The International Organization of Securities Commission (IOSCO) announced last week a three-point plan to monitor compliance of its new code of conduct for credit rating agencies (CRAs). This was done amid charges that its proposed plan will do little to restore market confidence in ratings.

In Europe, rating agencies self-monitor their activities and operate under a code of conduct. IOSCO suggested a new code that properly addressed issues related to the activities of these firms for structured finance products.

However, IOSCO believes that, for the code of conduct to be effective, rating agencies need to comply with the prescribed disclosures and regulators should take steps to ensure compliance.

The options IOSCO has suggested for the effective monitoring of compliance with the code of conduct include detailed arrangements for exchanging information between national securities regulators, cooperative inspection programs for CRAs and a specialized IOSCO committee to confer on compliance with the code of conduct by CRAs.

"The code of conduct focuses on transparency and disclosure in relation to CRAs' methodologies, conflicts of interest, use of information, performance and duties to issuers and the public," an IOSCO spokesperson said. "It does not dictate business models or governance but rather seeks to provide the market with information to judge and assess CRA activities, performance and reliability."

Meanwhile, the Committee for European Securities Regulators (CESR) has been urging the European Commission to create a regulatory body for the rating agencies and takes the view that if it can't be done internationally, it should be done within the European Union (EU) immediately. The work done by IOSCO would be the basis for any EU regime, said the spokesperson at IOSCO.

"The code of conduct is not active monitoring on the part of IOSCO," the spokesperson said. "Essentially it's a voluntary code, and it has been used as a basis for assessment by CESR."

However, EU Commissioner Charles McCreevy said he intends to introduce stricter controls for rating agencies that assess the creditworthiness of businesses. He also dismissed IOSCO's proposal for a rating agency code of conduct as falling short of what is required to restore investor and public confidence.

"The IOSCO code of conduct to which the rating agencies signed up has been shown to be a toothless wonder," McCreevy said while addressing the inaugural Global Financial Services Conference held in Edinburgh, Scotland, last May. "The fact is that despite the checks on compliance with the IOSCO code, no supervisor appears to have got as much as a sniff of the rot at the heart of the structured finance rating process before it all blew up. I am deeply skeptical that the appropriate response lies in building on and strengthening the IOSCO code."

McCreevy believes that many of the recent IOSCO task force recommendations do not appear enforceable in a meaningful way. He instead suggested limited but mandatory, well-targeted and robust internal governance reforms as the way forward to ensure stronger external oversight of rating agencies. He said that a regulatory solution at the European level is necessary to deal with some of the core issues facing CRAs.

"While some of the additional steps that the main rating agencies have announced are welcome, they are insufficient," he said. "I know some would be willing to do more, but I can quite understand why they are reluctant to move forward with more ambitious proposals if there isn't going to be a level playing field."

David Toube, an associate at Cleary, Gottlieb, Stein & Hamilton, said at a recent European Securitization Forum briefing that it's probable that McCreevy will deliver his solution before October this year. It will likely follow a sensible conduct to business rules much like the code applied to investment bank researchers.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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