Rating agencies – now it’s the Americans’ turn
Jinfo Blog

25th July 2009

By Tim Buckley Owen

Item

First it was the Europeans and now the Americans have come up with their own proposals for curbing the credit rating agencies. But as the Economist predicts that they could be stripped of their special status, Outsell wonders whether the current desire for tougher regulation will be translated into action. It was last April that the European Parliament and Council approved regulations requiring the agencies to pass stringent tests of both conflict of interest and methodology if they wanted their ratings to be used in the European Union (http://www.vivavip.com/go/e19183). The United States Treasury’s proposed legislation would bar agencies from consulting with any companies that they also rate, and would attempt to put a stop to ‘ratings shopping’ by requiring issuers to publish all the preliminary ratings they received, not just the best one. As in Europe, agencies would be subject to mandatory registration if they wanted to continue in business, would have to convince the US Securities & Exchange Commission (SEC) that their methodologies were sufficiently rigorous, and would have to apply a special symbol to dodgier structured finance products. There would also be efforts to reduce reliance on the agencies, and the US Treasury would work with the SEC and the President’s Working Group on Financial Markets to determine where references to ratings could be removed from regulations (http://digbig.com/5bacfw). But the Economist is concerned that this may not be sufficient. ‘Rating firms have become an anointed oligopoly (with margins to match) because they are embedded in regulations,’ it thunders, adding that: ‘the obvious solution is to strip the rules of references to ratings where possible, so that the market, rather than a government mandate, determines the extent of their use’ (http://digbig.com/5bacfx). Small wonder, then, that Outsell’s market report on Credit & Financial Information comments that the agencies had ‘a very poor year’. In the immediate short term, their prospects for revenue growth are 'severely constrained', it continues. All financial information providers will need to focus on maintaining a reputation for integrity and on developing the tools that will meet demands from both regulators and investors, Outsell says. But it also adds that establishing new regulatory regimes may take time, and that the expressed desire for tighter regulatory scrutiny may not be translated into action. (Purchase details at http://digbig.com/5bacfy). However the Economist warns that, with a number of lawsuits pending alleging agency ‘recklessness’, the momentum for the downgrading of the agencies could be too great for the administration to ignore, despite the legislative difficulties. One issue this could raise for information professionals is whether any alternative convenient shorthand for rating one investment risk against another would emerge if US efforts to reduce regulatory reliance on credit ratings were successful.

« Blog