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S&P calls for ratings consistency as agency power challenged by SEC

Deven Sharma, president of credit rating agency Standard & Poor’s (S&P), has called for a co-ordinated approach by credit agencies to ensure there is greater global rating consistency.

The move comes as US regulator the Securities and Exchange Commission added a third proposed amendment to the Credit Rating Agency Reform Act of 2006 (Ratings Agency Act) that could allow US money market funds to invest in short-term debt without reference to official ratings.

Currently such funds can only buy the debt if its has high-grade investment ratings, which are granted by the three major agencies – Standard & Poor’s, Moody’s and Fitch – and their smaller rivals.

But the new proposal could remove the requirement, with the SEC instead proposing new standards, such as liquidity or risk measures, to determine investment grade debt.

Rating agencies are under pressure from US and European regulators to change their approach to rating securities with a number of AAA-rated residential mortgage backed securities in danger of defaulting amidst the credit crunch.

And S&P’s Sharma said rating agencies had to have a “consistent approach across borders” and called for a co-ordinated approach to regulating agencies in the “best interest of international users of ratings”.

“We welcome any initiative that works in the interests of the market as a whole, preserves the independence and global consistency of ratings opinions and rating methodologies, and avoids unintended disruption, costs and inefficiencies for investors, issuers and other users of ratings,” he said.

According to Sharma, any regulatory initiative should look at the “integrity and transparency of the rating process” but not focus on individual ratings, which, he said would damage the independence of ratings.

Sharma said that the European Union’s Economic and Financial Affairs Council, the Financial Stability Forum for the G8 and the International Organisation of Securities Commission have been in talks to improve global rating consistency.

“Consistency of approach is vital for cross-border investors and other global credit providers,” he added.

“It supports their ability to assess credit risk on a like-for-like basis across markets, sectors and asset classes. And it helps issuers in local markets raise capital and compete internationally on an even basis with their global peers.”

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