02 April 2008

CESR consultation on CRAs reveals need for transparency, but not for regulation

CESR published the responses received to its consultation on the role of credit rating agencies in structured finance. The majority supported the CESR proposal to increase transparency of CRAs, although the required level and extend varies among respondents, and some respondents, such as ESF and SIFMA, warned that too much of it may also be harmful.

Also on the role of CRAs the opinions differed widely. The BBA and LIBA for example underline that ratings are not a substitute for investors’ own risk assessment and CRAs should not be held responsible for inappropriate decisions by investors.

French AFG reminds that regulators and legislators at national, European and international levels, have to think about their own responsibilities in the development of ratings in recent years, through the importance they have given to the ratings themselves.

The high majority of respondents refused the idea to introduce further extensive formal regulation stressing that improvement to the IOSCO code of conduct as the most appropriate response. Some respondents underlined that regulation would not have prevented the crises. A regulatory regime would in all likelihood not have regulated the details of the different CRA methodologies and procedures, German BVI states. It may not have prevented the reliance of CRAs on issuer provided doubtful or wrong information. ESF and SIFMA furthermore warned that more regulation will likely lead to even greater inappropriate reliance on ratings and ‘micro’regulations that could adversely impact the ‘opinion’ concept that underlies current rating.

IMA noted that some CRAs have already reduced their operations in structured finance and it is likely that the market will end up being a fraction of the size it has been in recent years. It would be unfortunate if CESR were to spend a significant amount of time looking at the disclosure for certain products which the market has already decided will not be used any more, IMA states.

Only few respondents like IMMFA and AIAF called to consider a formal regulatory regime, although this should be restricted to certain parts of the rating process.

Link to answers

© Graham Bishop