The Securities Industry and Financial Markets Association (SIFMA) credit rating agency task force issued its recommendations for credit rating agency reform today.
The recommendations are being shared with regulators, lawmakers, and credit rating agencies globally. They reflect the efforts of the senior-level investor-led industry group, and respond directly to the designation by the U.S. President's working group on financial markets (PWG) of the blue ribbon task force as the private-sector group providing the PWG with industry guidance on credit rating matters.
The task force, which examines issues of ratings and credit rating agencies, is comprised of 37 individuals from the U.S., Europe, and Asia. It includes asset managers, underwriters, and issuers who are experts in structured finance, corporate debt, municipal debt, and risk.
Co-chair of SIFMAs credit rating agency task force Boyce Greer said the recommendations offer investors greater disclosure of the ratings process itself in a more transparent system, and prompt the agencies to better disclose information they use in determining ratings.
To determine priority areas of focus the task force identified the credit-rating-related causal variables that played large part in triggering the credit crisis of the past year. Sixteen key issues were identified and ranked in order of importance. The top issues, including transparency, model quality, and surveillance, were addressed by the recommendations.
In addition to enhancing disclosure of rating methodologies, due diligence information, surveillance procedures, credit rating agency performance, and fees, the recommendations also encourage a more harmonized global regulatory framework, and independent risk analyses by investors. The task force also identified the need for industry members, globally, to provide expert input and advice on issues related to credit ratings to regulators, lawmakers, and other market participants.
To this end, the task force recommends the creation of a global, independent industry credit ratings advisory board, under the auspices of SIFMA. The advisory board members will initially be drawn from the task force, and will continue the task force's work to date as an advisor and consultative resource.
The twelve recommendations on how to restore credit rating trust include: credit rating agencies (CRAs) providing enhanced, clear, concise, and standardized disclosure of CRA rating methodologies; and CRAs disclosing results of due diligence and examination of underlying asset data examinations, and limitations on available data, as well as certain other information relied upon by the CRAs in the ratings process.