15 July 2014

Public comment on IOSCO Code for CRAs

Comments received include:

BlackRock

BlackRock are concerned about the provision stating that “CRA and its employees should not, either implicitly or explicitly, give any assurance or guarantee to an entity, obligor, underwriter, originator, or arranger about the outcome of a particular credit rating action. This does not preclude the CRA from developing prospective assessments used in structured finance and similar transactions, provided that doing so does not impair the integrity of the credit rating process.” In BlackRock’s view, this could inadvertently lead to ratings shopping for structured finance and similar transactions by stating that this provision does not preclude prospective assessments, presumably after an assurance or indication of the likely outcome of the prospective assessment is provided.

This provision could be improved by stating that a CRA and its employees should also not provide any assurance or guarantee to an entity, obligor, underwriter, originator, or arranger about the conclusion or outcome of a particular prospective assessment in the case of structured finance and similar transactions. BlackRock recommend that any prospective assessment of a structured finance security be provided only after engagement of the CRA.

Full BlackRock response

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European Association of Credit Rating Agencies (EACRA)

The Code of Conduct mentions that the measures described in the CRA Code are not “designed to be used only by CRAs with large staffs and compliance functions” and that “the types of mechanisms and procedures CRAs adopt to ensure that the provisions of the IOSCO CRA Code are followed will vary according to the market and legal circumstances in which the CRA operates”. EACRA think that this provision should be extended to include also “the size of the CRA as well as the potential impact of the CRA ratings on financial market participants and financial stability”. Smaller, highly focused CRAs have usually a lower reach out than the larger players and do not impact on financial stability. Smaller CRAs should have some flexibility towards the very comprehensive requirements as set out in the CRA Code: disclosing the number of provisions where the small CRA is not fully compliant could lead users of ratings to believe that the ratings issued are of lower quality. Instead of describing where CRAs are deviating from the CRA Code, EACRA recommend that CRAs should describe their business model and how potential conflicts of interests are addressed in order to ensure that the ratings are objective, independent and of the highest quality.

Full EACRA response

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Standard & Poor's Ratings Services

S&P Ratings Services believes that IOSCO’s addition of definitions of key terms could be problematic as it might not reflect each market’s practices and could create confusion and operational challenges for CRAs operating in multiple jurisdictions, many of which have developed their own definitions for such terms that differ from IOSCO’s proposed definitions. We are also concerned by the suggestion that the word “opinion” could suggest a level of “casualness” in determining credit ratings. The term “opinion,” as well as all of the other terms within the Code, must be read in the context of the entire document. The Code provides a number of principles relating to the quality of a rating, making it clear that determination of a rating involves process that includes the application of criteria and sophisticated analyses and is, therefore, anything but casual. It is highly unlikely in this context that the use of the word “opinion” would connote “casualness.” Instead, S&P Ratings Services believes that the use of the word “opinion” best captures the forward-looking and subjective nature of credit ratings.

Full Standard & Poor's Ratings Services response

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Moody's Investor Service

According to Moody's Investor Service, certain provisions in the existing IOSCO Code and/or the proposed amendments are inconsistent with the limited role of CRAs. Calling upon CRAs to engage in such activities increases the risk of overstating the role that CRAs play in the capital markets, which could lead to over-reliance on CRAs and their opinions. Examples include:

• requiring CRAs to encourage structured finance issuers to disclose information to the market;
• requiring CRAs to use “plain language” in their disclosures which should be “easily understood”, which could suggest that those disclosures are intended for parties other than financial market professionals, the otherwise traditional audience for credit ratings;
• opportunity to comment on the credit rating. This provision could give an indication that CRAs may be subject to the bias and influence of third parties.

Moody's Investor Service suggest the IOSCO Code further emphasise that CRAs provide only one perspective on credit risk for broader consumption by market professionals, and more importantly that credit ratings should not be perceived as substitutes for information by the issuer or analysis by the investor.

Full Moody's Investor Service response

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Full IOSCO Code of Conduct for CRAs

All comments

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