Need for a Global Regulatory Framework for Credit Ratings: S&P

March 6, 2009: Appropriate regulation of credit rating agencies will play an important role in building confidence in the marketplace, especially if the purpose of this regulation is to ensure that rating agencies comply with policies and procedures designed to promote independence and objectivity, according to a white paper published by Standard & Poor's Ratings Services.

At the same time, the paper notes that as the financial markets have become increasingly global, a globally consistent regulatory approach is essential to the efficiency of global capital formation.

"Achieving consensus on the mechanics of such a globally coordinated regime is not simple," said Deven Sharma, president of Standard & Poor's. "However, such an effort is important if we are to arrive at a solution that works for users of ratings globally and that helps restore confidence in the global capital markets."

The paper outlines 10 goals that investors and other users of ratings want to see from regulation, and which should guide the approach taken by policymakers internationally:

-- Ratings should be independently derived, credible, and unbiased: Ratings firms should be accountable to and subject to sanction by regulators if they fail to comply with appropriate policies and standards for managing potential conflicts. However, policymakers should explicitly preserve the independence of ratings and ratings methodologies.

-- A regulatory regime should require a mechanism for ratings users to raise questions about methodologies and should require registered credit rating agencies to have in place personnel to answer these questions.

-- The meaning and use of ratings should be clear, including the level of risk inherent in the rating.

-- Ratings on new and complex securities should be differentiated, either through separate rating scales or providing more information about the risk characteristics of these securities.

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