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Issuers’ Group Campaigns for Regulators to Reduce their Reliance on Ratings

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Ratings agencies are really getting a battering from all sides this month. Not only is the banking sector and the regulators scrutinising their every move, now issuers have added their two pennies’ worth to the debate. This week, issuer association EuropeanIssuers indicated that it believes references to credit ratings should be completely removed from European legislation.

EuropeanIssuers is supportive of all that has been going on to tackle the issues around potential conflicts of interest with regards to ratings providers and has said that it welcomes the European regulation that will subject credit rating agencies to registration and ongoing supervision by public authorities. “We applaud the measures taken to promote transparency and avoid conflicts of interest. We consider it a big step forward that the regulation empowers the supervisor to better monitor the tools that investors use to evaluate securities,” the group says in a statement.

Much like the rest of the industry, issuers are also seemingly concerned with accountability, as rating agencies have argued repeatedly that their function is merely to provide “opinions”. Thus, although inaccurate and unreasonable credit ratings were a primary cause of the recent crisis, rating agencies remained largely free of any responsibility, the group contends.

However, despite its support of the intentions of the regulation, EuropeanIssuers feels the regulatory community has not gone far enough in Europe. The stronger supervision that will be achieved as a result of the new regulation does not remove the need to address the excessive reliance on ratings, it contends. “Both the de Larosière Report and the regulation clearly state that such reliance should be significantly reduced over time. EuropeanIssuers forewarns that this goal should not be forgotten amidst the implementation of the regulation,” it says in a statement.

The group points to the steps being taken in the US by the Securities and Exchange Commission (SEC) to amend the existing regulation in order to remove reliance on ratings within the regulatory framework as a model to be followed in Europe. “We therefore urge the European Commission to continue the work it started when consulting the market on this subject in July 2008, and to come forward soon with concrete proposals to eliminate references to credit ratings in the European legislation,” it adds in its statement.

As it currently stands, the new European regulation vests the Committee of European Securities Regulators (CESR) and the national authorities with the necessary competences to ensure that rating agencies are truly accountable for the ratings they issue. This is in the latter’s own interest, says EuropeanIssuers: “stronger supervision and real accountability for their actions will help restore the agencies’ credibility in the market”.

CESR is set to assume the responsibility for coordination and advisory services to the ratings sector across Europe, including the establishment of a central repository for ratings agency data. All ratings agencies will therefore be required to submit to CESR information on their historical performance data including the ratings transition frequency and information about credit ratings issued in the past. In order for this to be effected smoothly, CESR is drawing up a standardised form on which this data must be summarised.

The regulator must also make this data available to the public and publish summary information on the main developments observed on an annual basis, under the auspices of increasing transparency in this sector. The regulator must also provide guidance on common standards on the presentation of historical performance data within six months of the entry into force of the proposed regulation, ergo by March 2010. However, no deadline has been set with regards to the implementation of the central repository. This step will largely depend on the need for a public tender process and IT development work, according to the regulator.

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