IOSCO takes deep dive into alternative ratings products

Body launches sweeping consultation to explore non-traditional sidelines sold by credit rating agencies

A wide-ranging consultation has opened to seek insights on the growing number of alternative product lines sold by credit rating agencies (CRAs).

Published on 7 November, the Other CRA Products probe aims to find out as much as possible about the increasing range of non-traditional sidelines that CRAs offer – some of which have stemmed from entire, new business divisions created specifically to sell those products.

The consultation has emerged from heavyweight industry watchdog the International Organization of Securities Commissions (IOSCO).

As the body says in its supporting statement, Other CRA Products (or OCPs) “may be used by market participants in making investment and other credit-related decisions… and may be used by issuers and obligors to make decisions about whether to obtain a credit rating from a particular CRA.”

OCP types that IOSCO has already identified through a set of stakeholder questionnaires include:

• confidential ratings;
• expected ratings;
• preliminary ratings;
• credit default swap spreads;
• bond indices; and
• portfolio assessment tools.

According to the organisation, responses to those initial questionnaires indicated that:

1. Some OCPs share some common processes and features with traditional credit ratings – for example, CRAs develop a number of OCPs using the same analysts who determine traditional credit ratings.
2. However, CRAs tend to create separate structures or business line organisations to merchandise their alternative products.
3. OCPs can be broadly classed in six, primary categories: research, private, non-final, part of the rating process, outside the rating process and hybrids – each of which has distinct features, outlined in the consultation report.

IOSCO is now asking users of CRAs – as well as employees at the agencies themselves – for their thoughts on the following questions:

• Are there additional OCP types that have so far not been identified?
• Are there other features of the six categories that should be added to IOSCO’s body of knowledge?
• Are there any further uses of OCPs that have not been included in the consultation report?

While there is no explicit sense of regulatory emergency in IOSCO’s statement, it is also asking stakeholders a) whether they consider OCPs to be covered by its Code of Conduct and CRA Principles, and b) whether they routinely apply those rules to OCPs.

The deadline for comments is 5 December.

Find the full consultation report here.