Global regulator body moots 8 steps to reduce reliance on ratings

International Organisation of Securities Commissions (IOSCO), the international policy forum for securities regulators across the world, has said that asset managers should determine the credit quality of a financial instrument on their own instead of over-reliance on external ratings.

Based on feedback In its final report, IOSCO on Monday rolled out a set of eight good practices to reduce over-reliance on external credit ratings in the asset management industry.

The good practices address national regulators, investment managers and investors. They have been identified based on feedback from asset managers, their representative trade bodies, institutional investors and their associations besides credit rating agencies. The Securities and Exchange Board of India is one of 34 regulators constituting the IOSCO board.

IOSCO said asset managers have the appropriate expertise and processes in place to perform credit risk assessment akin to their investment strategy and the type of instruments they invested in and should refrain from investing in products/ issuers in the absence of adequate information to assess credit risk.

Need for updation External credit ratings may form one of the elements for the assessment process but not the sole factor, IOSCO said, besides emphasising the need for regular updation and consistent application of the asset manager’s internal assessment process.

IOSCO said asset managers should understand the methodology, parameters, assumptions and limitations using the external ratings while using them.

Asset managers should also disclose their alternative sources of credit information in addition to external credit ratings and make available to investors a brief summary of their internal credit assessment process.

IOSCO added that a credit downgrade by an external rating agency should not immediately trigger an asset sale. After deciding to sell, the sale should be done within a time frame and should be in the best interests of the investor.

IOSCO also added that quality parameters, such as liquidity, valuation, and correlation among others should form the basis for assessing the credit quality of counterparties instead of solely relying on external credit ratings.

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