Iosco proposes changes to rating agencies’ code of conduct

Credit rating agencies under fire from Iosco

MADRID – The International Organisation of Securities Commissions (Iosco) has proposed changes to the code of conduct for credit rating agencies (CRAs) in its new consultation paper, The Role of Credit Rating Agencies in Structured Finance Markets.

The consultation paper says processes and procedures need to be strengthened to improve the quality and integrity of the ratings process – criticised for lacking transparency and independence.

The Iosco recommendations specify that decision-making over ratings downgrades be objective and that CRAs establish an independent function responsible for periodic reviews of an agency’s rating methodologies and models. Iosco also warned agencies to refrain from rating structured products if the complexity of the product raises doubts about the validity of their ratings models and methodologies.

Conflicts of interest are another concern. The paper says CRAs should conduct periodic reviews over their employee remuneration practices, and disclose whether any one client and its affiliates constitute over 10% of the CRA’s annual revenue.

Iosco requests comments on the consultation paper by April 25, 2008.

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