LONDON (Reuters) – The European Union’s securities watchdog said on Thursday it had ordered top rating agencies to take action to ensure that their ratings of collateralised loan obligations (CLOs) are accurate and independent, after an investigation raised some concerns.
The European Securities and Markets Authority (ESMA) said its investigation focused on Fitch Ratings, Moody’s and S&P – often referred to as the “Big Three” – given that they account for the vast majority of CLO ratings.
CLOs are securities backed by a pool of loans, often linked to companies with lower credit ratings.
“ESMA has informed each CRA (credit rating agency) of its findings and will develop individual remedial action plans to ensure appropriate safeguards and controls are in place,” the watchdog said in a statement.
“ESMA will continue to monitor the developments in CLO markets, including changes in CLO credit ratings, rating practices and rating methodologies.”
ESMA, which directly regulates rating agencies operating in the 27-country bloc, said CLOs are complex and opaque, and market participants use ratings to help decide which ones to buy.
There is a risk that ratings methodologies developed by the agencies could be unduly influenced by commercial feedback from market participants, ESMA said.
“In some instances, market outreach included the sharing of information that ESMA considers not appropriate,” the watchdog said.
This included market participants sharing with the agencies feedback on the commercial perception of a methodology, which could impair the “accuracy, objectivity and independence” of CLO credit ratings, it added.
(Reporting by Huw Jones; Editing by Mark Potter)
