ESMA Identifies Deficiencies in CRAs Sovereign Ratings Processes

The European Securities and Markets Authority (ESMA) has published a report identifying what it believes are a number of deficiencies in the processes for producing and issuing sovereign ratings at the three largest credit rating agencies (CRAs), Fitch Ratings, Moody’s Investors Service and Standard & Poor’s.
The report follows an investigation carried out by ESMA into the sovereign rating processes at the three CRAs between February and October 2013. The investigation was prompted by concerns about potential conflicts of interests, the impact of sovereign ratings on other types of ratings, CRAs’ capacity to cope with the number of rating actions during a period of high volatility, the use of bulk rating actions, and issues around the confidentiality and timing of rating actions.
The investigation focused on the governance and organisation of sovereign rating activities, the adequacy and expertise of allocated human resources, the disclosure of rating information to the public, and ensuring its confidentiality before disclosure.
ESMA identified deficiencies and issues for improvement in the following areas:

  • Independence and avoidance of conflicts of interests
  • Confidentiality of sovereign rating information
  • Timing of publication of rating actions
  • Resources allocated to sovereign ratings.

ESMA has yet to determine whether any of the report’s findings constitute a breach of the CRA Regulation, and may take action as appropriate in due course.
“ESMA’s investigation revealed shortcomings in the sovereign ratings process which could pose risks to the quality, independence and integrity of the ratings and of the rating process,” said Steven Maijoor, ESMA Chair. “The CRAs who were subject to this investigation still need to make improvements in their working practices to ensure their full compliance with the CRA Regulation and to eradicate inadequate practices from the past.”


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