New Regulations of Credit Rating Agencies

Introduction

The Argentine Securities Commission (the “Comisión Nacional de Valores” or “CNV”) issued General Resolution No. 605/12 (the “Resolution”), which modified the regulatory framework applicable to credit rating agencies (“CRAs”). The Resolution was published in the Official Gazette on April 17, 2012.

The Resolution is the outcome of an integral analysis of CRAs’ regulations by the CNV undertaken to elevate transparency standards and grant investors increased access to market information.

As a result of these amendments, Argentine CRAs’ regulation would be aligned with the international regulatory bodies´ rules on credit rating supervision. On April 18, 2012, the European Securities and Markets Authority (ESMA) declared that it considered the regulatory framework for CRAs in Argentina to be in line with the European Union rules. This may enable Argentine CRAs to apply for the endorsement regime set under Regulation (EC) No. 1060/2009, which would allow European financial institutions to continue using credit ratings issued in Argentina for regulatory purposes in Europe.

Background

CRAs in Argentina are governed by the following regulatory framework: (i) Decree No. 656/1992 (as amended by Decree No. 749/2000), (ii) Chapter XVI – Credit Rating Agencies – of the CNV Regulations (Text approved on 2001, as amended, hereinafter the “CNV Regulations”), and (iii) the information regime set under Chapter XXVI – Financial Information Highway – of the CNV Regulations.

The CNV has now updated such regulatory framework by modifying Chapter XVI – Credit Rating Agencies- and Chapter XXVI – Financial Information Highway –of the CNV Regulations. The modifications introduced by the CNV followed the regulatory trend initiated after the recent global economic crisis by international agencies such as the International Organization of Securities Commissions (IOSCO), the Council of Securities Regulators of the Americas (COSRA), the Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA).

The regulatory update introduced by the CNV set new requirements that affect (i) the corporate governance of the CRAs; (ii) ratings and rating methods; (iii) reporting; and (iv) conflicts of interest.

The resolution clearly divides the role of the management of the CRAs from those of the analysts and forbids any interaction among them. Analysts of CRAs are forbidden to negotiate fees with customers and management cannot interfere with the analysts’ work. Additionally, the Resolution creates the position of compliance officer, which is a position that needs to be appointed in every CRA. The compliance officer shall be in charge of monitoring that the CRAs perform their work according to their rating policies and procedures.

Ratings and rating methods were not significantly modified. The modifications refer to ratings of structured finance instruments, which must contain additional information describing the work undertaken by the analyst, and be approved by the rating committee with the presence of two rating committee members with extensive high level experience on structured financial transactions.

All ratings issued by the CRAs must contain the name of the lead analyst.

The reporting obligations of the CRAs have also been modified. A specific list of relevant matters which CRAs must inform immediately to the CNV through the AIF has been included. The former regulation required CRAs to inform the same relevant matters as those applicable to issuers, thus, CRAs informed relevant matters based on such rules. The list of CRAs’ relevant matters includes the following: (i) any modification in the assigned category and a summary of the reasons to take such action; (ii) any modification or termination, unilateral or agreed, of the terms originally agreed; (iii) any rating assigned as a result of a modification in the conditions of issuance of the securities; (iv) any significant modification in the CRAs’ systems, resources or processes. This list is illustrative and does not limit the obligations of CRAs to report any other relevant matters that should be reported.

In addition, CRAs must provide reports to the CNV on a quarterly, semi-annual and annual basis. On a quarterly basis CRAs must report quarterly financial statements and range of fees charged. On a semi-annual basis they must report historical information regarding ratings, and on an annual basis they must report the Annual Financial Statement as well as internal control mechanisms to guarantee quality of ratings and a compliance officer report.

The Resolution includes several provisions regarding independence of CRAs and lack of conflict of interest. CRAs must create appropriate methods to avoid any conflict therein.

Finally, in order to improve the delivery of information by means of the AIF, the CNV amended sub-section b) of Section 11 of Chapter XXVI – Financial Information Highway – in order to add new accesses for the delivery of relevant documentation by the rating agencies in electronic format.

Conclusion

The Resolution sets a variety of requirements that will demand higher levels of compliance for the CRAs. The proper implementation of these modifications should increase reliance of local and international investors on the quality of CRAs’ ratings, and allow foreign institutions such as the European financial entities to use them to comply with regulations applicable to them in their jurisdictions.