Companies also use credit ratings to evaluate trading partners, financial counterparties, and potential business partners; and in many jurisdictions, regulators also rely on CRAs for determining regulatory capital requirements and permitted investments. Yet for the credit rating process to work properly, a critical nexus of transparency and trust must be exhibited by all of these parties – the issuers, the credit rating agencies, and the regulators who oversee both.
During the past two years, however, CRAs, and the credit rating process itself, have been the subject of significant criticism. CRAs have come under fire for failing to warn investors of the dangers and ultimately disastrous collapse of large global companies, including, for example, Parmalat, Enron, and WorldCom. These events have led some to question whether the CRAs are meeting the needs of market participants.
Some have asserted that regulators should take a larger role in regulating the
CRAs and should encourage competition in the market for credit ratings. Yet both credit rating agencies and government regulators have been slow to respond to the call for reform. For example, while the U.S. Securities and Exchange Commission (SEC) issued its first concept release a decade ago and a new concept release in June 2003 on rating agencies and the use of credit ratings under U.S. Federal securities laws, it has yet to take any definitive action. Regulators in Europe are in the process of addressing the issue as well.
Meanwhile, IOSCO has published its Code of Conduct Fundamentals for Credit Rating Agencies. As a result of the continuing concerns over the credit rating process, a series of initiatives arose independently. In response to the SEC’s June 2003 concept release, the Association for Financial Professionals (AFP) in the U.S. and the Association of Corporate Treasurers (ACT) in the United Kingdom called for improved regulation, improved internal controls and an industry code of practice for all those involved in the credit rating process. At the same time the Association Francaise Des Tresoriers D’Entreprise (AFTE) developed and shared a best practices guide that it had used in conversations with the CRAs and relevant authorities. Recognizing the various efforts and in light of the global need to restore confidence to the credit rating process, it was agreed in September 2003 in Slovakia at the meeting of the International Group of Treasury Associations that AFP, ACT and AFTE would bring forward a single global proposal for improving rating industry practice.
