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Rating firms rail against mechanistic regulation

Standard & Poor’s, Moody’s and DBRS say they support calls for the removal of regulations that require firms to obtain credit ratings for issuances.

In October 2010, the Financial Stability Board published a principle that regulators and supervisors should “assess references to CRAs in standards, laws and regulations and wherever possible remove them”.

Giving evidence to the Treasury select committee last week, S&P’s managing director and head of financial services Dominic Crawley said: “We would like to see mechanistic inclusion of ratings in regulation removed.”

Moody’s managing director Frederic Drevon added: “We are concerned by any mechanistic reliance on ratings because it removes the responsibility of the end-user.”

DBRS managing director for Europe Alan Reid said: “We share the same view.”

The European Commission’s directive credit ratings agencies 3 proposes requiring firms to rotate the agency they use every three years or every year if they make more than 10 consecutive ratings on the same issuance.

Crawley told MPs: “This could create volatile ratings and could see the cost of capital go up. It is a blatant impingement on normal competition practice.”

But Reid said: “The playing field is dominated by a couple of agencies and if mandatory rotation takes place, it would allow more to come in and play.”

CRA3 also proposes the European Securities and Markets Authority approve changes to rating methodologies.

Drevon said: “That means to some extent substituting the opinion of the agency with that of the regulator, and interfering with the agencies’ independence. It also creates, over time, a system where the majority of ratings opinions may converge on a unique view of the world.”

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