US embassy cable - 05PARIS489

UNCLAS SECTION 01 OF 02 PARIS 000489 
 
SIPDIS 
 
PASS FEDERAL RESERVE 
PASS CEA 
STATE FOR E, EB, EUR 
TREASURY FOR DO/IM SOBEL, RHARLOW, LHULL 
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, FR 
SUBJECT: CESR HOLDS HEARING ON CREDIT RATING AGENCIES 
 
REF: Frankfurt 312 
 
1.  SUMMARY:  At a public hearing organized in Paris on 
January 14 by the Committee of European Securities 
Regulators, financial market participants aired differing 
opinions about how and whether the EU should regulate credit 
rating agencies.  The discussion highlights the difficult 
road ahead for greater EU-wide financial market integration. 
END SUMMARY 
 
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CESR SETS IN MOTION REGULATORY OVERSIGHT 
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2.  To respond to a request for advice from the European 
Commission about regulating credit rating agencies ("CRAs"), 
the Committee of European Securities Regulators (CESR) set 
up a task force, chaired by Ingrid Bonde, Director General 
of the Swedish Financial Supervisory Authority.  Besides 
holding a seminar in Paris in October 2004 and circulating a 
questionnaire on practices in the EU, the task force held an 
open hearing in Paris on January 14.  The hearing attracted 
representatives from the four major European CRAs (Moody's 
Investors Service, Inc, Standard & Poor's, Fitch, Inc. and 
Dominion Bond Rating Service Limited), as well as 
representatives from a number of issuers and industry 
associations. 
 
3.  Bonde divided the discussion at the hearing in three 
parts: an analysis of a possible recognition or registration 
system for CRAs; rules of conduct (conflicts of interest, 
fair presentation of credit ratings, management of inside 
information, right of appeal); and a range of regulatory 
options.  She commented that the task force will provide 
guidance to CESR on the consequences of the various policy 
options, and will make recommendations if consensus is 
possible among the EU25.  CESR will provide its report to 
the EU by April 1, 2005. 
 
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PRIVATE SECTOR INPUT 
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4.  Opinions were divided about the wisdom of a registration 
system. One business representative argued that CESR should 
take action (to explicitly reject registration regulations) 
before the US SEC does anything, to avoid being dragged 
along down the American route to excessive regulation. 
While some argued that registration would boost investor 
confidence, others said investors should not be discouraged 
from doing their own analysis of risks.  Bonde suggested 
that registration could lower entry barriers, but business 
representatives argued that entry barriers are natural, 
since the business is built on trust, which takes time to 
develop.  Some raised concerns about duplicating 
registration requirements for the Committee of European 
Banking Supervisors (CEBS) or the Committee of European 
Insurance and Occupational Insurance Supervisors (CEIOPS), 
and argued that voluntary international standards are good 
enough. 
 
5.  On the content of any rules of conduct, differences 
arose between large and small CRAs.  Issuers and other 
industry representatives mostly sided with the large CRAs, 
who oppose any significant additional regulatory burden, and 
argue that current IOSCO voluntary codes of conduct suffice. 
Smaller (mostly German) CRAs argued that rules should be 
developed to provide clarity to clients and transparency to 
investors. 
 
6.  The divergence of views on rules of conduct led to an 
identical divergence of views on regulatory options.  Larger 
CRAs favor voluntary codes with minimal regulatory 
oversight, pointing out that despite the Enron and Parmalat 
accounting scandals, there has been no market failure in 
CRAs' functions, and US actions, such as Sarbanes-Oxley, 
impose costs.  Smaller CRAs favor pan-European regulatory 
oversight to establish transparency of methodology and 
market integration. 
 
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COMMENT 
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7.  It would be somewhat ironic if market participants ward 
off proposals for greater oversight of CRAs, as that would 
make regulatory convergence (reftel) a bit more elusive and 
perhaps slow down European financial market integration. 
CESR seems likely to heed the vocal opposition to imposing 
regulatory costs on CRAs, but the process itself will no 
doubt be illustrative of the difficulties in implementing EU- 
wide financial services legislation. 
LEACH