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IOSCO consults on internal controls and procedures of credit rating agencies

Friday, 25 May 2012
IOSCO consults on internal controls and procedures of credit rating agencies The Technical Committee of the International Organisation of Securities Commissions (IOSCO) has published a consultation report, Credit Rating Agencies: Internal Controls Designed to Ensure the Integrity of the Credit Rating Process and Procedures to Manage Conflicts of Interest. This Consultation Report describes certain internal controls and procedures that credit rating agencies (CRAs) use to promote the integrity of the credit rating process and address conflicts of interest, with a view to promoting a better understanding of these practices. The views of stakeholders and CRAs on these questions will assist the IOSCO with further analysis of the internal controls and procedures used by CRAs. http://www.ftseglobalmarkets.com/

The Technical Committee of the International Organisation of Securities Commissions (IOSCO) has published a consultation report, Credit Rating Agencies: Internal Controls Designed to Ensure the Integrity of the Credit Rating Process and Procedures to Manage Conflicts of Interest. This Consultation Report describes certain internal controls and procedures that credit rating agencies (CRAs) use to promote the integrity of the credit rating process and address conflicts of interest, with a view to promoting a better understanding of these practices. The views of stakeholders and CRAs on these questions will assist the IOSCO with further analysis of the internal controls and procedures used by CRAs.

The report is based on an IOSCO review of CRAs that focused on the internal controls established by CRAs to enhance the integrity of the credit rating process and on the procedures to manage conflicts of interest. The review was motivated by the role of CRAs in the 2008 financial crisis, which raised concerns about the quality of credit ratings and credit rating methodologies, the timeliness of adjustments to credit ratings, and, more generally, the integrity of the credit rating process.  The 2008 financial crisis also raised concerns about how conflicts of interest are being managed by CRAs.

The internal controls and procedures described by the Consultation Report are divided into six categories.

 Internal Controls:

Quality of the rating process

Structural support to ensure the quality of the rating process

Monitoring and Updating

Integrity of the Rating Process

Procedures:

Managing Firm-Level Conflicts

Managing Employee-level Conflicts  

Despite concerns about their performance during the crisis, CRAs continue to play an important role in most modern capital markets. Issuers and corporate borrowers rely on the opinions of CRAs to raise capital. Lenders and investors use credit ratings in assessing the likely risks they face when lending money to, or investing in, securities of a particular entity.  Institutional investors and fiduciary investors, likewise, use credit ratings to help them allocate investments in a diversified risk portfolio.  Finally, laws and regulations use credit ratings to distinguish creditworthiness.

This report seeks to describe the operational practices of the CRAs that are designed to give effect to the relevant provisions of the IOSCO Code of Conduct Fundamentals for Credit Rating agencies, which was published in December 2004 and revised in May 2008.

The closing date for responses to the consultation is on Monday  July 9th 2012.

  

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