Shearman & Sterling LLP | FinReg | European Commission Reports on Reporting Obligations under the Credit Rating Agencies Regulation 
Financial Regulatory Developments Focus
This links to the home page
Financial Regulatory Developments Focus
  • European Commission Reports on Reporting Obligations under the Credit Rating Agencies Regulation 

    The European Commission published a report on reporting obligations under the Credit Rating Agencies Regulation. The Report reviewed references to external credit ratings in EU legislation and in private contracts among financial markets counterparties and outlines potential alternatives to credit ratings produced by credit rating agencies that are currently used by market participants across the EU. The alternatives examined include the use of market-based credit risk assessments, internal credit risk assessment tools and third-party credit risk assessments. The Commission concluded that there are currently no feasible alternatives to replace external credit ratings entirely. The Report reviews the credit ratings market and provides an assessment of provisions in the CRA Regulation aimed at increasing competition in the credit rating market. The Implementing Technical Standards on the mapping of External Credit Assessment Institutions (published in the Official Journal of the European Union on October 12, 2016) is highlighted as promoting competition as it enables European banks and insurers to use smaller CRAs. The Commission commented that such mapping could create future opportunities for the use of smaller CRAs and possibly stimulate market development. The Report also examined the impact and effectiveness of the provisions in the CRA Regulation on governance and internal procedures; such as the prevention of conflicts of interests and alternative remuneration models. The current market is dominated by the three largest CRAs (S&P, Moody's and Fitch) and the Commission noted that it is of the upmost importance to ensure the good conduct of such CRAs. The Report also considered the establishment of a European CRA and whether such an institution would be a feasible alternative for the assessment of sovereign debt and the creation of a European creditworthiness rating as the foundation for all other creditworthiness ratings. The Commission considers that the establishment of such common agencies would likely add more costs and would not bring any additional value to the ratings market in practice. The Commission concludes that the CRA Regulation will have a long-term positive impact on the credit ratings market.  Not all provisions of the CRA Regulation have been implemented and therefore further assessment to determine the full impact of the legislation will need to be conducted.
    View the report.