AMF report on role of Rating Agencies

27 March 2007

The AMF released a report on the role of Rating Agencies focusing on their role in the structured finance market, and especially in the CDO market. It completes the '2007 Risk and Trend Mapping for Financial Markets and Savings' published by the AMF in October 2006.

The present analysis points out the level of market concentration, with only 12 banks accounting for more than 70% of the European market, as well as the cornerstone role of the main rating agencies in this area. The preponderant percentage of securitization in rating agencies' income, which accounts for almost 50% of their revenues, is also noted.

The analysis reviews the potential conflicts of interest which might arise from this situation, especially with regards to rating agencies' ancillary business and with the participation of analysts in the negotiation of rating fees. It also questions the limits inherent to rating agencies' models in a context where products are constantly evolving technologically.

The analysis highlights the potential asymmetries of information in the secondary market between market participants and rating agencies/transaction sponsors.

The regulator's intent, in order to maintain and strengthen agencies' credibility in this area, is to ensure that the growth of agencies' means corresponds to market needs in terms of size and complexity. In addition, it must ascertain that market participants receive adequate information.

This study contemplates the regulatory actions to be implemented at the European level to ensure a better functioning of the securitization market. It suggests two main proposals:

the need for clarification of the underlying methodologies of securitization ratings, especially in comparison with more traditional corporate ratings;

and review of applicable regulations regarding permanent and periodic disclosure obligations over the course of the products' life cycle.

Document

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