CESR announces a call for evidence on credit rating agencies

On 28 July 2004, CESR, (the Committee of European Securities Regulators) released a call for evidence on credit rating agencies, issued in response to a request to it from the European Commission for technical advice on the development of possible legislative measures in relation to the regulation of credit rating agencies.

The European Commission requested that the technical advice address the following areas:

• handling of potential conflicts of interests within credit rating agencies
• transparency of credit rating agencies' methodologies
• the legal treatment of credit rating agencies' access to inside information
• concerns about the possible lack of competition in the market for provision of credit ratings

The issues identified were not exhaustive, leaving CESR free to consider other relevant issues. It is required to provide its advice to the European Commission by no later than 1st April 2005.

CESR was established under the terms of the European Commission's decision of 6 June 2001 and acts as an independent advisory group to assist the European Commission, in particular, in its preparation of draft implementing measures in the field of securities. Its aim is also to improve co-ordination among securities regulators and ensure more consistent and timely day-to-day implementation of community legislation in Member States.

The European Commission has requested that CESR co-operate with two other regulatory agencies, the US Securities and Exchange Commission (the SEC) and the Committee of European Banking Supervisors (the CEBS). The SEC is already reviewing the role and regulation of the credit rating agencies.

The regulation of credit rating agencies, whose views on the credit quality of issuers in the bond markets are hugely influential, is an increasingly hot topic, particularly in the wake of recent financial scandals such as Enron, WorldCom and Parmalat.

Investors are increasingly demanding a greater degree of transparency in respect of how credit rating agencies assess creditworthiness. Some observers believe that fears would subside if full explanations of rating criteria and disclosure of meetings with companies were required to be made available to investors. Another view is that the regulators could reduce the need for greater regulation by opening up the ratings industry to new organisations, thus increasing competition.