IOSCO Statement Of Principles Regarding The Activities Of Credit Rating Agencies

IOSCO STATEMENT OF PRINCIPLES REGARDING THE ACTIVITIES OF CREDIT RATING AGENCIES A STATEMENT OF THE TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS 25 SEPTEMBER 2003 Credit rating agencies (CRAs, or ratings agencies) issue opinions on the future creditworthiness of a particular company, security or obligation as of a given date. These opinions tend to be relied upon by investors, lenders, and others, and, accordingly, CRAs can have an effect on securities markets in a variety of ways. Credit ratings can affect issuers’ access to capital, influence the structure of financial transactions, and determine the types of investments fiduciaries and others can make. Some regulators use the ratings issued by CRAs for various regulatory purposes. Given the influence CRA opinions can have on securities markets, the activities of CRAs are of interest to investors, lenders, issuers and securities regulators alike. The core objectives of securities regulation, as described by IOSCO’s “Objectives and Principles of Securities Regulation,” are protecting investors, ensuring that securities markets are fair, efficient, and transparent, and reducing systemic risk. In offering informed, independent analyses and opinions, CRAs contribute to achieving these objectives. Rating agencies that the market recognizes as credible and reliable can play a valuable role in global securities markets. Consequently, the Technical Committee has concluded that a set of IOSCO principles regarding the activities of CRAs would be a useful tool for securities regulators, ratings agencies and others wishing to improve how CRAs operate and how the opinions CRAs assign are used by market participants. As CRAs are regulated and operate differently in different jurisdictions, the following principles do not lay out a “one-size-fits-all” approach, but state high-level objectives for which ratings agencies, regulators, issuers and other market participants should strive in order to improve investor protection and the fairness, efficiency and transparency of the securities markets and reduce systemic risk. The manner in which these principles are given effect will depend upon local market circumstances and each jurisdiction’s legal system. In some cases, the principles may be best implemented through internal mechanisms at the CRA and promoted by borrowers, lenders and other market participants. Depending on the circumstances, the principles could be given effect through regulatory requirements. As a result, mechanisms for implementing the principles may take the form of any combination of:  Government regulation;  Regulation imposed by non-government statutory regulators;  Industry codes; and,  Internal rating agency policies and procedures. The Technical Committee proposes to await future consideration of these alternatives in the major jurisdictions and take account of preferences of other sector supervisors before considering its preferred method of implementation. The Technical Committee proposes to review these developments within 18 months. PRINCIPLES FOR THE ACTIVITIES OF CREDIT RATING AGENCIES Quality and Integrity of the Rating Process 1. CRAs should endeavor to issue opinions that help reduce the asymmetry of information among borrowers, lenders and other market participants. 1.1. CRAs should adopt and implement written procedures and methodologies to ensure that the opinions they issue are based on a fair and thorough analysis of all relevant information available to the CRA, and that CRA analysts perform their duties with integrity. CRA rating methodologies should be rigorous, systematic, and CRA ratings should be subject to some form of validation based on historical experience. 1.2. CRAs should monitor on an ongoing basis and regularly update an analysis and rating once a rating is issued whenever new information becomes available that causes the rating agency to revise or terminate its opinion. 1.3. CRAs should maintain internal records to support their ratings. 1.4. CRAs should have sufficient resources to carry out high-quality credit assessments. They should have sufficient personnel to properly assess the entities they rate, seek out information they need in order to make an assessment, and analyze all the information relevant to their decision-making processes. 1.5. Analysts employed by ratings agencies should use the methodologies established by the CRA and be professional, competent, and of high integrity. Independence and Conflicts of Interest 2. CRA ratings decisions should be independent and free from political or economic pressures and from conflicts of interest arising due to the CRA’s ownership structure, business or financial activities, or the financial interests of the CRA’s employees. CRAs should, as far as possible, avoid activities, procedures or relationships that may compromise or appear to compromise the independence and objectivity of the credit rating