SIFMA AMG Submits Comments to IOSCO in Response to Consultation Report on CRAs in Asset Management (with Lofchie Comment)

The Asset Management Group of SIFMA ("SIFMA AMG") submitted comments to IOSCO regarding its consultation paper on good practices for reducing investment advisers' reliance on credit rating agencies ("CRAs") (the "Report").

In its letter, SIFMA AMG addressed one primary aspect of the Report: "the picture it paints of the asset management business and its operations." SIFMA AMG stated that the way in which the Report portrays the asset management business is "fundamentally inaccurate."

The letter explained that the Report's position is based on the assumption that credit ratings have "financial stability-threatening herding and cliff effects" that can arise from the "mechanistic reliance" on the ratings by market participants. According to SIFMA AMG, this assertion presumes without evidence that the asset management business is "monolithic in nature," with all managers responding in the same way to changes in these ratings.

SIFMA AMG stated that appropriate policy discussion regarding the asset management industry must be based on objective and comprehensive analysis of the relevant participants and their activities. SIFMA AMG explained that, in the Report, IOSCO overstates the risks of "herding" and "cliff effects" linked to asset managers' use of credit ratings due to a misunderstanding of the ways in which credit ratings are used by asset managers and their clients.

Lofchie Comment: It is somewhat ironic that asset managers should be criticized for "herding" in their use of credit rating agencies at the same time that regulators are mandating that swaps be centrally cleared. The mandated central clearing of swaps essentially drives the entire market to uniform views on the volatility of both the cleared transactions and the collateral used to margin those transactions.

See: SIFMA Comment Letter.