SEC finds problems in review of credit-raters

Updated 16 November 2012
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SEC finds problems in review of credit-raters

WASHINGTON: Some credit-rating agencies failed to disclose ratings method changes or were lax in following policies on timely downgrades of securities, according to a report issued by US securities regulators yesterday.
The Securities and Exchange Commission summarized the results of its annual examination of raters, a requirement under the 2010 Dodd-Frank Act which called for greater scrutiny of ratings agencies following the 2007-2009 financial crisis.
The largest ratings firms, Moody's Corp. and McGraw-Hill Cos Inc.'s Standard & Poor's, have been criticized for helping to exacerbate the crisis by giving rosy ratings to subprime mortgage securities that quickly turned toxic.
Yesterday’s SEC report does not name which firms had violations, but does distinguish between larger versus smaller credit-raters.
The SEC's exams were conducted on site at all nine raters registered with the SEC, which include smaller firms like Egan-Jones, as well as the big three - Moody's, Standard & Poor's and Fimalac SA's Fitch.
The SEC found that each of the larger raters and two smaller firms failed to follow their own methodologies and policies for determining ratings.
In one case, the SEC said, one of the big three changed its method for calculating a key financial ratio for asset-backed securities ratings and failed "for several months" to publicly disclose the change and its impact.
This firm, the SEC said, "appeared to have weak internal supervisory controls and lacked transparency over the process of rating these asset-backed securities."
The SEC added that market share and business considerations may have played a role in how this rater applied its methodology - a potential conflict of interest that many critics see as a problem in the industry.
The big three use what is called an "issuer-paid" business model, in which companies seeking ratings pay for them.
The big raters say this conflict can be managed but critics argue this model should be scrapped.
The Dodd-Frank law requires the SEC to study possibly replacing the model with a new method in which a public or private utility would assign structured product ratings to firms at random. So far, its findings have not been released.
S&P said on Thursday it has "enhanced its ratings process, governance and compliance function, including proactively making a number of the changes that are now being recommended by the SEC."
Spokesmen for Moody's and Fitch were not immediately available for comment.


Oil prices fall as OPEC and Russia weigh output boost

Updated 59 min 39 sec ago
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Oil prices fall as OPEC and Russia weigh output boost

  • Russian Energy Minister Alexander Novak has had talks with Saudi Energy Minister Khalid Al-Falih on an easing of the terms of the global oil supply pact that has been in place for 17 months
  • The energy ministers of Saudi Arabia, Russia and the United Arab Emirates are discussing an output increase of about 1 million barrels per day

LONDON: Oil prices fell below $78 a barrel on Friday as OPEC and Russia considered easing supply curbs to offset disruptions in Venezuela and an expected drop in Iranian exports.
Russian Energy Minister Alexander Novak has had talks with Saudi Energy Minister Khalid Al-Falih on an easing of the terms of the global oil supply pact that has been in place for 17 months, Novak said on Friday.
The energy ministers of Saudi Arabia, Russia and the United Arab Emirates are discussing an output increase of about 1 million barrels per day (bpd), sources told Reuters.
Speaking in St. Petersburg, Falih told Reuters that “all options are on the table” when asked about the targets on production cuts.
Brent crude futures were down 80 cents at $77.99 a barrel by 0914 GMT, having hit their highest since late 2014 at $80.50 this month.
US West Texas Intermediate (WTI) crude futures were at $70.18 a barrel, down 53 cents.
“The debate about a possible relaxation of the production restrictions should preclude any renewed price rise,” Commerzbank analysts said.
“The $80 mark is likely to pose an obstacle that is difficult to overcome because it would significantly raise the probability of a production increase.”
The Organization of the Petroleum Exporting Countries (OPEC) as well as a group of non-OPEC producers led by Russia started withholding output in 2017 to tighten the market and prop up prices.
Global crude supplies have tightened sharply over the past year because of the OPEC-led cuts, which were boosted by a dramatic drop in Venezuelan production.
The prospects of renewed sanctions on Iran after US President Donald Trump pulled out of an international nuclear deal with Tehran have also boosted prices in recent weeks.
As a result, compliance with the deal to reduce output by 1.8 million bpd by the end of 2018 has been at 152 percent, sources said.
Amrita Sen, chief oil analyst at consultancy Energy Aspects, said: “Addressing overcompliance was always likely to be on the agenda amid a tight market and low inventories, but the volume to bring back is still up for debate.”

HIGHER PRICES AT A COST
While Russia and OPEC benefit from higher oil prices, up almost 20 percent since the end of last year, their voluntary output cuts have opened the door to other producers to ramp up production and gain market share.
US crude oil production has risen by more than a quarter in the past two years, to 10.73 million bpd. Only Russia produces more, at about 11 million bpd.
Output from the likes of the United States, Canada and Brazil, which are not bound by the OPEC/Russian-led pact, is likely to rise further as crude prices rise.