CESR Launches A Consultation On The Role Of Credit Rating Agencies In Structured Finance

CESR publishes today a consultation paper entitled “The Role of Credit Rating Agencies in Structured Finance” (Ref. CESR/08-036).

Following the European Commission’s additional request for CESR to review several aspects of the rating process regarding structured finance instruments (CESR/07-608), CESR is now publishing a consultation paper to seek market participants views on the main issues included in the European Commission’s request.

Ingrid Bonde, the Chairperson of the CESR task force on credit rating agencies, said:

“CESR wishes to state at this stage that the CRAs’ concerted initiatives put forward so far are not enough and that the rating industry response needs to be supported by further prompt and firm actions”.

The consultation paper covers the following areas in relation to structured finance:

Transparency of rating processes and methodologies (see paragraphs 76-100): In particular the consultation focuses on the ease of investor access to information on key limitations and assumptions in complex structured finance methodologies. The paper also seeks opinions on the procedures followed by the credit rating agencies (CRAs) when applying changes to their methodologies, for example, on the need for clear disclosure to investors of which methodology a rating is based on.

Monitoring of rating performance (see paragraphs 101-112): CESR seeks views on the need for regular public disclosure of structured finance rating performance and the need for CRAs to maintain sufficient resource and organisational flexibility to act promptly in reviewing structured finance ratings.

CRA staff resourcing (see paragraphs 113-126): The consultation seeks market participants views on the whether CRAs were adequately resourced for the volume and complexity of structured finance ratings they were producing and whether there needs to be more transparency from the CRAs over their resourcing and levels of staff experience. In addition, CESR asks market participants in their consultation paper, whether they agree that more clarity and greater independence is desirable for analyst remuneration at the CRAs.

Conflicts of interest (see paragraphs 127-146): The key focus of the consultation is on whether the nature of CRA interaction with issuers during the structured finance presents additional, un-managed or poorly managed conflicts of interest leading to reduced rating integrity; whether the CRAs’ activities constitute advisory activity in this area; whether some of the ancillary services offered may lead to potential conflicts of interest and whether greater disclosure is required on the fees CRAs earn from structured finance activity as a result of the “issuer pays” model and the specific “success” fee structure for this activity.

Regulatory options: The paper remains open regarding the possible policy options, setting out:

• The benefits and negative features of the current self-regulatory approach (see paragraphs 161-162)

• The benefits and costs that any regulatory regime would create (without differentiating between the different frameworks that have been suggested for a more formal oversight regime for CRAs within the EU) (see paragraphs 166-167).

CESR requests market views on what regime would be more appropriate.

CESR’s final report will also an assessment of the rating agencies’ progress in implementing the IOSCO code. This will be the second year of review of the rating agencies’ codes of conduct under CESR’s voluntary framework.

The timetable for the finalisation of the advice is as follows:

To ensure that market participants’ views are duly considered in this process, CESR would like to encourage all interested market participants to actively participate in the consultation process by sending their comments via CESR's website (www.cesr.eu) under the section "Consultations". Besides, CESR will welcome interested parties (other than CRAs) to attend the hearing that will be held at CESR’s premises in Paris on the 26th March 2008. An agenda for the hearing will be made available on the CESR’s website. Subscriptions to attend the hearing can be made via CESR’s website under the sections “hearings”.