Since a wave of downgrades on subprime residential mortgage-backed securities (RMBS) began in mid-2007, sometimes from high investment grade to low speculative grade, credit ratings agencies have been in the eye of a storm. Regulators have placed them under increased scrutiny, investors have challenged both existing ratings methodologies, and changes made to those methodologies, at least one lawsuit alleging fraud by the agencies has been allowed to proceed in the US, and the state of California is also examining whether to subpoena the agencies.
The regulatory changes are profound. The new rules enacted by the European Commission and US Treasury effectively ensure that agencies will become fully supervised entities, with the potential to lose their licence in the event of serious misconduct. The Committee of European Securities Regulators (CESR) will be responsible for monitoring performance under the EU legislation, with the Securities and Exchange Commission (SEC) playing the supervisory role in the US.
