Market Abuse: National responses to a global problem Presented by: Nigel Phipps Regulatory Relations Presented by: Nigel Phipps Regulatory Relations May 23, 2005 British Institute of International and Comparative Law

Credit Rating Agencies and Market Abuse

3 What I will cover 1.The context 2.The information picture 3.The handling of issuer information 4.Other issues Inside information generated by Moody’s Insider lists Staff development Fair presentation and disclosure of conflicts of interest

4 1.The context 2.The information picture 3.The handling of issuer information 4.Other issues

5 Two examples The CEO of an issuer had been alarmed by a lawyer’s presentation saying that they could only share confidential information with certain parties and rating agencies weren't on that list. A request for us to agree in writing not to commit market abuse if we were to receive price sensitive information

6 The rock and a hard place for a rating agency We must not disseminate information which we knew or ought to have known is false or misleading. If an issuer provides us with inside information and makes us an insider we cannot use the information to take a rating action. BUT we have an existing public rating on the issuer which, on the basis of the inside information, is now misleading.

7 The risk in all of this (1) Ratings are a public good – free, disseminated broadly and non-exclusive Other attributes – predict good credit from bad, easy to use, breadth Hence used by many who want – Accuracy – Stability

8 The risk in all of this (2) Therefore only change the rating when the fundamental creditworthiness HAS changed. Information is vital to provide this public good. The poorer the information flow, then the more reactive our rating opinion will become to transient market rumours.

9 The global dimension Investors and borrowers expect us to produce rating opinions that are globally consistent Our analysts work in product and specialist groups that are at European and often global A patchwork approach to fighting market abuse will put at risk the consistency objective

10 1.The context 2.The information picture 3.The handling of issuer information 4.Other issues

11 The information picture Confidential information Inside information Public information Material & Certain Material & almost certain

12 The information types 1.Public information – issuer reporting; other sources 2.Confidential information – data, documents and verbal communications related to an issuer’s strategic and financial plans, forecasts and performance; – information about the credit exposures of an issuer; 3.Inside information – E.g. a significant event or transaction before an issuer has publicly disclosed this; – information related to proposed or future Moody’s rating actions.

13 The context information picture The handling of issuer information Other issues

14 Confidential information This is commercially sensitive information. We will use it when taking a rating action But will maintain confidentiality PROTECTION: We will whenever possible allow the issuer to check the information in the press release announcing the rating action

15 Inside information from the issuer The issuer must tell us it is inside information PROTECTION: – We will not take a rating action in respect of this information – We might require reassurance as to the status of any inside information

16 1.The context 2.The information picture 3.The handling of issuer information 4.Other issues

17 Inside information generated by Moody’s A Moody’s rating action might be price sensitive We will keep the time between the rating committee decision and public dissemination as short as possible Issuers will be given time to review the press release. But it is for us to release the rating action publicly We use appropriate channels to ensure proper dissemination

18 Insider lists Staff development

19 Fair presentation and disclosure of conflicts of interest Rating agencies are outside the scope of the directive (although we are watching national implementation) The standards we work to are set out in our Code of Professional Conduct.

20 Code of Professional Conduct The IOSCO principles and code are being implemented in our Code of Professional Conduct Our code seeks to protect the integrity of the rating process We will be reporting publicly on our compliance with the code. We will ensure a continuing dialogue between market participants and us on the basis of the code.

21 Conclusion 1.The context 2.The information picture 3.The handling of issuer information 4.Other issues