Following more than a year of discussions about how to best tackle the underlying issues with credit ratings in the post-crisis environment, the Committee of European Securities Regulators (CESR) has produced a new consultation paper detailing the data requirements for these ratings agencies under the new regime of heavier scrutiny. Industry participants have until the 18 June to provide feedback to CESR about the new requirements, which include details about the typical set of information competent authorities may request from credit ratings agencies (CRAs) on an ongoing basis.
“Competent authorities will typically require CRAs to provide a set of standard information and data as part of ongoing supervision. This may include rating transactions, methodology changes but also activity reports, board minutes as well as any changes to the organisation,” notes the consultation paper. This is in keeping with the general bent within the regulatory community to obtain more information from CRAs about their practices in light of their perceived role in the financial crisis.
The paper covers data required for general monitoring of CRAs, as well as potential investigatory activities should a breach be suspected, but it does not cover data required during the registration process. These firms will have to provide operational data such as ratings updates (including withdrawals), new issuances, methodologies reviews, internal control reviews, financial data and information on staff turnover to regulators on a monthly basis. Compliance data, including updated work plans, identification and mitigation of potential conflicts of interests or breaches, compliance reports and internal audit or risk reports produced by the CRA, will be required on a monthly or quarterly basis, depending on the size of the firm.
CESR is being rather prescriptive about the data it is requiring these firms to provide to their national regulators in order to ensure that full transparency is achieved. It is also mandating on site visits by home and host regulators to these individual firms in order to ensure they are kept in line and living up to their purported risk management practices. “The number and frequency of meetings should be proportionate to the size and structure of a CRA, whether it is part of a group, as well as on individual circumstances,” notes CESR.
CESR is keen for ratings agencies and market participants to provide feedback on whether these requirements are practical and will provide enough transparency into the practices of the much maligned CRAs. The European approach is also similar to that being adopted in the US by the Securities and Exchange Commission (SEC), which earlier this year issued a set of proposals following a regulatory roundtable on the subject of CRAs.