged by the Commission that the rating agencies should be subject to an EU registration system.

The Council would also welcome intensified competition by entry into the market of new players". 

For comment, see this article in the Financial Times newspaper.

Europe: McCreevy on the regulation of credit rating agencies

Further information concerning the shape of the European Commission's proposals for the regulation of credit rating agencies was provided by Internal Market Commissioner McCreevy in a speech titled "Regulation and Supervision after the Credit Crunch" delivered in Dublin on July 4. McCreevy stated:

There is the issue of the need to review the role and use of credit ratings. CRAs significantly contributed to the market turmoil by greatly underestimating the credit risk of structured credit products. I requested the advice of the Committee of European Securities Regulators (CESR) and the European Securities Markets Expert Group (ESME) on the various aspects of CRAs' activity and their role in the financial markets.

The IOSCO Code of Conduct to which the rating agencies signed up has not produced the desired effects. I am certainly not persuaded that the appropriate response lies in strengthening the voluntary framework established by the IOSCO code. International convergence is desirable if it can be achieved – but per se, this is not enough. And let me make it clear, I do not believe that Europe should be in the passenger seat on this issue. We need to drive things forward and set the pace.

While some of the additional steps that the main rating agencies have announced are welcome, they are insufficient. This is one of many reasons why I have concluded that a regulatory solution at European level is now necessary to deal with some of the core issues.

It is my intention to propose in October a registration and external oversight regime for rating agencies, whereby European regulators will supervise the policies and procedures followed by the CRAs. Reforms to the corporate and internal governance of rating agencies will form a part as well. I will also try to strengthen competition by encouraging entry into the market by new players. The European Securities Markets Expert Group stressed the importance not just of governance of rating agencies, but also the importance of having an appropriate corporate culture as well.

In the proposals I will bring forward on credit rating agencies, I also want to ensure that supervisors who will have responsibility for oversight will have at their disposal sufficient resources and expertise to keep up with financial innovation and to challenge the CRAs in the right areas, on the right issues, at the right time".

Europe: the supervision of credit rating agencies

The European Commission has published a proposal for a Regulation to amend Regulation (EC) No 1060/2009 on credit rating agencies: see here (pdf). The purpose of the Regulation is to give the new European supervisory authority - the European Securities and Markets Authority (about which see here) - exclusive supervisory powers over credit rating agencies registered in the European Union.

For further information see: press release | faqs |

Europe: credit rating agencies - regulation proposed by the Internal Market Commissioner

The European Internal Market Commissioner, Charlie McCreevy, has today delivered a speech titled "Regulating in a Global Market". This speech is important because Mr McCreevy indicates his intention to regulate credit rating agencies. He also indicates - in typically forthright fashion - his view on the IOSCO Code published last month:

I said before that I would not wait indefinitely for the credit rating agencies to come forward with meaningful proposals to put their houses in order. And I mean what I say. The IOSCO Code of Conduct to which the rating agencies signed up has been shown to be a toothless wonder. The fact is that despite the checks on compliance with the IOSCO Code, no supervisor appears to have got as much as a sniff of the rot at the heart of the structured finance rating process before it all blew up. I am deeply sceptical that the appropriate response lies in building on and strengthening the IOSCO code: While external oversight of rating agencies is important it is not sufficient to adequately address the issues. Many of the recent IOSCO task force recommendations do not appear enforceable in a meaningful way and I am now convinced that limited but mandatory, well targeted and robust internal governance reforms are going to be imperative to complement stronger external oversight of rating agencies. While some of the additional steps that the main rating agencies have announced are welcome, they are insufficient. I know some would be willing to do more but I can quite understand why they are reluctant to move forward with more ambitious proposals if there isn't going to be a level playing field. This is one of many reasons why I have concluded that a regulatory solution at European level is now necessary to deal with some of the core issues"

Reform in this area is not confined to Europe. In the USA, for example, the Securities and Exchange Commission has proposed changes designed to increase the transparency of the credit rating process - click here for further information.

IOSCO: revised code of conduct for credit rating agencies

The International Organization of Securities Commissions (IOSCO) has published a revised Code of Conduct Fundamentals for Credit Rating Agencies. The chairman of IOSCO's Technical Committee, Michel Prada, has observed:

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."

The revised Code is included as part of the Technical Committee's report and an overview of the changes is available in this press release. For newspaper comment, see here.

UK: the Credit Rating Agencies Regulations 2010

The Credit Rating Agencies Regulations 2010 were laid before Parliament today and come into force on 7 June 2010: see here (pdf). An explanatory memorandum is available here (pdf) and this explains:

The Regulations contain provisions that ensure that the EC Regulation [No 1060/2009 of the European Parliament and of the Council on credit rating agencies] is effective in the United Kingdom. The Regulations designate the Financial Services Authority (“the Authority”) as the UK competent authority for the purposes of the EC Regulation, in accordance with Article 22(1) of the EC Regulation. They confer investigatory powers on the Authority in accordance with Article 23 of the EC Regulation, and create national penalties in accordance with Article 36 ...

The EC Regulation introduces a harmonised approach to the regulation of credit rating activities in the European Union. The Regulation: [a] establishes a registration system for credit rating agencies; [b] requires registered agencies to comply with various provisions relating to independence, conflicts of interest, employees and analysts, methodologies and models, outsourcing, and disclosure and presentation of information; and [c] requires specified financial institutions to use credit ratings for regulatory purposes only if they have been issued or endorsed by a registered credit rating agency, or issued by an overseas agency that has been certified in accordance with the Regulation".

Australia: credit rating agencies - regulatory change

The Australian Securities and Investments Commission has announced changes to the regulation of credit rating agencies, effective from 1 January 2010. See here for further information. 

USA: SEC introduces new rules and amendments governing credit rating agencies

The Securities and Exchange Commission has voted unanimously to introduce amendments designed to strengthen the regulatory framework governing credit rating agencies. For further information see: SEC factsheet | SEC press release | Amendments | SEC Chairman speech (wmv) | SEC Chairman speech (quicktime) |

UK: FSA - International Regulatory Outlook, 2nd edition published

The UK's Financial Services Authority has published the second edition of International Regulatory Outlook. The second edition focuses on regulatory cooperation and considers whether a case can be made for institutional reform in European financial services regulation.  It also contains a short explanation of the FSA's position vis-a-vis the European Commission's proposals for greater regulation of credit rating agencies.