- The Washington Times - Friday, March 6, 2009


We at Standard & Poor’s agree with President Obama’s call for an open and transparent financial system that speaks in plain language investors can understand. The president said we need “clear rules of the road, not to hinder financial institutions, but to protect consumers and investors, and ultimately to keep those financial institutions strong.” We think he’s right on the mark.

That might strike some as an unusual position coming from an institution that would be subject to new regulations. But unprecedented times call for unprecedented action. That’s why we, as one of the world’s largest credit ratings organizations, strongly support a new approach to regulating our industry. The goal all of us share is to restore public confidence in the capital markets and renew economic growth.

It should not be, as President Obama said, a choice between “some oppressive government-run economy or a chaotic and unforgiving capitalism.” We need a regulatory system for ratings organizations that is transparent and consistent from country to country. We also need an approach that respects the analytical independence and integrity of our opinions about the creditworthiness of companies and state and local governments that issue debt.

If we get it right, regulation will inspire confidence in the capital markets and credit ratings. If we get it wrong, we could end up worse than where we are today - with a patchwork of protectionist requirements that complicate the credit markets, create uncertainty and sow the seeds of confusion. That would result in more regulation but less innovation, more rules but less certainty and an opening for regulatory forum shopping.

Three principles should guide the discussion that President Obama and leaders from the other G-20 nations will have about credit ratings organizations next month. First, regulations should be globally consistent. Second, regulations should raise transparency around, for example, the criteria used and applied by credit ratings organizations. And third, they should not prescribe the analyses we do and the ratings opinions we issue.

Global consistency can be accomplished by having a regulatory framework built on a set of standards commonly accepted by the market and regulators internationally, such as the enhanced IOSCO (the International Organization of Securities Commissioners) code of conduct. The key would be to have a common set of goals and principles across the globe, while still leaving ratings organizations accountable to each country in which we operate and subject to review and enforcement by the relevant regulatory bodies. In the United States, that would be the Securities and Exchange Commission.

The second principle - transparency - will help enhance investor confidence and address any conflict of interest concerns. Ratings organizations can increase transparency by educating market participants about how we arrive at ratings, what information we consider, and what assumptions we make.

We should be required to publish the assumptions and criteria used in our analytical models as well as a scorecard on our performance so issuers and investors can make their own judgments about the quality and value of our credit ratings.

S&P is increasing the amount of information we publish, including our underlying assumptions for various asset classes, stress tests for our ratings and scenario analyses around the factors that could drive a ratings change. This will help investors better understand the risk characteristics of ratings. In addition, we are implementing a number of additional checks and balances to guard against potential conflicts of interest. These include periodic rotation of analysts, appointing an ombudsman independent of the ratings business, and establishing criteria management, quality assurance and risk management functions.

The third principle is about what regulation should not do. It should not mandate how we arrive at our credit ratings. For example, regulators should not require that we use models and formulas that could impact the quality and independence of our credit ratings and market transparency. It would open the process to political interference and inhibit competition among ratings organizations by making their opinions mere cookie cutter images of each other.

With these three principles as guides, regulators should not inadvertently encourage undue reliance on ratings, both by regulators and by investors. If ratings are used as benchmarks of creditworthiness in regulations, other benchmarks should be considered as well. This would help avoid overdependence on ratings.

Ratings organizations must be accountable to regulators. This would provide the market with assurance that the ratings process has integrity. That should be the case whatever their business model, because all business models - whether investor-pays, issuer-pays or government-pays - carry potential conflicts and particular advantages and disadvantages.

The market will also be served well by any regulatory framework adopted in the future which addresses the end-to-end process of how securities are originated and how ratings are developed and used by investors.

We can all agree that a well-functioning credit ratings process contributes to investor confidence and bolsters the economy. There is now a rare opportunity for ratings organizations to collaborate with regulators and policy makers worldwide on how best to increase confidence in the financial markets. As President Obama said, the goal of this regulatory transformation should be “not to stifle, but to advance competition, growth and prosperity.”

Regulation is not always the answer, but given the challenges facing the capital markets, new regulation that is globally consistent, increases transparency and respects ratings organizations’ analytical independence can help rebuild confidence.

Deven Sharma is president of Standard & Poor’s, the investment research and risk- and credit-rating firm.

Sign up for Daily Newsletters

Manage Newsletters

Copyright © 2020 The Washington Times, LLC. Click here for reprint permission.

Please read our comment policy before commenting.


Click to Read More and View Comments

Click to Hide