GLOBAL - Recommendations for credit rating agency (CRA) reform have today been released by the Securities and Financial Markets Association (SIFMA).
They were put together by a task force, comprised of 37 individuals from the US, Europe, and Asia, which was formed to examine key issues related to ratings and credit rating agencies.
It included asset managers, underwriters, and issuers who are experts in structured finance, corporate debt, municipal debt, and risk.
Boyce Greer, president, fixed income and asset allocation at Fidelity and co-chair of SIFMA's Credit Rating Agency Task Force, said: "The recommendations issued today endorse the development of a far more transparent credit rating system.
"Specifically, these recommendations offer investors greater disclosure of the ratings process itself, and spur credit rating agencies to share more fully information they use in determining credit ratings.
"Investors' ability to better understand the credit rating agency inputs and methodology will allow investors to incorporate ratings appropriately in their own internal risk assessments and investment decision analytics. This, in turn, is a key element of strengthening the securitised credit markets."
Other recommendations include:
• CRAs should disclose CRA surveillance procedures to foster transparency, and allow market users of ratings to understand their bases and limitations;
• CRAs should provide access to data regarding CRA performance to allow investors to assess how CRAs differ both in the performance of their initial ratings, and in their ongoing surveillance of existing ratings;
• Conflicts of interest should be addressed with a sensitivity towards the difference between CRA "core" services and CRA consulting services;
• A global SIFMA advisory board of industry participants should be established to advise regulators and lawmakers on ratings issues;
• Lawmakers, regulators, and law enforcers across the globe should coordinate more closely in addressing this global problem, in order to avoid counter-productive, piecemeal, inconsistent attempts at remediation;
• CRA fee structures, and identities of top payors, should be disclosed by CRAs to their regulators;
• CRAs should ensure that ratings performance of structured products are consistently in line with ratings performance of other asset classes to increase investor confidence in the reliability of ratings; • Rating "modifiers" should not be the means adopted to create transparency because they would lead to significant unnecessary costs, while at the same time likely triggering unintended negative consequences;
• Investors should understand the limits of ratings, and use them as just one of many inputs and considerations as they conduct their own independent analyses; and
• All members of the financial industry involved in the generation and use of ratings, including issuers and underwriters, should examine their processes with an eye towards improvement, including working towards standardising reporting and disclosure on underlying assets.
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