Asset managers need to step away from an overreliance on external credit ratings when making investment decisions, according to the International Organisation of Securities Commissions (IOSCO).
In its final report on ‘Good practices on reducing reliance on CRAs in Asset Management’, IOSCO said asset managers use external ratings due to demand, as dependence on external ratings remains on the investor side.
“References to external credit ratings may derive from regulatory requirements or an investor’s own internal rules,” IOSCO said.
“This may result in mechanistic reliance, which could trigger forced asset sales in the event of downgrades.”
IOSCO made eight recommendations for the Financial Stability Board to decrease the reliance on external ratings.
It said asset managers should make judgements on their own as to the credit quality of a financial instrument before investing and through the holding period.
It also said external credit ratings should only form one part of the internal assessment process instead of being the only factor supporting credit analysis.
IOSCO also said a downgrade in external credit ratings should not automatically result in the immediate sale of the asset. If the manager/board do divest, the transaction should occur in a period that is in the best interests of the investors.
IOSCO urged regulators to find a way to translate the principles into specific policy actions to end the mechanistic dependence on ratings by banks, institutional investors and other market participants.
