INTERNATIONAL Organisation of
Securities Commissions, IOSCO has
proposed 13 practices for large market
intermediary firms to consider for their
internal credit assessment policies and
IOSCO believes that identifying sound
practices regarding the suitable alternatives
to credit ratings for assessing credit risk
should reduce the over-reliance of large
intermediaries on credit rating agencies.
This reduction, in turn, is expected to increase investor protection, while
contributing to market integrity and financial
While the CRA ratings can offer investors
and lenders an efficient way to label the risks
associated with a particular borrowing or
lending facility, the recent global financial
crisis illustrated how a mechanistic reliance
on the CRA ratings can contribute to and
exacerbate the fallout on the markets.
Numerous international and national
bodies were said to have taken measures to
address the reliance of market participants
such as broker-dealers on credit ratings.
In the report entitled ‘Sound practices at large Intermediaries: Alternatives
to the use of credit ratings to assess
creditworthiness’, the IOSCO highlighted
the draft sound practices.
It said large intermediaries should
establish an independent credit assessment
function clearly separated from other
business units, including the development
of appropriate policies and procedures
to ensure that decision-making was not
unduly affected by operations from other
areas of the firm.
It said they should involve senior
management in order to ensure the successful implementation of a
robust credit assessment process,
including promotion of a risksensitive
culture throughout the
The IOSCO said, “Establish a
coherent oversight structure to
ensure that the credit assessment
process is properly implemented
and adhered to, including the
establishment of reporting lines
and responsibilities that are
clearly articulated and followed.
“Take steps to ensure that a
firm’s governing committee
receive an appropriate level of
information on the amount of
credit risk to which the firm is
exposed. This may include policy
exceptions, limit breaches, stress
testing analysis concentrations,
watch lists, and top exposures,
among other things.”

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