Shearman & Sterling LLP | FinReg | EU Authority Seeks to Clarify the Third-Country Endorsement Regime for Credit Ratings
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  • EU Authority Seeks to Clarify the Third-Country Endorsement Regime for Credit Ratings

    The European Securities and Markets Authority has opened a consultation on proposed supplementary guidance on the application of the endorsement regime under the EU Credit Rating Agencies Regulation. The CRA Regulation provides that banks, investment firms, insurers, reinsurers, management companies, investment companies, alternative investment fund managers and CCPs may only use credit ratings for certain regulatory purposes where such ratings have been issued by CRAs established in the EU and registered with ESMA. Credit ratings issued in a third country may only be used for such regulatory purposes in the EU under an endorsement regime or an equivalence/certification regime. Endorsement allows credit ratings issued by a third-country CRA and endorsed by an EU CRA to be used for regulatory purposes in the EU. The equivalence/certification regime allows credit ratings issued by a third-country CRA in relation to a third-country entity or financial instrument to be used in the EU for regulatory purposes - it does not cover ratings issued by a third-country CRA for an EU entity or a financial instrument issued in the EU. However, the equivalence regime requires an affirmative assessment by ESMA and the Commission as to the legal regime for credit ratings agency in the third country.

    In November 2017, ESMA published an updated version of the Guidelines on the endorsement regime, which clarified that ESMA expects an endorsing CRA to verify, and be able to demonstrate, that the third-country CRA has established internal requirements which are at least as stringent as the corresponding requirements in the relevant provisions of the CRA Regulation, or that the third-country CRA fulfills the endorsement requirements under the CRA Regulation.

    ESMA is proposing to supplement the Guidelines, following feedback from CRAs engaged in endorsing credit ratings. The CRAs suggested that further guidance is needed to help them assess whether the internal requirements of a third-country CRA can be considered as stringent as those in the CRA Regulation. The proposed ancillary guidance aims to clarify the general principle for assessing whether a requirement is 'as stringent as' and provides an assessment of concrete cases, submitted by CRAs, of diverging policies within and outside the EU. Responses to the consultation can be provided until May 25, 2018. ESMA intends to publish a consolidated version of the Guidelines in Q3 2018. As with the existing Guidelines, the additional guidance will apply to credit ratings issued on or after January 1, 2019, and to existing credit ratings reviewed after that date.

    View the consultation paper and response form.

    View the existing Guidelines.