CRA reform

Credit rating agencies (CRAs) have been a target of reform (신용평가회사 개혁/信用評價會社 改革) all around the world since the global financial crisis. Out of question, CRAs play a significant role in the capital markets. They help ordinary investors to overcome the information asymmetry by indicating the creditworthiness of debt instruments such as bonds, debentures, commercial papers, etc.

But as witnessed in the recent sovereign debt crisis and the U.S. subprime fiasco, there has been renewed concern that financial institutions and institutional investors are relying too much on external ratings and do not carry out sufficient internal credit risk assessments.

Based on the belief that inaccurate and improper credit ratings of structured products resulted in the global financial crisis, the regulators of the United States and other major countries increased their monitoring and supervision of credit rating agencies. It is also true that the real problem was not caused by the credit rating but the structuring process and risk management.

Key words
credit rating, conflicts of interest, code of conduct

Discussions on CRA Reform
Since the turn of the Millenium, there have been various proposals of regulations and supervision of credit rating agencies suggested by the United States, the European Union, Japan and the International Organization of Securities Commissions (IOSCO).

United States
Credit Rating Agency Reform Act 2006

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Securities and Exchange Commission (SEC): See Actions During Turmoil in Credit Markets.

SEC, Annual Report on Nationally Recognized Statistical Ratomg Organizations, December 2012.

European Union
EU Member States have paid attention to potential conflicts of interest arising out of payment for the credit rating. The CRA Regulation introduced measures to counteract the inherent conflicts of interest of the "issuer-pays" model which is widely used by CRAs and issuers. This model relates to the case where issuers solicit and pay for the ratings of their own debt instruments.

There have been discussions on alternative payment models in the credit rating market: the "investor/subscriber-pays", "payment-upon-results", "Government as hiring agent" and "public utility" model.

IOSCO
IOSCO Code of Conduct Fundamentals for Credit Rating Agencies

Korean case
In Korea, systemic efforts to prevent conflicts of interest, to promote competition and new methodologies, to introduce new symbols and systems of rating and so forth, have been taken and carried out to reform the credit rating agencies in line with the so-called global standards. In particular, the standard internal control standards have been implemented by the Financial Supervisory Service since January 2010, in which prevention of conflicts of interest, enhanced compliance, disclosure of credit rating process and results, and no more unfair activities are called for in a concrete manner.

Some questions remain that Korea has to apply identical measures even though its background and economic circumstances are quite different from those of other countries.

It seems to be necessary for the growth of Korean credit rating industry to discourage rating shopping rather than to reduce the reliance on external ratings. So as to solve the information asymmetry, double ratings in line with the aggregate amount of bond issues, nomination of credit rating agencies by rotation based upon their performances are strongly recommended. Take a precedent of the auditor rotation system which has been successfully implemented since 1997. This half-mandatory system has brought to halt the close relations between the auditors and audited companies, and ensured the independent auditing for at least three years.

Conclusion
Accordingly, credit rating agencies with good performances have more chances to do rating jobs. Sometimes, the "issuer-pays" model is believed to have something to do with conflicts of interest. However, the newly suggested "Government as umpire" model does not care who pays for the rating service. Where double ratings are required for a sophisticated and large-amount bond issue, the issuer should nominate a different credit rating agency so that two agencies may observe the fair play rule in a competitive manner.