05 December 2008

ECON workshop on Credit Rating Agencies

The workshop concentrated on issues such as the conflict of interests, the quality of ratings, supervision and the registration of rating agencies in the EU. Mr Gauzes plans to issue his draft report on 20 January next year.

Rapporteur Jean-Paul Gauzes who will issue his draft report on 20 January next year, pointed out that the major issues of the proposal relate to the conflict of interests, supervisory issues and registration of rating agencies, and the quality of ratings.

 

Mr Lauk, speaking for the EPP group questioned the business model of rating agencies and asked whether CRAs might be superfluous. He also wondered if ratings should better be paid by users rather than issuers.

 

Mr Klinz, speaking for the ALDE group, underlined the need to bring the provisions of the proposal in line with those of other important proposals such as Basel II and Solvency II. He also questioned the practicability to register every agency in every country in the European Union.

 

Mr Pitella, speaking for the PES group underlined the supervisory structure must be over-regional.

 

Thomas McGowan, speaking for the SEC explained US experience resulting from the NRSRO legislation dating back to September 2006. He also touched upon the latest SEC decision to strengthen oversight of Credit Rating Agencies made on 3^rd December (see here).

 

A questionnaire undertaken by the SEC shows that both sides, users and issuers of ratings, underline that rating should be used. The SECs role therefore is not to assess the correctness of ratings, but more that these are made properly.

 

Mr McGowan outlined that some type of regulation on CRA needed. However, he underlined that it had to be recognized that CRAs were not the driving force of the current crises. He also pledged for a system of voluntary registration noting that in the US some of the smaller rating agencies do not want to be registered.

 

Questioned upon the rating model he said that one of the great disadvantageous of an subscribtion-based model is that the ratings might not be publicly available.

 

Hubert Reynier, speaking for the French AMF, warned against possible regulatory arbitrage of the proposal and reminded to take into account the reality of the business which is global and independent from the jurisdictions. However, CESR has to become a ‘cornerstone’ of the framework, he said. The question is not so much one of ‘Regulation’, but to impose a supervisory function, Mr Reyneir said. It is important that CESR has the legal powers and the capacities to apply the rules, he underlined.

 

Pointing to the appropriateness of the IOSCO code he underlined that this was related on corporate ratings. This time, however, we face a problem of the structured finance market, he said.

 

Several other speakers from the industry and associations pointed to the possible negative for European financial markets resulting from Article 4 of the proposal. This would not only be harmful, but also highly protectionist and would also prevent further competition in the market. Other concerns related to corporate governance issues such as analyst rotation which were regarded as possibly counterproductive.  

 

The presentations as available are attached below.