ESMA slams internal processes at credit rating agencies

The European Securities and Markets Authority (ESMA) has issued a report on its first examinations of credit rating agencies (CRAs), concluding internal processes at Fitch, Moody’s and S&P are “not sufficiently recorded.”

“Although CRAs made an effort during the registration process to put in place policies and procedures in order to fully comply with the CRA Regulation, during the on-site examination ESMA noted that certain parts of CRAs’ internal processes (i.e. Rating Committees and other key internal meetings) were not sufficiently recorded,” the European regulator said.

ESMA added core elements of the rating process, in particular the outcome of voting within the rating committees and the reasons considered to support or depart from the initial proposals presented by the analysts, do not appear to be appropriately or systematically recorded.

This raises concerns for the adequate recording of the main elements of the committee’s analytical discussions underlying each rating action, ESMA said.

Proper recording of the rating committee discussions would allow the CRA to verify internally and to keep records of the fact that ratings are based on a “thorough analysis of all the information that is available to it and that is relevant to its analysis according to its rating methodologies”, as required by Article 8(2) of the CRA Regulation.

Overall ESMA identified several shortcomings and areas for improvement, including transparency of rating methodologies, disclosure and presentation of ratings, adequacy of controls over IT systems, recording of core internal processes and decisions and adequacy of resources devoted to internal control functions and analytical business lines.

ESMA has not determined whether any of the observations in the report constitute a breach of the CRA Regulation. It will follow-up on the observations through risk mitigation plans for each individual CRA in the first half of 2012.

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