From the Regulators

The aim is to reduce companies’ reliance on credit rating agencies

By James Langton |

Global securities regulators have published a set of proposed best practices for large companies to use to ensure they aren't too reliant on credit rating agencies (CRAs) to assess credit risk.

The International Organization of Securities Commissions (IOSCO) Thursday published a consultation paper that sets out 13 proposed practices for large industry firms, such as brokers and asset managers, to consider when implementing their own policies and procedures for assessing credit risk.

IOSCO says that it believes that following these practices can help firms avoid an over-reliance CRAs. As well, IOSCO suggests that regulators could also consider these practices as part of their oversight of industry firms.

"While CRA ratings can offer investors and lenders an efficient way to label the risks associated with a particular borrowing or lending facility, the recent global financial crisis illustrated how a mechanistic reliance on CRA ratings can contribute to and exacerbate the fallout on the markets," IOSCO notes. Reducing this reliance, it suggests, will help increase investor protection, and bolster market integrity and financial stability.

Among other things, the proposals include: establishing an independent credit assessment function; developing a coherent oversight structure to ensure that the credit assessment process is properly implemented and followed; avoiding exposure to credit risks that can't be independently assessed; and, ensuring regular, independent reviews of these credit assessment policies and procedures.

IOSCO compiled the list of best practices through a study of large firms designed to gain an understanding of their existing approach to assessing credit risk; and, two roundtable discussions with the industry that were carried out last year.

Comments on the proposals are due by July 8.