CESR HOLDS HEARING ON CREDIT RATING AGENCIES

UNCLAS SECTION 01 OF 02 PARIS 000489 SIPDIS PASS FEDERAL RESERVE PASS CEA STATE FOR E, EB, EUR TREASURY FOR DO/IM SOBEL, RHARLOW, LHULL TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER USDOC FOR 4212/MAC/EUR/OEURA E.O. 12958: N/A TAGS: EFIN ECON PGOV FR SUBJECT: CESR HOLDS HEARING ON CREDIT RATING AGENCIES REF: Frankfurt 312 ¶1. SUMMARY: At a public hearing organized in Paris on January 14 by the Committee of European Securities Regulators, financial market participants aired differing opinions about how and whether the EU should regulate credit rating agencies. The discussion highlights the difficult road ahead for greater EU-wide financial market integration. END SUMMARY -------------- CESR SETS IN MOTION REGULATORY OVERSIGHT -------------- ¶2. To respond to a request for advice from the European Commission about regulating credit rating agencies ("CRAs"), the Committee of European Securities Regulators (CESR) set up a task force, chaired by Ingrid Bonde, Director General of the Swedish Financial Supervisory Authority. Besides holding a seminar in Paris in October 2004 and circulating a questionnaire on practices in the EU, the task force held an open hearing in Paris on January 14. The hearing attracted representatives from the four major European CRAs (Moody's Investors Service, Inc, Standard & Poor's, Fitch, Inc. and Dominion Bond Rating Service Limited),as well as representatives from a number of issuers and industry associations. ¶3. Bonde divided the discussion at the hearing in three parts: an analysis of a possible recognition or registration system for CRAs; rules of conduct (conflicts of interest, fair presentation of credit ratings, management of inside information, right of appeal); and a range of regulatory options. She commented that the task force will provide guidance to CESR on the consequences of the various policy options, and will make recommendations if consensus is possible among the EU25. CESR will provide its report to the EU by April 1, 2005. -------------- PRIVATE SECTOR INPUT -------------- ¶4. Opinions were divided about the wisdom of a registration system. One business representative argued that CESR should take action (to explicitly reject registration regulations) before the US SEC does anything, to avoid being dragged along down the American route to excessive regulation. While some argued that registration would boost investor confidence, others said investors should not be discouraged from doing their own analysis of risks. Bonde suggested that registration could lower entry barriers, but business representatives argued that entry barriers are natural, since the business is built on trust, which takes time to develop. Some raised concerns about duplicating registration requirements for the Committee of European Banking Supervisors (CEBS) or the Committee of European Insurance and Occupational Insurance Supervisors (CEIOPS), and argued that voluntary international standards are good enough. ¶5. On the content of any rules of conduct, differences arose between large and small CRAs. Issuers and other industry representatives mostly sided with the large CRAs, who oppose any significant additional regulatory burden, and argue that current IOSCO voluntary codes of conduct suffice. Smaller (mostly German) CRAs argued that rules should be developed to provide clarity to clients and transparency to investors. ¶6. The divergence of views on rules of conduct led to an identical divergence of views on regulatory options. Larger CRAs favor voluntary codes with minimal regulatory oversight, pointing out that despite the Enron and Parmalat accounting scandals, there has been no market failure in CRAs' functions, and US actions, such as Sarbanes-Oxley, impose costs. Smaller CRAs favor pan-European regulatory oversight to establish transparency of methodology and market integration. -------------- COMMENT -------------- ¶7. It would be somewhat ironic if market participants ward off proposals for greater oversight of CRAs, as that would make regulatory convergence (reftel) a bit more elusive and perhaps slow down European financial market integration. CESR seems likely to heed the vocal opposition to imposing regulatory costs on CRAs, but the process itself will no doubt be illustrative of the difficulties in implementing EU- wide financial services legislation. LEACH