28 May 2008

IOSCO changes to Code of Conduct for Credit Rating Agencies

IOSCO agreed on changes to the Code of Conduct, demanding CRAs differentiate ratings of structured finance products from other ratings and provide better information on the rating process.

IOSCO agreed on changes to the Code of Conduct, demanding CRAs to differentiate ratings of structured finance products from other ratings, provide better information on the rating process and disclose – in some cases - their annual revenue structure to avoid conflicts of interest.

 

“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”, Michel Prada, Chairman of IOSCO’s Technical Committee, said.

 

Amendments to the Code of Conduct include:

Quality and Integrity of the Rating Process

• CRAs should adopt reasonable measures so that the information they use is of sufficient quality to support a credible rating. If the rating involves a type of financial product with limited historical data upon which to base a rating, the CRA should make clear, in a prominent place, the limitations of the rating.

• CRAs should also assess whether existing methodologies and models for determining credit ratings of structured products are appropriate when the risk characteristics of the assets underlying a structured product change materially;

• CRA analysts should be prohibited from making proposals or recommendations regarding the design of structured finance products that the CRA rates;

 

CRA Independence and Avoidance of Conflicts of Interest:

• CRAs should disclose whether any one issuer, originator, arranger, subscriber or other client and its affiliates make up more than 10 percent of the CRA’s annual revenue;

• CRAs should discourage “ratings shopping,” disclose in their rating announcements whether the issuer of a structured finance product has informed it that it is publicly disclosing all relevant information about the product being rated;

 

CRA Responsibilities to the Investing Public and Issuers

• CRAs should differentiate ratings of structured finance products from other ratings, preferably through different rating symbols;

• CRAs should indicate the attributes and limitations of each credit opinion, and the limits to which it verifies information provided to it by the issuer or originator of a rated security;

• CRAs should also disclose the degree to which they analyze how sensitive a rating of a structured financial product is to changes in the CRA’s underlying rating assumptions;

 

Disclosure of the Code of Conduct and Communications with Market Participants

• A CRA should publish in a prominent position on its home webpage links to the CRA’s code of conduct; a description of the methodologies it uses; and information about the CRA’s historic performance data.

 

Press release

Role of Credit Rating Agencies – Final Report

Code of Conduct Fundamentals for Credit Rating Agencies

Comments Received

 

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