EU watchdog tells top credit raters to tighten internal controls. As a result of an inquiry that generated some concerns, the European Union’s securities watchdog announced on Thursday that it had asked leading rating agencies to take steps to guarantee that their ratings of collateralized loan obligations (CLOs) are accurate and impartial.
Fitch Ratings, Moody’s (MCO.N), and S&P (SPGI.N) are sometimes referred to as the “Big Three” because they are responsible for the great majority of credit-linked investment (CLO) ratings. The European Securities and Markets Authority (ESMA) stated that its inquiry centered on these three companies.
CLOs, or collateralized loan obligations, are securities backed by a pool of loans and are typically associated with businesses with weaker credit ratings.
“ESMA has informed each CRA (credit rating agency) of its findings and will develop individual remedial action plans to ensure appropriate safeguards and controls are in place,” the watchdog stated in a prepared statement.
“ESMA will continue to monitor the developments in CLO markets, including changes in CLO credit ratings, rating practices, and rating methodologies.”
According to the European Securities and Markets Authority (ESMA), which directly regulates rating firms operating within the 27-country bloc, collateralized loan obligations (CLOs) are challenging to understand and opaque. Market players rely on ratings to assist them in making decisions on which CLOs to purchase.
The European Securities and Markets Authority (ESMA) asserts that there is a chance that the information gathered from market participants will have an excessive impact on the rating processes developed by the agencies.
“In some instances, market outreach included the sharing of information that ESMA considers inappropriate,” the regulatory agency stated.
This includes market participants commenting to the agencies about the commercial view of a technique, which, according to the report, might compromise the “accuracy, objectivity, and independence” of CLO credit ratings.
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