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Brussels, 31 July 2008

Consultation by the Commission services on Credit Rating Agencies (CRAs)

The European Commission has published two consultation documents on CRAs seeking views from all interested parties by 5th September. The first document relates to the conditions for the authorisation, operation and supervision of credit rating agencies. The second proposes policy options in order to tackle what is felt to be an excessive reliance on ratings in EU legislation.

Commissioner McCreevy declared: "I have been listening to many advisory bodies to the Commission and watching developments in the industry and in other jurisdictions for the last year. I am convinced, like others in Europe of the need to legislate in this area at EU level. CRAs will have to comply with exacting regulatory requirements to make sure ratings are not tainted by the conflicts of interest inherent to the ratings business. The crisis has shown that self-regulation has not worked. I am also convinced that excessive reliance on ratings in EU legislation might have discouraged banks and other financial institutions from exercising their own due diligence. They should not be encouraged by law to rely solely on ratings for their risk assessment processes. I intend to present my proposals to the Commission for adoption this autumn and I look forward to receiving the views of all interested parties".

It is generally accepted that CRAs underestimated the credit risk of structured credit products and failed to reflect early enough in their ratings the worsening of market conditions thereby sharing a large responsibility for the current market turmoil. The current crisis has shown that the existing framework for the operation of CRAs in the EU (mostly based on the IOSCO Code of Conduct for CRAs) needs to be significantly reinforced. The move to legislate in this area was recently welcomed by the Ecofin Council at its meeting in July. The documents published today aim at ensuring the highest professional standards for rating activities. They do not intend to interfere with rating methodologies or rating decisions which will remain the sole competence and responsibility of CRAs. The envisaged proposals also take account of existing standards and developments at international level. The US has had rules on CRAs since the mid-seventies and is at present also considering changes to its rules.

The consultation paper suggests the adoption of a set of rules introducing a number of substantive requirements that CRAs will need to respect for the authorisation and exercise of their rating activity in the EU. The main objective of the Commission proposal is to ensure that ratings are reliable and accurate pieces of information for investors. CRAs will be obliged to deal with conflicts of interest, have sound rating methodologies and increase the transparency of their rating activities.

The consultation document also proposes two options for an efficient EU oversight of CRAs: The first option is based on a reinforced co-ordination role for the Committee of European Securities Regulators (CESR) and strong regulatory co-operation between national regulators. The second option would combine the establishment of a European Agency (either CESR or a new agency) for the EU-wide registration of CRAs and the reliance on national regulators for the supervision of CRA activities.

The consultation document on reliance on ratings identifies the references made to ratings in existing EU legislation and looks at possible approaches to the issue of excessive reliance on ratings.

The documents are open for consultation until 5th September. This short consultation period is justified by the need to issue a proposal in the autumn to allow the Council of Ministers and the Parliament to agree before the next European Parliament elections in June 2009.

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Comments should be sent to the following e-mail address:

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