The technical committee of the International Organization of Securities Commissions (IOSCO) has published a consultation report called Credit Rating Agencies: Internal Controls Designed to Ensure the Integrity of the Credit Rating Process and Procedures to Manage Conflicts of Interest.
This consultation report describes certain internal controls and procedures that rating agencies utilize to promote the integrity of the credit rating process and address conflicts of interest. The goal is to futher a better understanding of these practices.
According to the IOSCO, the stakeholder and rating agency views on these questions will help the agency in analyzing these firm's internal controls and procedures.
The Consultation Report is based on an IOSCO review on rating that focused on the internal controls established by rating agencies that enhance the integrity of the rating process and on the procedures to manage conflicts of interest.
The review was driven by the rating agency's role in the 2008 financial crisis that raised market concerns regarding credit rating quality and methodologies and the timeliness of adjustments to credit ratings.
More generally, it also examined the integrity of the credit rating process. The 2008 financial crisis also warned against how these rating firms are managing conflicts of interest.
The internal controls and procedures described by the Consultation Report are divided into six categories.
In terms of internal controls: quality of the rating process, structural support to ensure the quality of the rating process, monitoring and updating; and the rating process' integrity.
In terms of procedures, the division is between managing firm-level conflicts and managing employee-level conflicts.
This report is aiming to describe the operational practices of the rating agencies designed to offer effect to the relevant provisions of IOSCO's Code of Conduct Fundamentals for Credit Rating agencies, which was published in December 2004 and revised in May 2008. For the Code, please click here.
The closing period for responses to this consultation is July 9.