The CFA Institute Centre for Financial Market Integrity said today that it is encouraged by reports that global regulators, finance ministers and central bankers will be reviewing IOSCO’s Code of Conduct Fundamentals for Credit Rating Agencies to supplement their discussions on changes to the credit rating agency (CRA) industry. In discussions with the CRA industry to refine its process, the CFA Institute Centre has offered several other proposals to further improve investors’ confidence in the global financial markets.
“As we discussed the subprime market meltdown with our members from around the world, the call for credit rating agencies to distinguish structured product ratings from corporate ratings and improve their processes was clear,” said James Allen, CFA, capital markets director for the CFA Institute Centre. “We support IOSCO’s code of conduct for CRAs as a globally accepted industry standard and suggest improvements to the code to enhance investor confidence.”
CFA Institute Centre suggested eight further proposals:
1. Create improvements to the credit rating process including:
- Use a rating nomenclature/categorization that distinguishes structured products from both corporate and commercial paper ratings to help investors recognize the differences.
- Refine or otherwise eliminate the concept of “investment grade” wherever possible to reduce the incidence of misconception about the purpose of the CRA’s ratings.
- Encourage a global best practice of prohibiting the practice of “notching,” where a CRA unilaterally issues a rating on an entity or structure that was not sought by the issuer.
- Create an executive-level compliance officer position at CRAs to ensure implementation and enforcement of the IOSCO code.
- Require complete adoption of the IOSCO code to claim compliance.
- Call on CRAs to refrain from rating new structured products until the statistical data are sufficiently robust to produce a defensible rating.
2. Use fair value reporting for financial instruments. Financial reports should show the fair value of all assets and liabilities that affect a company’s economic performance and condition to ensure that investors have a basis for evaluating asset values.
3. Put investors’ interests first. Regulators in all markets should ensure that investment firms and investment managers adopt, implement and enforce procedures to make certain the instruments they sell or use match their clients’ circumstances, goals, objectives and preferences.
Allen added that “the ripple effect created by the turbulent U.S. markets should be a reminder that, as our Comprehensive Business Reporting Model (PDF) states, transparent financial reporting is a critical lens for investor understanding and decision making. The CFA Institute Centre believes that public companies, especially those that utilize complicated SIVs and SPEs, need to improve their reporting of such structures, including putting them on their financial statements.”
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