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The Securities Industry and Financial Markets Association (SIFMA) Credit Rating Agency Task Force today issued its recommendations for credit rating agency reform. The recommendations are being shared with regulators, lawmakers, and credit rating agencies globally, and reflect the efforts of the senior-level investor-led industry group. The recommendations also respond directly to the designation by the US President’s Working Group on Financial Markets (PWG) of the blue ribbon Task Force as the private-sector group providing the PWG with industry guidance on credit rating matters.
The Task Force, formed to examine key issues related to ratings and credit rating agencies, is comprised of 37 individuals from the US, Europe, and Asia. The Task Force includes asset managers, underwriters, and issuers who are experts in structured finance, corporate debt, municipal debt, and risk.
“The recommendations issued today endorse the development of a far more transparent credit rating system,” said Boyce Greer, president, Fixed Income and Asset Allocation at Fidelity and co-chair of SIFMA’s Credit Rating Agency Task Force. “Specifically, these recommendations offer investors greater disclosure of the ratings process itself, and spur credit rating agencies to share more fully information they use in determining credit ratings. Investors’ ability to better understand the credit rating agency inputs and methodology will allow investors to incorporate ratings appropriately in their own internal risk assessments and investment decision analytics. This, in turn, is a key element of strengthening the securitized credit markets.”
Recognizing the importance of credit rating agencies and the ratings they provide in the overall functioning of our financial markets, to determine priority areas of focus the Task Force identified the credit-rating-related causal variables that played a significant role in triggering the credit crisis of the past year. Sixteen key issues were identified, and ranked in order of importance. The recommendations address those issues that topped the list, including transparency, model quality, and surveillance.
“Robust, liquid markets depend on transparency,” said Deborah Cunningham, chief investment officer at Federated Investors and co-chair of SIFMA’s Credit Rating Agency Task Force. “Providing greater disclosure, enhanced surveillance, and comparable ratings performance metrics, the credit rating agencies can help restore the quality of ratings and the perceived integrity of the ratings process. This is essential if we are to avoid a continuation or repeat of the global market turmoil of the past year.”
In addition to enhancing disclosure of rating methodologies, due diligence information, surveillance procedures, credit rating agency performance, and fees, the recommendations also encourage a more harmonized and convergent global regulatory framework, and independent risk analyses by investors. The Task Force also identified the need for industry members, globally, to provide expert input and advice on issues related to credit ratings to regulators, lawmakers, and other market participants. To this end, the Task Force recommends the creation of a global, independent industry Credit Ratings Advisory Board, under the auspices of SIFMA. The Advisory Board members will initially be drawn from the Task Force, and will continue the Task Force’s work to date as an advisor and consultative resource.
"This is dynamic, impactful guidance. The 12 recommendations integrate the best thinking of senior, expert SIFMA members worldwide on how to restore trust in credit ratings," said Tim Ryan, president and CEO of SIFMA. “In a similar vein, in September our joint SIFMA, ESF and ASF Securitization Markets Task Force will issue actionable, industry-developed recommendations based on independent research and analysis by McKinsey & Company, which are designed to help revitalize the securitization and structured credit markets.”
The recommendations include the following:
• Credit Rating Agencies (CRAs) should provide enhanced, clear, concise, and standardized disclosure of CRA rating methodologies;
• CRAs should disclose results of due diligence and examination of underlying asset data examinations, and limitations on available data, as well as certain other information relied upon by the CRAs in the ratings process;
• CRAs should disclose CRA surveillance procedures; this will foster transparency, and allow market users of ratings to understand their bases and limitations;
• CRAs should provide access to data regarding CRA performance; this will allow investors to assess how CRAs differ both in the performance of their initial ratings, and in their ongoing surveillance of existing ratings;
• Conflicts of interest should be addressed with a sensitivity towards the difference between CRA “core” services and CRA consulting services;
• A global SIFMA advisory board of industry participants should be established to advise regulators and lawmakers on ratings issues; this will give regulators access to industry expertise, and encourage the more fully harmonized global regulatory framework the Task Force views as essential;
• Lawmakers, regulators, and law enforcers across the globe should coordinate more closely in addressing this global problem, in order to avoid counter-productive, piecemeal, inconsistent attempts at remediation;
• CRA fee structures, and identities of top payors, should be disclosed by CRAs to their regulators;
• CRAs should ensure that ratings performance of structured products are consistently in line with ratings performance of other asset classes; this will increase investor confidence in the reliability of ratings;
• Rating “modifiers” should not be the means adopted to create transparency; they would lead to significant unnecessary costs, while at the same time likely triggering unintended negative consequences;
• Investors should understand the limits of ratings, and use them as just one of many inputs and considerations as they conduct their own independent analyses; and
• All members of the financial industry involved in the generation and use of ratings, including issuers and underwriters, should examine their processes with an eye towards improvement, including working towards standardizing reporting and disclosure on underlying assets.
To view the recommendations, please visit http://www.sifma.org/capital_markets/docs/SIFMA-CRA-Recommendations.pdf
More information about the SIFMA Credit Rating Agency Task Force, including a roster of members, can be found at www.sifma.org/capital_markets/cra-taskforce.shtml.
