* ESMA says better record keeping needed
* Watchdog will follow up on report in first half 2012
* Agencies say working to improve compliance with EU rules
By Huw Jones
LONDON, March 22 The "Big Three" credit rating
agencies must improve their explanations of downgrades, the
sector's European Union regulator said in a report on Thursday,
noting other shortcomings.
The European Securities and Markets Authority (ESMA), which
became the main supervisor for ratings agencies in the EU last
year, examined Standard & Poor's, Moody's and
Fitch in December.
The rating agencies were blamed by policymakers for helping
to sow the seeds of the financial crisis by giving high ratings
to mortgage-backed securities linked to U.S. home loans that
In Europe they have also been under the gun for downgrading
the debt of Greece while it's bailout package was being
negotiated, a step which was viewed as making the rescue harder.
ESMA focused on ratings of banks, government bonds and
covered bonds for the 12 months to 31 Oct. 2011.
There were instances where the outcome of voting on a rating
change in the agency's rating committee and the reasons for
making a change were not appropriately or systematically
recorded, ESMA said.
"This raises concerns for the adequate recording of the main
elements of the committee's analytical discussions underlying
each rating action," ESMA said.
Proper records are needed to show the agency made a rating
change based on "thorough analysis". Agencies also need to
improve the way they show users how they arrive at a rating.
There was relief among the agencies that no major breach of
rules were found or enforcement action initiated so far.
"ESMA has not determined whether any of the observations in
the report constitute a breach of the Credit Rating Agency
Regulation," ESMA said in a statement, adding that it will
follow up on its report in the first half of 2012.
It said the report was published "without prejudice to the
possibility of further investigations which could lead to
enforcement or supervisory actions."
Fitch said it was pleased that its own efforts to strengthen
internal processes have been recognised but it also understood
the need for continuous improvement.
"Fitch is fully committed to compliance and confident that
we will meet the requirements outlined by ESMA today," Fitch
said in a statement.
Moody's said that in recent years it has implemented a wide
range of measures to strengthen the analytical quality,
transparency and independence of its ratings.
A spokesman for S&P said: "We are committed to continuously
strengthening the quality and transparency of our ratings
consistent with ESMA's observations and recommendations."
The EU is now approving its third set of rules in as many
years for rating agencies. The latest draft law includes a
requirement for users to switch to another agency after a
certain number of years to boost competition.