Market Abuse: National responses to a global problem

Presented by:

Nigel PhippsRegulatory Relations

Presented by:

Nigel PhippsRegulatory Relations

May 23, 2005British Institute of International

and Comparative Law

Credit Rating

Agencies and

Market Abuse

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What I will cover

1. The context

2. The information picture

3. The handling of issuer information

4. Other issues

Inside information generated by Moody’s

Insider lists

Staff development

Fair presentation and disclosure of conflicts of interest

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1. The context

2. The information picture

3. The handling of issuer information

4. Other issues

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Two examples

The CEO of an issuer had been alarmed by a lawyer’s presentation saying that they could only share confidential information with certain parties and rating agencies weren't on that list.

A request for us to agree in writing not to commit market abuse if we were to receive price sensitive information

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The rock and a hard place for a rating agency

We must not disseminate information which we knew or ought to have known is false or misleading.

If an issuer provides us with inside information and makes us an insider we cannot use the information to take a rating action.

BUT we have an existing public rating on the issuer which, on the basis of the inside information, is now misleading.

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The risk in all of this (1)

Ratings are a public good – free, disseminated broadly and non-exclusive

Other attributes – predict good credit from bad, easy to use, breadth

Hence used by many who want

– Accuracy

– Stability

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The risk in all of this (2)

Therefore only change the rating when the fundamental creditworthiness HAS changed.

Information is vital to provide this public good.

The poorer the information flow, then the more reactive our rating opinion will become to transient market rumours.

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The global dimension

Investors and borrowers expect us to produce rating opinions that are globally consistent

Our analysts work in product and specialist groups that are at European and often global

A patchwork approach to fighting market abuse will put at risk the consistency objective

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1. The context

2. The information picture

3. The handling of issuer information

4. Other issues

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The information picture

Confidential information

Inside

information

Public information

Material

&

Certain

Material & almost certain

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The information types

1. Public information – issuer reporting; other sources

2. Confidential information

– data, documents and verbal communications related to an

issuer’s strategic and financial plans, forecasts and performance;

– information about the credit exposures of an issuer;

3. Inside information

– E.g. a significant event or transaction before an issuer has

publicly disclosed this;

– information related to proposed or future Moody’s rating actions.

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The context

information picture

The handling of issuer information

Other issues

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Confidential information

This is commercially sensitive information.

We will use it when taking a rating action

But will maintain confidentiality

PROTECTION: We will whenever possible allow the issuer to check the information in the press release announcing the rating action

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Inside information from the issuer

The issuer must tell us it is inside information

PROTECTION:

– We will not take a rating action in respect of this information

– We might require reassurance as to the status of any inside information

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1. The context

2. The information picture

3. The handling of issuer information

4. Other issues

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Inside information generated by Moody’s

A Moody’s rating action might be price sensitive

We will keep the time between the rating committee

decision and public dissemination as short as

possible

Issuers will be given time to review the press release.

But it is for us to release the rating action publicly

We use appropriate channels to ensure proper

dissemination

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Insider lists

Staff development

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Fair presentation and disclosure of conflicts of interest

Rating agencies are outside the scope of the directive

(although we are watching national implementation)

The standards we work to are set out in our Code of

Professional Conduct.

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Code of Professional Conduct

The IOSCO principles and code are being

implemented in our Code of Professional Conduct

Our code seeks to protect the integrity of the rating

process

We will be reporting publicly on our compliance with

the code.

We will ensure a continuing dialogue between market

participants and us on the basis of the code.

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Conclusion

1. The context

2. The information picture

3. The handling of issuer information

4. Other issues