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Securities regulators to impose code of conduct on debt raters

MIKE SEGAR/REUTERS

Canadian securities regulators are preparing to impose new rules on agencies that assess the creditworthiness of the millions of dollars in debt issued by corporations, governments and other instructions.

The Canadian Securities Administrators said Friday that credit ratings agencies in this country who want their opinions to be eligible for use under securities laws will need to apply to become a "designated rating organization."

Credit rating organizations — which in Canada include DBRS, Moody's and Standard & Poor's — will also have to adhere to a code of conduct, which will include rules concerning conflicts of interest, governance, conduct and required filings.

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The rules were designed to bring Canadian standards in line with international requirements, specifically those in the European Union, so European market participants can rely on Canadian credit ratings, the umbrella organization of provincial and territorial securities regulators said.

The CSA is an umbrella organization representing the provincial and territorial regulators that collectively oversee Canada's securities industry.

"The CSA recognize the significant role credit rating organizations play in today's global credit markets," said Bill Rice, chair of the CSA, and chief executive officer of the Alberta Securities Commission.

"By considering international developments while creating the Canadian regulatory regime for credit rating agencies, the CSA has set appropriate standards for credit rating agencies that are also consistent with international regimes."

Ratings agencies rate companies and governments by their ability to repay debt. The higher the rating — triple-A is the highest — the more investors trust them, and the less interest companies or governments have to pay to borrow money.

There has been criticism levelled at some credit rating agencies for failing to provide adequate warning before the global financial meltdown of 2008, with critics saying there was insufficient warning about some of the debt the agencies rated.

Large-scale money managers with a conservative approach, such as pension funds, usually won't buy low-rated bonds because of a higher risk of default. Other investors may be more risk-tolerant but usually expect to get a higher interest rate or pay a lower price for bonds.

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The agencies, which are paid by the organizations that issue the debts, have been criticized for moving too slowly to downgrade some debt securities, saddling investors with losses and the feeling they'd been duped.

Conversely, the rating agencies have been criticized for being quick to downgrade some top-ranked borrowers. S&P sent markets tumbling last year after it stripped the U.S. of its top-notch credit rating, and again earlier this month when it downgraded France's debt.

The CSA first published amendments to its governance of ratings agencies in March of last year. Following a feedback period, it has made some minor enhancements to bring Canada's rules in line with the EU regulation.

The new rules, which require government approval in some regions, are expected to come into effect in April.

The CSA is a council of the 13e Canadian securities regulators that co-ordinates and harmonizes regulation for the Canadian capital markets.

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