Credit rating agencies (CRAs) will be adhering to a new Code of Conduct in the near future because of a new report from the International Organization of Securities Commissions, which was created to give credit rating agencies new guidelines to follow when evaluating structured finance products.
The changes were prompted by recent concerns over structured finance vehicles backed by subprime mortgages. In a press statement about the proposed changes, IOSCO says the agency’s “Code of Conduct Fundamentals for Credit Rating Agencies” report was drawn up after the recent subprime fallout caused securities regulators and market observers to question the methodologies of credit rating agencies.
“IOSCO’s Code of Conduct aims to improve investor protection, improve the fairness, efficiency and transparency of securities markets and to reduce systemic risk,” said Michael Prada, chairman of IOSCO’s Technical Committee. “We have engaged in a frank and constructive dialogue with the CRA industry, issuers and investors and have taken a broad range of views into account in finalizing the changes to our code.”

Below is a verbatim list of some of the report’s many suggestions:
take steps designed to ensure the decision-making process for reviewing and downgrading a current rating of a structured finance product is conducted in an objective manner
ensure that CRA employees that make up CRA rating committees have appropriate knowledge and experience in developing a rating opinion for the relevant type of credit
establish new products review functions to review the feasibility of providing a credit rating for a type of structure that is materially different from the structures a CRA currently rates
assess whether existing methodologies and models for determining credit ratings of structured products are appropriate when the risk characteristics of the assets underlying a structured product change materially
ensure that adequate resources are allocated to monitoring and updating its ratings
to discourage ratings shopping, disclose in their rating announcements whether the issuer of a structured finance product has informed it that it is publicly disclosing all relevant information about the product being rated
disclose whether any one issuer, originator, arranger, subscriber or other client and its affiliates make up more than 10-percent of the CRA’s annual revenue
establish policies and procedures for reviewing the past work of analysts that leave the employ of the CRA