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IPE special report May 2018

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ESMA critical of ‘unsatisfactory’ asset-backed security assessment

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Credit ratings agencies’ assessment of structured finance instruments is, at times, unsatisfactory and must be improved, Europe’s markets supervisor has insisted.

The European Securities and Markets Authority (ESMA) examined the procedures employed by four large credit ratings agencies (CRAs) – DBRS Ratings, Fitch, Moody’s Investors Services and Standard & Poor’s – and said it found shortcomings in the way the underlying data was reviewed.

Steven Maijoor, chairman of ESMA said that the high volume of structured finance instruments and the renewed interest in securitisation, partially stemming from the European Commission, made its nearly year long investigation timely.

“All registered CRAs should take note of the problems identified and ensure that they properly incorporate the requirements and objectives of the CRA Regulation into their working practices in order to ensure the quality of credit ratings and maintain investor confidence,” he added.

ESMA’s research found that CRAs were not ensuring that the due diligence underlying issuances was obtained prior to rating the instruments, something the supervisor said prejudiced a rating agency’s ability to conclude whether information on those assets was of “sufficient quality”.

“ESMA also noted that, while some CRAs have enhanced the process of collecting such due diligence or third party assessment for new ratings, the same information is not always available for outstanding ratings issued before the entry into force of the [CRA] Regulation.”

The supervisor suggested that disclosures on the assessment of the quality of information underpinning issuances be made as each rating was issued.

A spokeswoman for Fitch told IPE that it had reviewed the review’s findings of residential mortgage-backed securities (RMBS) with interest.

“While we are confident that our policies and procedures are robust and meet regulatory standards, we will continue to co-operate fully with ESMA,” she added.

A spokeswoman for Moody’s added: “Moody’s continuously strives to improve its strong analytical processes. We will review our policies and procedures and adjust as appropriate.”

Asset-backed securities, such as RMBS and commercial mortgage-backed securities (CMBS), have been controversial in the wake of the credit crisis, which saw a number of large pension investors suffer losses and subsequently sue a number of banks over their holdings.

Dutch civil service scheme ABP in late 2013 settled with Credit Suisse and Morgan Stanley over alleged mis-selling of RMBS.

The European Commission has recently said it would like to see renewed growth in the European securitisation market in order to stimulate lending to small firms.

Read more about the European Central Bank’s attempts to grow the asset-backed securities market in a recent issue of IPE

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