Report on The Role of Credit Rating Agencies

The technical committee of the International Organization of Securities Commissioners (“ISOCO”) recently published a consultation report on The Role of Credit Rating Agencies (“CRA”) in Structured Finance Markets. CRAs played a critical role in the recent market turmoil, according to the report. This follows from the fact that many investors and market participants effectively outsourced their valuations and risk analysis of residential mortgage backed securities (“RMBS”) and RMPB-backed collateralized debt obligations. As the number of delinquencies on subprime mortgages increased, “some investors began to question the accuracy of collateralized debt obligations and RMBS ratings.” Those questions furthered a growing reluctance to invest in these products by increasingly risk adverse investors. These questions and the resulting reluctance to invest may have added to the liquidity crisis.

The Technical Committee reformed the CRFA Task Force and asked it “to analyze the role CRA’s play in the structured finance markets and whether the IOSCO Code of Conduct should be modified. From the analysis by that group came the report which makes four broad recommendations regarding: 1) the quality and integrity of the rating process; 2) independence and avoidance of conflicts of interest; 3) CRA responsibility to the investing public and issuers; and 4) disclosure of the Code of Conduct and communications with market professionals . The report – essentially a discussion draft – was prepared in conjunction with the work being done by the ISOCO’s subprime task force.

The members of the technical committee are drawn from twelve states. In addition, U.S. SEC and CFTA are members.