Credit Rating Agencies (CRAs) play a key role in European capital markets today, publishing opinions (“ratings”) on the creditworthiness of issuers/ issues of debt securities. Independent, objective and internationally consistent credit ratings raise the integrity, transparency and competitiveness of capital markets, lower the costs of capital for issuers and contribute to investor protection.

In recent years CRAs have attracted the attention of policy makers at national, European and international levels – given the important role their opinions play in capital markets and questions raised over their response to corporate scandals in the US and Europe, as well as over certain ratings decisions in Europe. In parallel, a greater regulatory reliance on ratings was introduced in the Basel II capital accord, and the Capital Requirements Directive (CRD).

The European Parliament and Council both requested the European Commission to review the role and activities of CRAs, and CESR was mandated to provide recommendations to the Commission. At the international level, IOSCO undertook a number of parallel initiatives.

As the result of these extensive reviews, a consensus emerged among stakeholders endorsing the provisions of the IOSCO Code of Conduct Fundamentals for CRAs (published in December 2004). Rather than establishing a rigid and intrusive regulatory framework which may be incompatible with the protection of the independence of CRA’s opinions, IOSCO recommended to implement the Code on a comply-or-explain basis, underpinned by a market-driven compliance mechanism and regulatory monitoring.

The Commission’s Communication on CRAs of January 2006 endorsed this approach, also referring to the relevant provisions of the Market Abuse Directive, the MiFID and the CRD already applicable to CRAs. The Commission asked CESR to monitor the implementation of the IOSCO Code. CESR is expected to publish its first report on this subject before end 2006.