Rating agencies criticised over transparency shortcomings

The European Securities and Markets Authority’s (ESMA’s) examination of the credit rating agencies has highlighted several transparency issues.

ESMA has not determined whether any of the latest observations constitute a breach of regulations but has registered concerns about how Moody’s, Fitch and Standard and Poor’s arrive at their rating decisions.

Rating committees as well as other key meetings are “not sufficiently recorded” including the outcome of voting within the rating committees, as well as the reasons behind the final decisions.

ESMA has specifically cited transparency as a key issue for the agencies: “CRAs [credit ratings agencies] should improve the recording of core internal processes, in particular regarding the activities of the rating committees.

“A more rigorous approach to the organisation and recording of rating committees and other key internal meetings and committees (i.e. relating to control functions, business lines management meetings etc…) would lead to improved control mechanisms for monitoring the quality and consistency of internal decisions, in particular relating to the rating activities.”

“Further formalisation should also be achieved in order to enhance rigorousness and transparency as regards participation and decision making within key internal meetings and committees, including selection of committees’ members (chair and voting and non-voting members).”

Additionally, rating committees meetings were often attended by personel who had not been involved in the evaluation of a specific rated entity and that attendees were only offered a limited time to analyse documents relevant to the meeting.

Users of the agencies should be kept better informed about how and why final decisions are reached. ESMA has suggested that criteria are compiled in a single document setting forth the main methodology.