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The Governance of Credit Rating Agencies

Regulatory Regimes and Liability Issues

Andrea Miglionico

The global crisis revealed that credit rating agencies (CRAs) are capable of bringing about potential distortions in the financial sector, thereby resulting in a reduction in market confidence which, in turn, influences negotiations and expectations. CRAs need to be held accountable for lack of transparency and inaccurate ratings, however the existing regulatory framework does not secure adequate investor protection. This book provides a new and important contribution to research in the area, at a crucial time in the debate around financial regulation and investment regimes.
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EXTENDED CONTENTS

Andrea Miglionico

About the author

Preface

Acknowledgements

List of abbreviations

Table of cases

Table of legislation

PART I    THE BUSINESS OF CREDIT RATING

1.   THE CREDIT RATING INDUSTRY

A. INTRODUCTION1.01

1. The ‘gatekeeper’ function1.07

2. Role of CRAs in the financial markets1.17

3. The reputational capital of CRAs1.30

4. Structure of the book1.53

2.   BUSINESS MODEL OF CRAs

A. RATING METHODOLOGIES2.01

1. The bond rating services2.09

2. Solicited and unsolicited ratings2.18

B. CONFLICTS OF INTEREST2.26

1. Issues of the ‘issuer-pays’ business model2.37

2. The over-reliance on CRA ratings2.41

C. THE DISCLOSURE REGIME2.57

1. The quest for accuracy of rating2.62

2. The impact of rating on sovereign debt2.68

D. COMPETITION IN THE RATINGS INDUSTRY2.78

E. THE USE OF ‘RATING TRIGGERS’ IN FINANCIAL TRANSACTIONS2.84

1. Procyclicality effect of rating triggers2.90

PART II    THE REGULATION OF CRAs

3.   GLOBAL REGULATORY FRAMEWORK

A. THE INTERNATIONAL APPROACH: THE IOSCO CODE3.01

1. The soft law approach of the IOSCO Code3.08

B. THE EXTERNAL CREDIT ASSESSMENT INSTITUTION3.16

4.   THE US REGIME

A. THE NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION4.01

1. US regulation of CRAs4.12

5.   THE EU REGIME

A. THE EUROPEAN REGULATORY RESPONSE5.01

1. Supervision of CRAs5.06

2. The role of ESMA5.14

6.   THE UK REGIME

A. UK REGIME OF CRAs6.01

1. The principles-based regime6.06

B. PROPOSAL FOR AN EU CRA6.11

PART III    LIABILITY OF CRAs

7.   UNITED KINGDOM

A. PRELIMINARY CONSIDERATIONS7.01

1. Liability in tort for economic loss7.05

2. The tort of negligence7.15

B. THE DOCTRINE OF ESTOPPEL7.19

C. THE DUTY OF CARE FOR CRAs7.31

1. The question of ‘proximity’7.39

2. The ‘assumption of responsibility’ rule7.49

3. The application of the Hedley Byrne case to CRAs7.54

D. THE CAPARO CASE7.65

1. The ‘three-stage test’ for CRAs7.72

8.   UNITED STATES

A. THE RATING AGENCIES’ FIRST AMENDMENT PROTECTION IN THE UNITED STATES8.01

1. The presumption of being ‘financial reporters’8.11

2. The nature of rating as commercial speech8.20

B. THE PROFESSIONAL LIABILITY OF CRAs UNDER THE DODD-FRANK ACT 20108.28

1. The shortcomings of professional liability8.34

9.   EUROPEAN UNION

A. REGULATION NO 462/20139.01

1. The question of Article 359.04

2. The burden of proof for the investor9.10

B. THE ABSENCE OF A HARMONIZED LIABILITY REGIME UNDER EU LAW9.15

10.  AUSTRALIA

A. THE BATHURST CASE10.01

1. The fiduciary duty to investors10.07

2. The tort claim in negligence and the statutory claim for damages10.12

B. IMPLICATIONS OF THE AUSTRALIAN LEGISLATION FOR CRAs’ LIABILITY10.19

PART IV    CONCLUSIONS

11.  FINDINGS OF THE RESEARCH

Bibliography

Index