Shearman & Sterling LLP | FinReg | EU Credit Rating Equivalence Decisions Repealed for Some; Reaffirmed for Others
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  • EU Credit Rating Equivalence Decisions Repealed for Some; Reaffirmed for Others
    07/30/2019
    A series of Implementing Decisions on the equivalence with the EU Credit Rating Agencies Regulation of the credit rating regimes of certain non-EU countries have been published in the Official Journal of the European Union. The EU 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 if a rating is issued by: (i) an EU CRA registered with the European Securities and Markets Authority; (ii) a third-country CRA under the endorsement regime; or (iii) a third-country CRA under the equivalence/certification regime. Equivalence decisions for several jurisdictions were adopted in 2012 under the CRA Regulation, as it was at the time. The equivalence decisions were for Brazil, Canada, Argentina, Singapore, Australia, Mexico, the U.S., Japan and Hong Kong. CRAs from Mexico, the U.S. and Japan subsequently obtained certification from ESMA.

    The new Implementing Decisions for Brazil, Canada, Argentina, Singapore and Australia repeal existing equivalence decisions in respect of the credit rating legislation in these countries, stripping these regimes of their equivalent status. The equivalence decisions have been repealed because these jurisdictions have not amended their laws and regulation to reflect the changes made in 2013 to the CRA Regulation, which introduced more stringent requirements for EU CRAs. Therefore, although the laws and regulations of these jurisdictions are still considered to be equivalent to the unrevised CRA Regulation, they no longer meet the revised EU standards.

    The Implementing Decisions for Mexico, the U.S., Japan and Hong Kong confirm the equivalence of such countries' credit rating legislation. Drafts of these equivalence decisions were published for feedback by the European Commission on June 11, 2019. The existing equivalence decisions for these jurisdictions have been repealed. The new equivalence decisions confirm that the laws and regulations of these countries are equivalent to the CRA Regulation, as amended in 2013.

    It is believed that this is the first time that the European Commission has repealed an equivalence determination, although the time-limited equivalence for Swiss exchanges was allowed to expire at the end of June. The granting and repeal of the Swiss equivalence was seen by many commentators, including the European Parliament, as a political decision by the European Commission, because it was linked to the negotiations between the EU and Switzerland on revising their legal arrangements.

    The EU has recently strengthened the role of ESMA and the other EU supervisory authorities to review and monitor the laws of third countries that have been granted equivalence to ensure that the laws continue to achieve the same outcomes as those of the EU. These repealing decisions no doubt serve as a warning to those jurisdictions that have been granted equivalence that the EU expects them to keep their laws aligned with its legislation. The repealing decisions, in this instance, may not have too great an impact on the markets and market participants because no CRAs in Brazil, Canada, Argentina, Singapore and Australia had been certified by ESMA and so EU regulated entities were not able to use for regulatory purposes credit ratings issued by CRAs from those countries in any event.

    This step is widely seen as a shot across the bows from the Commission, with Brexit on the horizon and the potential for divergence between the U.K. and EU regimes arising in future. When the U.K. leaves the EU, it will have laws and regulations that are the same or achieve the same outcomes as those of the EU because the U.K. has opted to onshore EU legislation, making only those amendments needed to ensure the laws remain operable after exit day. The European Commission has to date only adopted equivalence decisions for the U.K. for areas where it is deemed necessary for financial stability purposes, such as the equivalence decision for U.K. CCPs. It is not yet known when, or even if, the Commission will adopt equivalence decisions for other areas' financial services for the U.K. If they are granted, the U.K., like other jurisdictions, will need to ensure that its laws keep pace with any changes to the EU legislation if it wishes to maintain access to the EU markets.

    View the repealing and recognition Decisions.

    View details of the draft Decisions.

    View the European Parliament's resolution on the relationship between the EU and third-countries in financial services supervision.

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