Ratings agencies told to shape up over structured finance instruments

Credit Ratings - FITCH

Credit rating agencies (CRAs) are falling short in their assessment of structured finance instruments, according to a new report from the European Securities and Markets Authority (ESMA).

The authority said there are problems in the way some data was reviewed by the four big CRAs -  DBRS Ratings, Fitch Ratings, Moody’s Investors Services and Standard & Poor’s. Combined, these account for almost 100 per cent of the total outstanding credit ratings on EU structured finance instruments.

In addition to shortcomings in several areas affecting the surveillance of structured finance ratings, ESMA also identified weaknesses on the level of disclosure and transparency which could be detrimental to investor protection.

So far the authority has not determined whether any of the findings constitute a breach of the CRA Regulation, but it has requested that the agencies put in place “remedial action plans” to solve the individual concerns identified.

Numerous good practices were also identified and these concerns do not tell the whole story, it is worth noting.

ESMA’s chair, Steven Maijoor, said concerns centred on information quality controls, the application of the agencies’ methodologies and the related disclosure, as well as the timely completion of the credit ratings annual review.  There were also issues related to the role and independence of the internal review function.

“The high volume of issued structured finance instruments and renewed interest in securitisation as an alternative funding source make the results of this review all the more timely,” he added.

“All registered CRAs should take note of the problems identified and ensure that they properly incorporate the requirements and objectives of the CRA Regulation into their working practices in order to ensure the quality of credit ratings and maintain investor confidence.”