Brussels, 02/12/2013 (Agence Europe) - On Monday 2 December, the European Securities and Markets Authority (ESMA) called for the three major ratings agencies - Moody's, Standard and Poor's and Fitch, the “Big Three” - to come fully into line with European standards on sovereign ratings methodology.
“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, head of ESMA, upon publication of the report. At this stage, the Paris-based body has not yet established that any particular conclusions of its report constitute breaches of the regulation. It will be monitoring each agency on an individual basis to determine whether they have remedied the shortcomings identified. It is also impossible to say whether any binding actions will be necessary.
Conflicts of interest. Concerns centred mainly on the potential existence of conflicts of interest or risks related to independence, such as the involvement of senior officials or those holding positions other than financial ratings within the rating process.
Additionally, certain confidential information is not sufficiently protected. In certain cases, various forthcoming rating actions have been communicated to third parties in advance, sometimes even before the rating committee has taken place. Nor is the use of external consultants sufficiently under control. Lastly, the security systems designed to protect certain confidential data could be better.
In certain cases, ESMA also noted periods of up to 2 weeks between a decision of a ratings committee and the actual publication of that decision. The authority also criticised excessive dependency on junior staff or recent recruits, in some cases in positions of responsibility which require knowledge and experience. Examples of good practice were, however, noted, particularly in ensuring the coherence and continuity of the allocation of portfolios to analysts.
Stressing the impact of financial ratings on the financial markets, Maijoor stressed that it is imperative “that users can have confidence that the CRAs have adequate systems and controls in place to ensure that ratings are rigorous, free from conflicts of interest and timely”. (EL/transl.fl)