CESR has published its final report into the progress that EU based credit rating agencies' (CRAs) have made in complying with the International Organisation of Securities Commission's 2008 Code of Conduct Fundamentals for Credit Rating Agencies (the IOSCO Code).

CESR has assessed the codesof 24 CRAs, as available at the end of March 2009, and has broadly categorised them as either being compliant, or deviating from, the IOSCO Code. The findings of CESR were as follows:

  • 6 CRAs have not adopted a code of conduct, with 4 of the 6 claiming to adhere to the IOSCO Code;
  • 2 CRAs have adopted a code of conduct but have not made the code public. As such, despite being compliant with a significant number of the provisions of the IOSCO Code, CESR considers them to deviate as market participants and stakeholders have no ability to independently verify the code;
  • 16 CRAs have adopted and published codes of conduct; with 8 codes aligned to the 2008 IOSCO Code and 6 codes aligned to 2004 IOSCO Code, with the remaining 2 CRAs reproducing a limited number of IOSCO Code provisions.

The five global CRAs that are involved in rating structured finance products (Moody's, Fitch, S&P, AM Best and DBRS), have all modified their codes of conduct to take into account the new IOSCO Code. However, CESR has found that these five codes do deviate from a number of the provisions of the IOSCO Code and do not provide adequate explanations for such deviations. There are 2 provisions from which most of the global CRAs deviate:

  • Moody's, S&P and Fitch deviate from the requirement that prohibits analysts from making proposals or recommendations regarding the design of the structured finance products; and
  • Moody's, S&P, Fitch and DBRS deviate from the requirement to disclose in the rating announcement whether the issuer of a structured finance product has informed them that it has publicly disclosed all relevant information about the product being rated or if the information remains non-public.

A number of CRAs have indicated that they are awaiting incoming EU legislation before updating their codes of conduct. CESR recommends that the 6 CRAs that have not adopted a code of conduct, adopt the IOSCO Code as a priority and that the 2 unpublished codes be made available as the IOSCO Code requires.

CESR also expects that the deviations identified in the codes of the five global CRAs, as well as the other CRAs, will be assessed by itself and national authorities as part of the review of applications for registration of CRAs under the incoming EU legislation. CESR expects that the legislation will contain conditions closely aligned with the provision of the IOSCO Code.

For a full copy of the Report, please click here.