GYEONGJU, South Korea (MNI) – The Financial Stability Board will
release a detailed report on November 4 calling for reduced reliance on
credit rating agencies, FSB chairman Mario Draghi said in comments for
release on Saturday.

“Principles will call on the standard setters and national
authorities to assess references to credit rating agencies in laws and
regulations and wherever possible to remove them or to replace them by
suitable standards of creditworthiness where it is possible,” Draghi
said.

However, Draghi made clear that this may not always be possible and
in any event will take some time to implement.

The objective “is to reduce the undesired effects that mechanical
reliance on the ratings of credit rating agencies might have,” Draghi
said. “The direction of this effort is clear, but it is also clear that
this change cannot happen over night.”

Draghi, who is also the governor of the Bank of Italy, explained
that a prolonged process must be expected since many years of mechanical
reliance on these ratings has resulted in a lack of independent capacity
to assess creditworthiness.

Those who have relied on credit rating agencies “will have to
develop this capacity before they can replace ratings with their [own]
assessment,” Draghi said.

“I do not think it is going to be a simple or brief trip. It’s a
long journey,” Draghi said.

Draghi stressed that reform proposals are not aimed at banning
credit rating agency ratings but merely reducing “the undesired effects
the so-called cliff effects that mechanical reliance on ratings entail.”

Draghi said the FSB will also release two additional reports in the
day ahead.

One of them will set out “recommendations to increase supervisory
intensity and effectiveness. This report will focus on ensuring that
supervisors have clear, unambiguous mandates, powers, and resources,” he
said.

“This is to make sure that supervisors are fully equipped to deal
with the complexity of global, systemically important financial
institutions in a much more complex global financial system,” Draghi
explained.

The final release will concern the OTC derivative markets and “how
reforms can implement it consistently across jurisdictions to achieve
the G20 commitments concerning….standardization of OTC derivatives
trading, centralization, central clearing of the OTC trading, and
organized platform trading,” he said.

–Frankfurt bureau tel.: +49-69-720142. Email: jtreeck@marketnews.com

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