Friday, August 1, 2008

Brussels outlines ratings agencies plan

(FT) Credit rating agencies should be subject to “exacting regulatory requirements” in order to operate in Europe under a single supervisory regime, according to the European Commission.

Brussels is proposing legislation this autumn to oversee the agencies and outlined how supervision might work in two consultation documents, released on Thursday, on combating failures in the current system of voluntary self-regulation.

Ratings agencies have been blamed for contributing to financial turbulence by underestimating the risks attached to the mainly mortgage-related bonds at the heart of the credit crisis.

The idea of formal regulation has already been backed in principle by EU finance ministers. Charlie McCreevy, internal market commissioner,said on Thursdday he was convinced of the need for a European-level set of rules.

“[Ratings agencies] will have to comply with exacting regulatory requirements to make sure ratings are not tainted by the conflicts of interest inherent to the ratings business,” he said.

“The crisis has shown that self-regulation has not worked.”
The Commission’s legislative move prompted concern among agencies and other market participants, worried about the prospect of numerous supervisors in different member states, as well as varying regimes globally.

Standard & Poor’s said it would want to look at whet-her the proposed regime would support “a globally co-ordinated approach to the oversight of rating agencies . . . and the independence of rating opinions”.

Meanwhile, the leading global association for debt markets spelt out its proposals to restore market confidence in the agencies and said one of its key objectives was to ensure some uniformity in the rules faced by the ratings industry worldwide.

The 12 recommendations of the Securities Industry and Financial Markets Association taskforce focus on better disclosure and transparency by the industry. However, it rejected the idea of a new or modified ratings scale for structured credit, which has been promoted by the lead French regulator Michel Prada, among others.

Deborah Cunningham, chief investment officer at Federated Investors and co-chair of the taskforce, said restoring the “quality” and “perceived integrity” of ratings was “essential if we are to avoid a continuation or repeat of the global market turmoil of the past year”.

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