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IOSCO agreed on changes to the Code of Conduct, demanding CRAs to differentiate ratings of structured finance products from other ratings, provide better information on the rating process and disclose – in some cases - their annual revenue structure to avoid conflicts of interest.
“We have engaged in a frank and constructive dialogue with the CRA industry, issuers and investors and have taken a broad range of views into account in finalizing the changes to our code”, Michel Prada, Chairman of IOSCO’s Technical Committee, said.
Amendments to the Code of Conduct include:
Quality and Integrity of the Rating Process
• CRAs should adopt reasonable measures so that the information they use is of sufficient quality to support a credible rating. If the rating involves a type of financial product with limited historical data upon which to base a rating, the CRA should make clear, in a prominent place, the limitations of the rating.
• CRAs should also assess whether existing methodologies and models for determining credit ratings of structured products are appropriate when the risk characteristics of the assets underlying a structured product change materially;
• CRA analysts should be prohibited from making proposals or recommendations regarding the design of structured finance products that the CRA rates;
CRA
• CRAs should disclose whether any one issuer, originator, arranger, subscriber or other client and its affiliates make up more than 10 percent of the CRA’s annual revenue;
• CRAs should discourage “ratings shopping,” disclose in their rating announcements whether the issuer of a structured finance product has informed it that it is publicly disclosing all relevant information about the product being rated;
CRA Responsibilities to the Investing Public and Issuers
• CRAs should differentiate ratings of structured finance products from other ratings, preferably through different rating symbols;
• CRAs should indicate the attributes and limitations of each credit opinion, and the limits to which it verifies information provided to it by the issuer or originator of a rated security;
• CRAs should also disclose the degree to which they analyze how sensitive a rating of a structured financial product is to changes in the CRA’s underlying rating assumptions;
Disclosure of the Code of Conduct and Communications with Market Participants
• A CRA should publish in a prominent position on its home webpage links to the CRA’s code of conduct; a description of the methodologies it uses; and information about the CRA’s historic performance data.
Role of Credit Rating Agencies – Final Report
Code of Conduct Fundamentals for Credit Rating Agencies