March 26, 2008 / 3:13 PM / 11 years ago

CORRECTED - Watchdogs to ban agencies designing rated debt

(Corrects headline to remove EU reference)

LONDON, March 26 (Reuters) - Credit rating agencies will be banned from making “proposals or recommendations” on the design of structured products that they rate, according to planned changes outlined by a grouping of the world’s top regulators.

In its modifications to the code of conduct used by rating agencies, the International Organisation of Securities Commissions said agencies should also ensure reviews and downgrades of structured product ratings are done objectively, and should carry out regular, independent reviews of their methods and models.

Ratings agencies have come under fire since the start of the current credit crisis, accused by politicians and watchdogs of providing ratings and credibility for products that were too complex and of being too slow to tell investors about the risks.

The market turbulence has also revived a long-standing debate over the business model behind rating agencies, where borrowers rather than investors pay for the ratings, and some lawmakers have said they see a conflict of interest if an agency helps to design a product which it then rates.

“These changes are required in order to ensure that investors and the financial markets can have confidence that credit rating agencies are producing clear, well-researched ratings, free from bias (and) which can be easily understood by their users,” Michel Prada, chairman of IOSCO’s technical committee said on Wendesday.

To avoid conflicts of interest, IOSCO said on Wednesday rating agencies should establish procedures to review the work of analysts who leave to join an issuer and carry out formal reviews of its remuneration processes.

They must also disclose whether any one client makes up more than 10 percent of its annual revenue, according to the changes.

In answer to criticisms that rating agencies failed to do enough to help investors, agencies will now be required to explain the attributes and limitations of a credit opinion and to provide information that forms the basis for its rating, as well as disclosing its methodology.

Comments on the IOSCO report, broadly in line with indications given earlier this year, are due by April 25, and a final version of the code is expected to be proposed by May.

Despite calls from lawmakers for a mandatory shake-up of ratings agencies, IOSCO members have kept the code voluntary.

Leading rating agencies, including Standard & Poor’s, Fitch and Moody’s (MCO.N), have said changes are already underway. (Reporting by Clara Ferreira-Marques; Editing by Jason Neely/Quentin Bryar)

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