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Continuity Assures Rating Quality

Von Dr. Oliver Everling | 12.September 2008

According to Feri EuroRating Services AG in Bad Homburg (www.feri.de), Article 10 of the newly proposed European Commission’s Directive / Regulation on credit rating agencies (CRAs) applies namely to the situation of issuer-driven rating agencies: Employees who are directly involved in the credit rating process are in danger to initiate or participate in discussions regarding fees or payments with any rated entity or any person directly or indirectly linked to the rated entity. In contrast, most of our ratings are provided without any initiative from the part of the issuer. „Our approach is to a large extent investor-driven“, writes Feri, „with subscribers paying for our services. Nevertheless, in some cases, due to the size of our organization and the necessary expertise to explain our rating approach und provide clients with transparency on our models and criteria, aforementioned employees might be present in discussions regarding fees or payments.“

The European Commission had 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. Its Article 10 says: 1. A credit rating agency shall ensure that employees directly involved in the credit rating process have appropriate knowledge and experience for the duties assigned. 2. Employees who are directly involved in the credit rating process shall not be allowed to initiate, or participate in, discussions regarding fees or payments with any rated entity or any person directly or indirectly linked to the rated entity by control. 3. A credit rating agency shall ensure that employees who are directly involved in the credit rating process meet the requirements set out in Annex II, Section A of the draft Regulation / Directive. Annex II, Section A shall be adapted by the Commission, acting in accordance with the procedure referred to in Article 28(2), in light of technical developments and to ensure its uniform application. 4. A credit rating agency shall ensure that analysts and persons approving credit ratings shall not be involved in providing the credit rating services to the same rated entity or its related third parties for a period exceeding four years. The period after which the analysts and persons approving credit ratings may again be involved in providing the credit rating services to the same rated entity or its related third parties may not be shorter than two years.

Due to model-based approaches to ratings, it cannot be ensure that analysts and persons approving ratings are not involved in providing the rating services to the same rated entity or its related third parties for a period exceeding four years, writes Feri. „Our analysts who deal with a specific group of issuers for many years are among our most qualified ones, since they understand better than anyone else the specific situations and problems of the entities rated. To our belief increasing fluctuation and turnover rate among analysts would not assure more reliable ratings.“

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