The International Organisation of Securities Commissions (Iosco) has recommended regulators monitor and inspect rating agencies to check whether they are following its code of conduct.
The voluntary code, drawn up in December 2004, covers a range of best practice guidelines. It was most recently updated in May this year to address issues that had arisen during the credit crisis around the development and use of ratings. Additions to the code included strengthening the integrity of ratings, for example by having separate analytical teams dedicated to initial ratings and monitoring. The update also included principles to avoid conflicts of interest in rating structured credit, such as reviewing the salary policies for analysts to ensure they do not compromise objectivity, and reviewing the work of analysts who leave to work for financial firms they have previously dealt with.
Iosco is exploring how its members might work together to verify the information rating agencies need to provide under the code of conduct, and how agencies can adhere to principles designed to protect against conflicts of interest. The final set of recommendations will be submitted to the organisation’s technical committee in September, but a spokesperson from Iosco could not predict when these might come into force.
Iosco’s most recent recommendations raise the prospect that the code could become more coercive. The organisation suggested national regulators should share information about rating agencies' compliance with the code and co-ordinate their inspections. It also proposed an Iosco committee could be set up to confer on compliance issues.
Several rating agencies said they would work with Iosco on these developments and would adopt new initiatives if they help financial markets and are consistent across jurisdictions.
“We will review any Iosco proposals closely and will be happy to be involved in any market consultation relating to them. We welcome any initiative that works in the interests of the market as a whole and is globally consistent, while also preserving the independence and global consistency of rating opinions and rating methodologies,” said a spokesperson from Standard & Poor’s.
Meanwhile, a Moody's spokesperson said: “Moody's is committed to continuing the constructive dialogue it has established with the regulatory community, policy-makers and market participants and we welcome initiatives that help restore confidence to the capital markets. Towards this end, we encourage and are hopeful that any appropriate approach adopted by authorities regarding the role and function of credit rating agencies will remain globally consistent.”
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