Credit rating agencies (CRAs) can play an important role in many domestic and crossborder transactions. CRAs assess the credit risk of corporate or government borrowers and issuers of fixed-income securities. CRAs attempt to make sense of the vast amount of information available regarding an issuer or borrower, its market and its economic circumstances in order to give investors and lenders a better understanding of the risks they face when lending to a particular borrower or when purchasing an issuer’s fixed-income securities.
A credit rating, typically, is a CRA’s opinion of how likely an issuer is to repay, in a timely fashion, a particular debt or financial obligation, or its debts generally. Issuers, lenders, fixed-income investors, and government regulators use credit risk assessments for a variety of purposes. Issuers and corporate borrowers rely on (and, in many cases, pay for) opinions issued by CRAs to help them raise capital. Investors and lenders typically insist on being compensated for uncertainty and, when taking on debt, issuers pay for this uncertainty through higher interest rates.
CRA opinions that help reduce uncertainty for investors also help reduce the cost of capital for issuers. Lenders and investors in fixedincome securities, by contrast, use CRA ratings in assessing the likely risks they face when lending money to or investing in the securities of a particular issuer. Institutional investors and fiduciary investors (i.e., those with independent authority to invest on behalf of others, such as the managers of trust funds or pensions), likewise, use CRA ratings to help them allocate investments in a diversified risk portfolio.
Government regulators also may use CRA ratings for a variety of purposes, including setting capital charges for financial institutions according to the risks attendant to the institutions’ various investments.
The IOSCO Technical Committee formed a Task Force to examine certain key issues regarding the role CRAs play in securities markets. In particular, the Technical Committee
charged the Task Force with assessing: