According to a U.S. Department of Justice opinion letter titled "Constitutionality of Mandatory Registration of Credit Rating Agencies," a credit rating agency (CRA) is defined as a company that is paid a fee, usually by the issuer of specific debt securities and/or money market instruments, to make a readily-accessible assessment of the creditworthiness of that issuer. There are currently a total of 72 CRAs worldwide that operate in the international financial markets.
The Role of CRAs
In its "Final Report on the Role of Credit Rating Agencies in Structured Finance Markets," the Technical Committee of the International Organization of Securities Commissions (IOSCO) stated that the significance of CRAs rests on the risk management ability that they give to individuals, corporations, and governments that rely on their assessments. These ratings are presumed to be based on a thorough analysis of a wealth of both public and non-public information that CRAs collect on securities issuers.
The Importance of the Credit Reporting System
The Sarbanes-Oxley Act of 2002 required the U.S. Securities and Exchange Commission (SEC) to issue its "Report on the Role and Function of Credit Rating Agencies in the Operation of the Securities Markets" by January 2003. In this report, the SEC confirmed just how critical the work of CRAs are in the global financial market. Among other things, the credit ratings issued affect the ability of issuers to satisfy their financial obligations to their investors; the compliance of mutual and pension funds with internal by-law restrictions or investment policies; the recommendations that broker-dealers make to their customers; and the regulation of commercial paper instruments by governments worldwide.
Pattern of Deception
As specified by an open letter titled "Wrongful Actions of Credit Reporting Agencies" sent to U.S. Senator Christopher J. Dodd, the letter&039;s author, Sovereign Advisors, listed the disastrous results, dating back to 1970, of when CRAs issued erroneous credit ratings. This list included, but was not limited to, the collapses of Enron and Worldcom and the financial debt crises in Asia and New York City.
Nationally Recognized Statistical Rating Organizations
As of September 2008, the SEC has designated a total of ten international CRAs as Nationally- Recognized Statistical Rating Organizations (NRSRO). Such a designation gives these CRAs preferential treatment by the U.S. government and on Wall Street. The ten NRSROs are: A. M. Best Company (United States), Dominion Bond Rating Service, Ltd (Canada), Egan-Jones Rating Company (United States), Fitch Ratings (United Kingdom), Japan Credit Rating Agency, Ltd (Japan), LACE Financial (United States), Moody&039;s Investor Service (United States), Realpoint LLC (United States), Rating & Investment Information, Inc. (Japan), and Standard & Poor&039;s (United States).
0 comments:
Post a Comment