Sunday, June 29, 2008

SEC regulatory proposal for Credit Rating Agencies.

After a tumultous year or two in the financial markets, finally some regulatory action. In mid June, the SEC invited comments to a planned proposal to reduce the influence of credit rating agencies (CRA) in the financial markets. The central theme of such a proposal is 'to address concerns about the integrity of their credit rating procedures and methodologies in the light of the role they played in determining credit ratings for securities collateralized by or linked to subprime residential mortgages' No surprises there... Following the recent market turmoil (everybody's favorite phrase),the Senate Banking Committee held a hearing on the role of the credit rating agencies in the mortgage mess. They directed that the Securities and Exchange Commission (SEC) impose tough regulations on the rating industry.

The SEC plans to propose new rules that would be aimed at enhancing disclosure, comparability as well as provide more detailed information on the processes and methodologies behind the credit ratings. These rules would also add reporting requirements and address conflicts of interest that may arise in the structured products rating process.

According to the Wall Street Journal, the SEC will propose new rules that may 'diminish the importance of credit ratings in determining the amount of capital that investment banks are required to hold'. Floyd Norris of the New York Times, says that credit rating agencies are being made the scapegoats in a crisis that seems to have no end to it. Besides rating agencies, weak regulations that let borrowers with poor credit history borrow money are also to blame.

While that may be true, lets not forget Moody's credit rating 'computer glitches' reported by the Financial Times a few weeks back followed by a 'confession' by S&P reporting its own rating 'glitch'.

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