The following posts provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
UK Conduct Regulator Consults on Brexit-Related Changes to Its Rulebook and Binding Technical Standards
The U.K. Financial Conduct Authority has published its first consultation on proposed changes to the FCA Handbook to ensure a functioning legal and regulatory framework for financial services in the event of a "no-deal" scenario whereby the U.K. exits the EU on March 29, 2019 without a ratified Withdrawal Agreement in place and there is consequently no transitional period for firms. The proposed amendments will not take effect if the U.K. enters into a transitional period after exit day.
The consultation includes the FCA's proposals in relation to the Binding Technical Standards it has been empowered by HM Treasury to amend prior to Brexit and to maintain afterward. These are the retained EU "Level 2" delegated and implementing regulations that set out regulatory technical standards and implementing technical standards. The consultation also sets out the FCA's proposed approach to non-legislative "Level 3" materials such as guidelines, recommendations and opinions that will also be onshored.
The FCA states in the consultation that the majority of the proposed changes are consequential in nature and follow the amendments to retained EU law that HM Treasury is proposing, as set out in the series of financial services-related statutory instruments being made under the European Union (Withdrawal) Act 2018.
European Securities and Markets Authority Publishes Its 2019 Priorities
The European Securities and Markets Authority has published its Annual Work Programme for 2019, dated September 26, 2018. ESMA sets out its focus areas for 2019 and provides details of expected outputs within each of the areas. ESMA also indicates that a number of pieces of EU legislation may be reviewed. These include the Market Abuse Regulation and the clearing obligation under the European Market Infrastructure Regulation, in addition to the reviews that have already been announced.
US Office of the Comptroller of the Currency Issues Guidance with Respect to Implied Sovereign Support
The U.S. Office of the Comptroller of the Currency issued guidance to OCC-supervised institutions with respect to the role of informal or implied expressions of support from foreign governments in determining credit risk ratings.
Five EU Banks Fined for Issuing Credit Ratings Without Authorization
The European Securities and Markets Authority has fined five EU banks for issuing credit ratings without being authorized to do so by ESMA. The Credit Rating Agencies Regulation requires firms to register with ESMA as a Credit Rating Agency before issuing credit ratings to ensure that such ratings are independent, objective and of adequate quality.
ESMA found that the banks had each issued credit research to their clients that included shadow ratings and opinions. ESMA deemed that these aspects of the reports amounted to a credit rating as defined in the CRA Regulation. None of the five banks have been authorized by ESMA under the CRA Regulation, nor have any of them applied for such authorization.
The banks have a right of appeal to the Board of Appeal of the European Supervisory Authorities.
View ESMA's press release and decision notices.
EU Consultation on Revised Guidelines on Periodic Reporting by Credit Rating Agencies
The European Securities and Markets Authority has launched a consultation on proposed revised Guidelines on periodic reporting by credit rating agencies. Under the EU Credit Rating Agencies Regulation, ESMA is responsible for direct supervision of EU CRAs registered with it. ESMA wishes to update its existing Guidelines, first published in 2015, to better reflect ESMA's supervisory powers and duties. In particular, ESMA does not consider that the current approach of determining reporting requirements according supervisory fees matches its risk-based approach to supervision. ESMA is proposing to establish reporting categorizations for CRAs as well as reporting calendars based on reporting categorization. Furthermore, ESMA is proposing to standardize the reporting templates and to provide additional reporting instructions.
The consultation closes on September 26, 2018. ESMA intends to publish the Final Report on the Guidelines before the end of 2018.
View the consultation.
Final EU Guidelines Clarify the Third-Country Endorsement Regime for Credit Ratings
The European Securities and Markets Authority has published a final report on the application of the endorsement regime under the EU Credit Rating Agencies Regulation. The report contains ESMA's feedback statement for its earlier consultation on draft supplementary Guidelines as well as the final supplementary Guidelines.
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 if a rating is issued by: (i) an EU CRA registered with ESMA; or (ii) a third-country CRA under the endorsement regime or the equivalence/certification regime. Endorsement allows credit ratings issued by a third-country CRA to be used for regulatory purposes in the EU provided that the rating has been endorsed by an EU CRA. The CRA Regulation sets out various conditions for such an endorsement.
