Brussels, 10/01/2006 (Agence Europe) - At the end of December, the Commission adopted a Communication rejecting any idea of submitting a legislative proposal on credit rating agencies. Like the Committee of European Securities Regulators (CESR), it considered that existing European legislation along with the International Organisation of Securities Commissioners' (IOSCO) code of conduct provide a sufficient regulatory framework. It said it would, however, continue to follow developments in the sector very closely and would consider legislative proposals if new circumstances arose, such as serious market failure or if there were changes in the way credit rating agencies were regulated in other parts of the world.
There are three Financial Services Action Plan (FSAP) relevant to credit rating agencies: Directive 2003/6/EC on market abuse, such as insider dealing or market manipulation, the Capital Adequacy Directive for banks and investment firms (Basel II) and Directive 2004/39/EC on markets in financial instruments (MiFID).
The Credit Rating Agencies' internal code of conduct is supposed to incorporate all the arrangements of the IOSCO code, which was published at the end of 2004. Each time that this is not the case, credit rating agencies are required to demonstrate that the measures in their own code will have exactly the same effect as those of the IOSCO. The Commission was encouraged that many credit rating agencies have produced their own codes of conduct based on the IOSCO code. It warned, however, that the codes of conduct must be put into daily practice. For this reason, it would ask the CESR to monitor compliance with the IOSCO code and report back annually. It was also considering setting up an informal group of experts to gauge the opinions of market participants.
In early 2004, the European Parliament adopted a resolution on the role and methods of credit rating agencies as part of its concerns over the independence and impartiality of these agencies, the quality of ratings given and the transparency of methods used to reach decisions. According to the EP, agencies which use this information for other activities are to be avoided. It was also concerned by the degree of concentration in rating activities and their possible anti-competition effects. Three companies dominate the World credit rating market: Standard & Poor's Ratings Services, Moody's Investors Service and Fitch Ratings.
Credit rating agencies exercise a considerable effect on financial markets. Their role is to issue opinions on the creditworthiness of a particular issuer or financial instrument. In other words, they assess the likelihood that an issuer will default either on its financial obligations generally or on a particular debt or fixed income security. Ratings are usually sought - and paid for - by the issuers themselves.