Standard & Poor's Outlines Consistent Regulatory Framework For Rating Agencies

Appropriate regulation of credit rating agencies will play an important role in building confidence in the marketplace, especially if the purpose of this regulation is to ensure that rating agencies comply with policies and procedures designed to promote independence and

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Appropriate regulation of credit rating agencies will play an important role in building confidence in the marketplace, especially if the purpose of this regulation is to ensure that rating agencies comply with policies and procedures designed to promote independence and objectivity, according to a white paper published by Standard & Poor’s.

The paper outlines 10 goals that investors and other users of ratings want to see from regulation, and which should guide the approach taken by policymakers internationally:

Ratings should be independently derived, credible and unbiased: ratings firms should be accountable to and subject to sanction by regulators if they fail to comply with appropriate policies and standards for managing potential conflicts. However, policymakers should explicitly preserve the independence of ratings and ratings methodologies.

A regulatory regime should require a mechanism for ratings users to raise questions about methodologies and should require registered credit rating agencies to have in place personnel to answer these questions.The meaning and use of ratings should be clear, including the level of risk inherent in the rating.

Ratings on new and complex securities should be differentiated, either through separate rating scales or providing more information about the risk characteristics of these securities.

Regulators should consider if issuers of structured securities should be required to disclose publicly information about collateral pools that is currently provided to ratings firms confidentially.Ratings policies should be applied clearly and consistently, to minimise surprises when and if ratings are changed.

There should be transparency of communication between issuers and ratings firms, for instance when issuers request a rating on a structured security.Ratings performance statistics, including comparability of ratings across asset classes and geographies, should be publicly disclosed, to help investors assess ratings quality.

There should be a competitive market for ratings, with more and varying views on credit quality from qualified providers. Criteria for registering ratings firms should be transparent and regulators should review the analytical and financial resources of each applicant.

Regulators should conduct robust, periodic inspections of how ratings firms are complying with their processes and policies and how they are following through on their commitments.

“Achieving consensus on the mechanics of such a globally coordinated regime is not simple,” says Deven Sharma, president of Standard & Poor’s. “However, such an effort is important if we are to arrive at a solution that works for users of ratings globally and that helps restore confidence in the global capital markets.”

“These are some of the principles that we believe should guide thinking on the future regulatory framework for ratings firms.”

L.D.

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