European Securities and Markets Authority Publishes Annual Report
The European Securities and Markets Authority has published its Annual Report, dated June 15, 2018. The report sets out ESMA's key achievements against its 2017 objectives of promoting supervisory convergence, assessing risks to investors, markets and financial stability, completing a single rulebook for the EU financial markets and directly supervising trade repositories, credit rating agencies and third-country CCPs. The report also discusses ESMA's contributions to the work of the Joint Committee of the European Supervisory Authorities.
The report does not consider the focus areas for ESMA in 2018, which are set out in ESMA's work programes. However, ESMA indicates that in 2018 it will be, among other things: (i) issuing further opinions on pre-transparency waivers under the Markets in Financial Instruments package; (ii) engaging with credit rating agencies and trade repositories on their strategy, governance, operational matters and preparations for Brexit; and (iii) continuing its work to finalize the technical standards and technical advice under the EU Prospectus Regulation.
View ESMA's Annual Report.
European Commission Adopts Revised Implementing Technical Standards on Mapping of External Credit Ratings
A Commission Implementing Regulation has been published in the Official Journal of the European Union. This Amending Regulation, which takes effect on May 15, 2018, revises a Commission Implementing Regulation adopted in October 2016 under the Capital Requirements Regulation.
Under the CRR, firms that use the Standardised Approach for the purposes of calculating their capital requirements for credit risk can use external credit assessments to determine the credit quality of exposures. These external credit assessments must be made by External Credit Assessment Institutions. ECAIs are either credit rating agencies registered under the CRA Regulation or central banks that issue credit ratings (which are exempt from the application of the CRA Regulation). The 2016 Implementing Regulation set out Implementing Technical Standards for the mapping of the credit quality of exposures (obtained from ECAIs) to their corresponding risk weights.
The Joint Committee of the European Supervisory Authorities consulted in July 2017 on the need to make changes to the 2016 Implementing Regulation to reflect the fact that, since it was adopted, five additional ECAIs had been recognized and one ECAI had been de-registered. The Joint Committee submitted draft revised ITS to the Commission in December 2017 and the Commission has adopted them in the Amending Regulation.
View the Amending Regulation ((EU) 2018/634).
View details of the July 2017 consultation.
US Federal Reserve Bank of New York Introduces Three New Reference Rates
The U.S. Federal Reserve Bank of New York, in conjunction with the U.S. Office of Financial Research, introduced three new reference rates. These three rates, the Secured Overnight Financing Rate, the Broad General Collateral Rate and the Tri-Party General Collateral Rate, are based upon overnight repurchase agreement transactions collateralized by Treasury Securities. The Federal Reserve Bank of New York has previously published indicative historical data for these three new rates. In connection with the production of these new rates, the Federal Reserve Bank of New York indicated that it plans to update its International Organization of Securities Commissions statement of compliance during the second quarter of 2018 to include these rates.
View the FRB of NY's announcement.
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.
EU Authority Acts on New Third-Country Endorsement and Equivalence Regime for Credit Ratings
The European Securities and Markets Authority has published updated Guidelines on the application of the endorsement regime and Technical Advice on the equivalence of certain third-country legal and supervisory frameworks under the Credit Rating Agencies Regulation. The CRA provides that banks, investment firms, insurers, reinsurers, management companies, investment companies, alternative investment fund managers and CCPs may only use credit ratings for regulatory purposes issued by CRAs established in the EU and registered with ESMA. Credit ratings issued in a third country may be used for regulatory purposes in the EU under the endorsement regime or the 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.
International Organization of Securities Commissions Reports on Other Products and Services Offered by Credit Rating Agencies
The International Organization of Securities Commission has published a final report on the non-traditional products and services offered by credit rating agencies. The report follows IOSCO's consultations and other panel discussions with CRAs, users of other CRA products and other market participants.
