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Rating agencies

The Romanian National Securities Commission (NSC) recently published instruction 4/2007 regarding the criteria for the recognition of rating agencies (RA).

The Instructions specify that in Romania the evaluation and notation performed by the following categories of RA are recognized:

  • RA that fulfil the criteria laid down by the Instructions; and
  • RA that perform their activity at international level, and which are either (i) recognized by the US capital markets competent authority as being "nationally recognized statistical rating organizations", (ii) recognized by the competent authorities from EU member states, or (iii) recognized by the competent authorities from non-EU states, in accordance with cooperation agreements concluded by NSC with the authorities.

The Instructions lay down seven main types of criteria that must be fulfilled by the RA, briefly described below.

RA must adopt and implement adequate procedures and methodologies, and must register and keep track of all the documents that have circulated within the RA.

The RA must have sufficient resources for the issuance of high quality ratings, and must take necessary measures to avoid issuing reports or analysis which contain erroneous or misleading information, on the general creditworthiness of an issuer or of a financial instrument.

Unless specified, an RA has the obligation of ongoing review and update of a rating after its publication, both on periodic basis and whenever certain events occur.

With respect to the integrity of the rating process, the RA and its employees have the obligation to comply with the laws and regulations applicable in any jurisdiction where they perform their activity, and are not allowed to ensure or to guarantee, implicitly or explicitly, that a certain rating will be granted.

Each employee of a RA must report immediately if he/she finds out that another RA's employee or entity under the respective RA control is or was involved in actions that were illegal, unethical or contrary to the conduct code.

The RA must separate the activities and its rating analysts from its other activities, in order to avoid any potential conflict of interest. Written internal procedures must be adopted and a mechanism created to identify, eliminate, manage and disclose any actual or potential conflicts of interests.

The RA and its employees must refrain from engaging in any transactions with securities or financial derivatives if they could generate conflicts of interest with rating activities.

RA must make public their policies and methodologies (and any changes), as well as the key elements upon which the rating opinion was based. Confidential information must be used only for purposes related to the rating activity, and should not be disclosed in press releases. RA's employees are forbidden from transactions with securities if they hold confidential information regarding the issuer of such securities.

The RA must make public their conduct code, and they must establish a separate department responsible with the communication with the market participants and the public.

In order to ensure the independence of shareholders, the Instructions state that the RA cannot have as large shareholders financial investment companies, insurance companies, credit institutions, issuers of securities or of other financial instruments, as well as any person with strong ties or who acts in concert with such persons. The executive directors of the RA cannot hold any other remunerated position.

The rating decisions must be adopted by a rating committee. Also, the organizational structure of the RA must ensure a clear separation between the analytical rating functions and the management/commercial functions. There should be Chinese walls between rating activities and other activities performed by the RA.

The RA must have its own website to publish ratings with a public character.

Only the Bucharest Stock Exchange has publicly announced its intention to create a rating agency in Romania. Although there were discussions with representatives of top international rating agencies, there is no Romanian rating agency acting on the Romanian market as yet. The publication by the NSC of the recognition criteria will hopefully lead to the creation of the first.

Mihaela Maxim

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