CESR publishes responses to the rating of structure finance instruments

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BRUSSELS – The Committee of European Securities Regulators (CESR) has published the first batch of responses to its questionnaire regarding the rating of structured finance instruments.

In its 2006 report, CESR identified a possible conflict of interest as an area of common deviation to all credit rating agencies (CRAs), due to the lack of a clear separation between the rating service and the ancillary services provided by CRAs.

CESR particularly highlighted the fact that this was even more troublesome in the “area of structured finance ratings, since the structures of the debt obligations are often decided in negotiations between the issuer and the CRA. These negotiations may contain several hypothetical structures, for instance, when it comes to how different tranches of debt are set up, or when it comes to levels of credit enhancement”.

To investigate this further, CESR decided to include a specific section on structured finance in its second annual report – part of the research for this included issuing a questionnaire to gather more information from the CRAs on these issues.

The two public responses can be accessed via CESR’s website: www.cesr-eu.org. The deadline for additional responses has been extended until September 10.

CESR has also scheduled a meeting with the CRAs for the beginning of October to discuss how they develop ratings for structured finance products. The association aims to seek clarification on the CRAs’ role in the US subprime mortgage crisis. It will also be meeting with Charlie McCreevy, European Commissioner for the Internal Market and Services, following his invitation to discuss CESR’s work on CRAs in the light of market developments in this field, and in particular, to discuss the role of CRAs in the rating of structured finance instruments.