IIF Response to IOSCO 'Alternatives to the Use of Credit Ratings'

The IIF responded on July 8 to the work of IOSCO aimed at examining the reliance of credit ratings by large market intermediaries, and at identifying sound practices with regard to the use of alternatives to credit ratings to assess creditworthiness. IOSCO formulated these recommendations for sound practices based on a survey they undertook on the credit risk analysis practices of large market intermediaries. The IIF's response is generally supportive of the recommended sound practices listed in the paper, and believe they cover the main areas while leaving sufficient leeway for market intermediaries to apply and adapt them to their specific business models and commensurate risk management needs.

Nonetheless, we recommend the final version focus solely on these sound practices and main principles, as some of the IOSCO survey results provided may be misconstrued as recommended practices for all. Another key component is to avoid ambiguity in the wording of the sound practices, which will lead to harmonized local regulations and supervision. The IIF expressed a concern that the practices described may not be truly representative of the different financial sector institutions, and that the diversity of market intermediaries is not taken sufficiently into account in the described practices. Therefore, only the Sound Practices should be taken as guiding principles for local regulators and supervisors.

Finally, while we agree that credit ratings are not a substitute for independent credit analysis, they remain a relevant data point in the credit analysis and investment process, and where there are no robust alternatives, the use of credit ratings should still be allowed.