Since January 2019, the European Securities and Markets Authority (ESMA) has been conducting a public consultation on the issue of internal controls within credit rating agencies operating within the jurisdiction. Based on observations between 2017 and 2018 that identified a number of shortcomings in this area of the CRAs practices, ESMA has been working at providing clear guidelines to help the industry move forward. Today, that report was released.   Based on the CRA Regulation (CRAR) , ESMA are required to ensure that regulations are developed and implemented relating to the internal control systems of the CRAs, which they must have in place ‘ in order to prevent or mitigate any possible conflicts of interest and ensure the integrity of its credit rating activities ’. As we know, this is a common, but no less important objective of rating agency regulators, and it is interesting to note that, more than a decade after the Financial Crisis, regulators are still attempting to ...

Efforts to relieve the financial pressure on the world’s poorest countries since the pandemic started have resulted in very little progress. UN, IMF, and World Bank efforts have led to the establishment of the Debt Service Suspension Initiative (DSSI), that consisted of members of the so-called ‘Paris Club’ and other prominent non-members, like China, suspending the rights to collect payments on their investments into poorer countries. However, there are so many issues with this plan, that not only has it not been entirely successful but it has also led to a lack of inspiration in similar efforts but from the private sector – and the involvement of the private sector is crucial. This has led critics to suggest that credit rating agencies have a role to play and, furthermore, should be more engaged in finding a solution. However, is this really the case, or is it yet another example of onlookers not fully understanding the ‘rating dynamic’ as I like to call it, and calling for action an...

In today’s short post, news regarding the plans of the International Organisation of Securities Commissions to set global standards in relation to ESG disclosure will be considered, particularly in relation to the trajectory of ESG rating agencies and their inherent issues. Though IOSCO’s recommendations would not be binding, they are influential and, as we shall discuss, the fact that the EU is currently considering its approach in this sector may prove to be perfect timing for some coordination in this field. However, what will it mean for the ESG rating agencies who are coming under fire recently for a lack of timely and comparable analysis?   The Financial Times reported yesterday that the IOSCO is planning on taking action with regards to the disparate set of rules regarding ESG disclosure across the spectrum . Research has suggested that there are more than 10 standards that suggest frameworks for how ESG-related information should be disclosed . Even via the European Un...

In this post, we will review the story today that a number of leading German financial institutions are taking aim at the Big Three credit rating agencies, specifically in relation to the fees they charge for their credit rating-related data feeds. This issue of transparency, particularly with regards to the provision of ancillary services, their cost, and the impact that it has upon the rating dynamic moreover, is not a new phenomenon. In fact, this was the very subject of my 2018 book Regulation and the Credit Rating Agencies; Restraining Ancillary Services which you can preview here , and purchase here .   In news published by Reuters today, it was stated that the Fund Association BVI, and the Insurance industry body GDV are in the process of making a joint appeal to the European Commission regarding the lack of transparency over the pricing structures from the ancillary service-wings of the credit rating agencies. The BVI today declared that the rating agencies are exploi...

We have analysed the issue of domestic credit rating provision within China on a number of occasions here in Financial Regulation Matters . Today one of my articles was published in The Journal of Business Law (available here , and here in a pre-published version) that analyses the trajectory of rating provision within the country. We have also looked at the situation from the view of the political and geo-political ambitions of China here , and from the viewpoint of the leading US-based rating agencies here . In today’s post, we will look at evidence that demonstrates the problem at hand, and why China has now become so open to having the US-based rating agencies operating within its territory, on their own, for the first time.   It has been reported this morning that domestic Chinese rating agencies are providing for massive upgrades in their ratings for ‘local government financing vehicles’ (LGFV), despite the impacts of the Covid-10 pandemic still playing out. The article...

We looked only earlier this month at criticism being levied against the Sustainable Rating Agencies, or ESG Rating Agencies as they are sometimes known and, as more details get revealed concerning the modern-slavery story engulfing the fast fashion retailer Boohoo, the agencies are continuing to come in for criticism. In this post, the focus will be on highlighting the issues that are being revealed, and questioning the supposed role of the agencies.   The Financial Times has been asking the question recently ‘ why did so many ESG funds back Boohoo? ’, which is not surprising given that it was the FT who conducted investigations into the appalling working conditions within Leicester in the UK. Those investigations, which were unfortunately not really acted upon until the recent spike in coronavirus within the city saw it locked down , have since led to financial repercussions for Boohoo, one of the biggest benefactors of the underground textiles industry within the region – ...

Regular followers of Financial Regulation Matters , and those interested in the development of the credit rating industry, know that there has been a concerted and purposeful effort from the rating agencies to integrate the concept of ESG (Environmental, Social, and Governance) into their credit risk assessments. This began with some takeovers of ESG-date providers, and was solidified, in theory, with the major rating agencies’ connection to the UN-supported Principles for Responsible Investment initiative (PRI). However, since then there have been a number of claims raised against the rating agencies, most noticeably concerning how the rating agencies transmit how they are considering ESG-related factors, and to what extent. Research has shown that, majoritively speaking, the agencies consider the “G” element to be the most ‘material’ aspect usually, with little being confirmed regarding the ‘materiality’ of the “E” and the “S”. Yet, with the recent events across the western world be...

In an article in The Financial Times yesterday, an issue was raised concerning the potential for the increase in the issuance of ‘social bonds’ to be negatively impacted by a concept known as ‘social washing’ . The fear is that instead of utilising the investments that the bonds are intended for, issuing entities will instead use those funds for other purposes, including balancing their books in these economically uncertain times. The article ends with the statement that until standards of disclosure and transparency increase to the level of the green bond marketplace, ‘investors may have to take it on trust that the money will be put to socially useful ends’. However, this is not how the marketplace is supposed to work in the modern environment; credit risk is not supposed to be determined by mere trust, but by the assistance of excruciating levels of data-driven analysis (although, of course, one cannot be 100% certain with regards to the accuracy of risk assessments). With this in ...

The Wirecard scandal has made for an engrossing account of corporate failure since the news emerged that the German financial payments processing company had been inflating its accounts. Now that the company has collapsed – the first time that a member of the German Dax index has failed – the ramifications are starting to be revealed. The EU is now investigating the role played by BaFin , the German regulator tasked with regulating the company, whilst the FCA in the UK has ordered the British arm of the company to freeze all of their customers’ accounts . Now that the aftermath is continuing to fold, the focus is now rightly turning to why the alarm bells were not sounded earlier by those both paid and expected to do so.   Of particular concern has been the auditing conducted by Ernst & Young (EY), and the credit rating conducted by Moody’s. With investors standing to lose out considerably because of this collapse, the performance of these gatekeepers is a massively impo...

There have been a number of developments recently with regards to the Securities and Exchange Commission receiving advice on how best to regulate the credit rating industry. Last month, a panel was convened so that the Investor Advisory Committee could hear from a number of experts on some of the issues facing the industry, and some potential solutions. Then, at the beginning of this month, the Credit Ratings Subcommittee of the Fixed Income Market Structure Advisory Committee (FIMSAC) produced a recommendation outlining three key areas for regulatory development. In light of this, this post will review the developments, and also examine whether the calls are realistic, or whether they may spurn the SEC into more action in this area.   The meeting of the SEC’s Investor Advisory Committee took place on the 21 st May, virtually – recording available here . In the afternoon, a panel was convened that was made up of: Professor Frank Partnoy of the University of California, Berkel...