IOSCO Provides Guidance on ''Sound Practices'' for Oversight of Market Intermediaries

IOSCO recommended twelve practices that regulators should consider incorporating into their oversight of market intermediaries. Based, in part, on a survey of market intermediaries in IOSCO jurisdictions, the practices are designed to minimize regulators' reliance on credit rating agencies for credit risk assessment.

IOSCO stated the practices as follows:

1. Establish an independent credit assessment function that is clearly separated from other business units, including the development of appropriate policies and procedures to ensure that decision-making is not unduly affected by operations from other areas of the firm.
2. Involve senior management in order to ensure the successful implementation of a robust credit assessment process, including promotion of a risk-sensitive culture throughout the organization. Such involvement would entail oversight of the credit risk assessment process by a dedicated risk management team that reports to high-level management, such as a separate independent credit committee.
3. Establish a coherent oversight structure to ensure that the credit assessment process is properly implemented and adhered to, including the establishment of reporting lines and responsibilities that are clearly articulated and followed.
4. Take steps to ensure that a firm's governing committee receives an appropriate level of information on the amount of credit risk to which the firm is exposed. This may include policy exceptions, limit breaches, stress testing analysis concentrations, watch lists, and top exposures, among other things.
5. Invest in staff and other resources necessary to develop a robust internal credit assessment management system that appropriately reflects the nature, scale, and complexity of its business. This includes having in-house the necessary staff expertise and technological ability to analyze effectively the firm's portfolio and to stay abreast of market indicators.
6. Avoid exposure to particular credit risks whenever the firm does not have the internal capability to independently and adequately assess the exposure. Take creditworthiness assessment capabilities into account when considering the firm's business growth plans and deciding how to, e.g., structure its portfolios, manage its trading book or whether to take on additional credit exposure.
7. Incorporate a wide variety of qualitative measures into robust credit assessment processes in addition to quantitative measures. This can provide a more holistic view of creditworthiness than simply relying on quantitative factors alone.
8. Prescribe internal risk levels and investment appetites for the assessment of creditworthiness that focus on the intrinsic value of the instrument to set limits and risk. These levels might distinguish between various categories, such as industry or on a geographical basis, and be reflected in the policies and procedures that set out the operating standards that must be followed by teams or individuals responsible for the assessment of credit risk.
9. Subject non-investment grade or unrated financial products to enhanced scrutiny.
10. Avoid mechanistically relying on external CRA ratings. View such ratings as only one factor among several that may be used in a comprehensive credit assessment process. Carefully consider the effect of using external credit ratings as parameters to assess the creditworthiness of investments or to decide whether to invest or disinvest. Recognize and understand the possible limitations of CRA ratings and become familiar with CRA credit risk assessment methodologies. For example, CRA ratings may be a lagging indicator of more general credit risks and do not always reflect the most recent factors affecting creditworthiness.
11. Strive to update and improve continually the firm's credit risk assessment practices to help ensure that they remain abreast of developments that could have a material adverse effect on the firm's portfolios and counterparty relationships.
12. Ensure internal audit or another independent party performs regular reviews of credit policies and procedures.