New Code of Conduct in works for credit rating agencies

Credit rating agencies across the world may soon have to follow a new Code of Conduct, which would seek to ensure greater transparency and address issues like conflict of interest in issuance of ratings by them.
Global regulatory body IOSCO today said the Credit Rating Agencies (CRA) Code is aimed at putting in place robust, practical measures as well as a framework to protect their integrity while carrying out the rating process.
Besides, the guidelines would ensure that issuers and users of credit ratings, including investors, are treated fairly besides safeguarding confidential material information provided to them by issuers.
The International Organisation of Securities Commissions' (IOSCO) has proposed significant revisions and updates to the its existing Code for CRAs.

Once final Code of Conduct is put in place by IOSCO, regulators across the world including Sebi would incorporate the same in their respective regulations for rating agencies.
Securities and Exchange Board of India's (Sebi) norms governing rating agencies are already among the strictest in India, but further revision would be done if required pursuant to IOSCO finalising its guidelines in this regard.

The proposed changes include enhancing provisions regarding protecting the integrity of the credit rating process, managing conflicts of interest, providing transparency, and safeguarding non-public information.
"CRA ratings decisions should be independent and free from political or economic pressures and from conflicts of interest arising due to the CRA's ownership structure, business or financial activities, or the financial interests of the CRA's employees," IOSCO said.

Further, the draft Code seeks to bring in additional measures with regard to governance, training, and risk management.
"The goal is to create an updated IOSCO CRA Code that works in harmony with the CRA registration and oversight programmes that many IOSCO members have implemented in recent years, and that continues to operate as the international standard for CRA self-governance," the grouping said.
First published in 2004, IOSCO CRA Code was in 2008 in the
wake of the global financial meltdown the same was revised to include significant disclosure provisions for the agencies.
The revised provisions addressed concerns regarding the quality of information that CRAs relied on, suggestions that they were too slow to review existing ratings and the possible conflict of interest arising from such agencies advising issuers on how to design structured finance products.

The draft Code of Conduct for CRAs would be open for public comments till March 28.
IOSCO is the global forum for securities regulators and its members regulate more than 95 per cent of the world's securities markets spread across more than 115 jurisdictions.