Credit rating agencies lack transparency, says ESMA

Surveillance of structured finance credit ratings is lacking at all four of Europe’s leading rating agencies, the European Securities and Markets Authority (ESMA) has concluded after a year-long investigation.

ESMA’s investigation, which ran from October 2013 until September 2014, focussed on the ratings agencies Fitch, Moody’s, DBRS and S&P. Between them, the four firms account for nearly all outstanding credit ratings on EU structured finance instruments.

It found evidence of shortcomings in the way that structured finance ratings were being monitored, as well as issues relating to methodology, disclosure and transparency. Concerns were also raised over annual internal reviews that lacked timely completion or independent oversight.

These weaknesses could affect the quality of the ratings and compromise the protections afforded to investors, said investigators.

All registered CRAs [Credit Ratings Agencies] should take note of the problems identified and ensure that they properly incorporate the requirements and objectives of the CRA Regulation into their working practices in order to ensure the quality of credit ratings and maintain investor confidence,” said Steven Maijoor, chair of the ESMA, who suggested that agencies use the best practice guidelines outlined in the report to help them improve.

The high volume of issued structured finance instruments and renewed interest in securitisation as an alternative funding source make the results of this review all the more timely,” he added.

ESMA has outlined remedial action plans for the agencies involved and will continue to monitor their improvement.



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