Commission launches consultations on Credit Rating Agencies (CRAs)

The European Commission has published two consultation documents on CRAs seeking views from all interested parties by 5th September. The first document relates to the conditions for the authorisation, operation and supervision of credit rating agencies. The second proposes policy options in order to tackle what is felt to be an excessive reliance on ratings in EU legislation.

It is generally accepted that Credit Rating Agencies (CRAs) underestimated the credit risk of structured credit products and failed to reflect early enough in their ratings the worsening of market conditions thereby sharing a large responsibility for the current market turmoil. The current crisis has shown that the existing framework for the operation of CRAs in the EU (mostly based on the IOSCO Code of Conduct for CRAs) needs to be significantly reinforced.

After “listening to  many advisory bodies to the Commission and watching developments in the industry and in other jurisdictions for the last year”, Commissioner McCreevy declared to be “convinced, like others in Europe of the need to legislate in this area at EU level. CRAs 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”.  Commissioner McCreevy intends to present to the Commission his proposals early this autumn.

The main objective of the Commission proposal is to ensure that ratings are reliable and accurate pieces of information for investors. CRAs will be obliged to deal with conflicts of interest, have sound rating methodologies and increase the transparency of their rating activities.

The move to legislate in this area was recently welcomed by the Ecofin Council at its meeting in July. The documents published aim at ensuring the highest professional standards for rating activities. They do not intend to interfere with rating methodologies or rating decisions which will remain the sole competence and responsibility of CRAs. The envisaged proposals also take account of existing standards and developments at international level. The US has had rules on CRAs since the mid-seventies and is at present also considering changes to its rules.

The documents are open for consultation until 5th September. This short consultation period is justified by the need to issue a proposal in the autumn to allow the Council of Ministers and the Parliament to agree before the next European Parliament elections in June 2009.

Contributions can be submitted through specific website in the Rating Agencies website.

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