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Brussels, 20th May 2003

Presented by Jeanne-Françoise de Polignac

The Role of Rating Agencies in European and Global Financial

Markets

Standard & Poor’s background presentation to the Market Briefing of the

European Parliamentary Financial Services Forumchaired by

Mrs Christa Randzio-Plath MEP

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S&P Europe

• In Europe since 1984

• 7 Offices and over 500 employees

• Over 2,000 European entities rated

• Over 80% of European capital market debt rated

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What is a credit rating?

A Standard & Poor’s Rating is: Standard & Poor’s opinion on the willingness and future ability of a borrower to make full and timely payment of interest and principal (borrowed sum) on a financial obligation in accordance with its terms.

A Rating is not:

advice or a recommendation to buy, sell or hold the security in question, a company audit, nor a credit scoring.

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The Role of Rating Agencies

Credit Ratings play a key role in:

Mitigating information asymmetry

Providing investors with independent, relevant and updated financial information on issuers and issues

Allowing issuers to access debt capital markets and to diversify their funding requirements.

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Ratings Scale

Highest Credit Quality: -----------

AA

A

BBBInvestment Grade Cut-off point ----------------

BB

B

CCC

CC

C

D

AAA

AA+AAAA-A+

A

A-

BBB+BBBBBB-

BB+BB

BB-

A-1+

A-1

A-2

A-3

B

AAA

Long Term Short Term

________________________

_____________________

Default -----------

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European Ratings by Sector

461

393

130

218

77

762

253

0 200 400 600 800 1000

Banks

Corporates

Infrastructure

Public Finance

Sovereign

Insurance

Structured Finance

Source: Standard & Poor’s, September 2002

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European Ratings by Country

760

339

268 262

202 189

239218

248

508

0

100

200

300

400

500

600

700

800

Source: Standard & Poor’s, September 2002

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The Rating Process

Rating Request Analytical TeamAppointed

Preliminary Research

Rating Committee

Company Informed

Meeting with Management

Appeal Process

Rating Issued

Surveillance

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Rating Methodology

2 broad categories considered

Financial Risk

Financial policy

Profitability

Capital Structure

Cash flow protection

Financial flexibility

Business Risk

Industry characteristics

Competitive position

Management

Business Strategy

for Industrials

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0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

(Years)

Average Cumulative Default

(%)

AAA

AA

A

BBB

BB

B

CCC

Default Statistics 2002

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Rating through the business cycle

0

0.5

1

1.5

2

2.5

3

3.5

4

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

%

Source: Standard & Poor’s, 2003

Defaulted debt as a percentage of rated debt, 1981-2002

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“Issuer Pays” - Model• S&P has no link with any financial institution or brokerage

• Rating decisions are collegial – decided by a Rating Committee

• Analyst remuneration is not based on the performance of the issuers or ratings they work on

• Analysts are not allowed to own securities in companies with which they regularly interact

• Code of Ethics requires that all non-public information remain confidential

• Influence of individual issuers on S&P is limited: 37 000 issuers doing business with S&P and no single issuers accounts for more than 1% of revenue

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UMRegulatory Treatment of

Rating Agencies

• In the US, the SEC has designated Nationally Recognised Statistical Rating Organisations (NRSROs) since 1975. NRSRO ratings are used widely in U.S. regulations.

– Recognition is based primarily on a rating agency’s reputation and the recognized use of its ratings in the U.S. financial market

– NRSRO designation is intended to reflect the view of the marketplace as to the credibility of the ratings

• S&P’s ratings are widely used and treated with high regard from investors outside the U.S., including Europe, where the NRSRO status does not exist and ratings are not as imbedded in regulations.

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UMCurrent International

Regulatory Developments• SEC Review of Rating Agencies

– In January 2003, the SEC presented its “Report on the Role and Function of Credit Rating Agencies in the Operation of Securities Markets” to US Congress, as mandated by the Sarbanes-Oxley Act of July 2002.

– A “Concept Release”, a consultation document, is forthcoming and addresses further study regarding the Information Flow, Potential Conflicts of Interest, Alleged Anticompetitive or Unfair Practices, Reducing Potential Regulatory Barriers to Entry and Ongoing Oversight.

• Congress Hearings of April 2003– The SEC has been requested to produce a report for Congress on the Utility

of NRSRO ratings, Monopoly Power, Fair Disclosure the NRSRO Status and Conflicts of Interest. This Report is due by early June 2003.

• IOSCO review– The International Organisation of Securities Commissions (IOSCO) will

present a high level principles on rating agencies by September 2003.– G7/G8, Financial Stability Forum, IMF

• Basel II Capital Accord– Basel II sets out recognition criteria for ECAIs (External Credit Assessment

Institutions)

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Current EU Regulatory Developments

• On-going Dialogue with European Regulators– S&P enhanced dialogue/consultation with the European Commission,

CESR, National Regulators (UK, Germany, France, Spain, Netherlands) and initiating dialogue in other EU jurisdictions and globally, e.g. Russia.

• Financial Services Action Plan– Capital Adequacy Directive (CAD III, the EU implementation of Basel II)– Market Abuse Directive. Consultation at level 2 with CESR and Commission– Oviedo Agenda

• French and German focus on Rating Agencies– « Project de Loi de Sécurité Financière » proposes monitoring, but not

supervision by the newly created Autorité des Marchés Financiers « AMF » – Germany - a Working Group may be set up.