European Securities and Markets Authority Promotes Rules Supporting the Use of Smaller Credit Rating Agencies
The European Securities and Markets Authority has issued a Supervisory Briefing, providing guidance to sectoral national regulators on the application of certain requirements to use smaller credit rating agencies under the Credit Rating Agencies Regulation. The CRA Regulation aims to create more competition in the EU credit ratings industry and includes requirements for issuers and related third parties regarding the appointment of multiple credit rating agencies to an issuance or entity. In particular, there is a double credit rating requirement for structured finance instruments, and, where this double credit rating requirement applies, issuers or related third parties must consider appointing at least one smaller CRA with no more than a 10% market share. Where it is decided that a smaller CRA will not be appointed, that decision must be documented.
The purpose of the guidance is to promote a common supervisory approach and enforcement of these requirements. The guidance clarifies which issuers and related third parties are within the scope of the requirements and provides a standard form to be used for documenting a decision not to appoint a smaller CRA. The Supervisory Briefing is not binding on regulators or market participants.
View the Supervisory Briefing.
European Securities and Markets Authority Consults on Updating the Guidelines on the Credit Rating Agency Endorsement Regime
The European Securities and Markets Authority has published a consultation paper on updating the Guidelines on the application of the endorsement regime under the Credit Rating Agencies Regulation. Endorsement is a regime that 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 consultation paper proposes two main changes to the existing Guidelines. First, where a third-country legal and supervisory framework has been positively assessed by ESMA, ESMA will no longer assume that compliance of the third-country CRA with this framework equates to compliance with requirements as stringent as those under the CRA Regulation. The endorsing CRA is expected 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. Secondly, the consultation paper clarifies that ESMA has the power to request information directly from the endorsing CRA about the conduct of the third-country CRA. The consultation closes on July 3, 2017.
View the consultation paper.
European Supervisory Authorities Publish Good Practices to Reduce Mechanistic Reliance on Credit Ratings
The Joint Committee of the European Supervisory Authorities published a final Report containing Good Supervisory Practices for reducing sole and mechanistic reliance on credit ratings. The ESAs consist of the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority. The purpose of the Report is to reduce the sole and mechanistic reliance on credit ratings, in accordance with requirements set out in legislation such as the Credit Rating Agencies Regulation, and to ensure a level of cross-sectoral consistency in the implementation of certain elements of the CRR. The ESAs have produced the report to assist regulators supervising entities such as banks, investment firms, insurance and reinsurance undertakings and investment companies. In particular, regulators' responsibilities of monitoring the adequacy of their supervised entities credit risk assessment processes, assessing the use of contractual references to credit ratings and encouraging them to mitigate the impact of any such references. The Report provides an overview of how regulators may approach their supervisory responsibilities under the CRA legislative package.
The Report contains two sets of common good practices. In the first, the ESAs propose a general framework for the monitoring of the use of credit ratings and the treatment of references to credit ratings in credit assessments. They also suggest potential alternatives or complementary measures to ratings and also how to address issues of proportionality arising from the varying scale and complexity of supervised entities. In the second set, there are specific practices to establish a common approach for supervision of how credit ratings are used across specific business processes, in particular, where credit ratings are most in danger of being used in a mechanistic way.
View the Report.
European Rating Platform Launched
The European Securities and Markets Authority announced the launch of a new database, the European Rating Platform. The ERP provides access to free, up-to-date information on credit ratings that have been issued by a credit rating agency that is registered or certified by ESMA, except for those issued under the investor-pays model. The ERP enables investors and other users of ratings to compare all credit ratings that exist for a specific rated entity or instrument. It holds rating history details from July 1, 2015 onwards, press releases accompanying the rating issuances and research reports for sovereign ratings.
View ESMA's announcement.
Go to the new ERP.
European Securities and Markets Authority Publishes Final Report on Validation and Review of Credit Rating Agencies' Methodologies
The European Securities and Markets Authority published its final Report on Guidelines on how Credit Rating Agencies should review and validate their methodologies. The CRA Regulation requires CRAs to review their methodologies, as well as quantitative and qualitative techniques used as part of the validation of the methodologies, to ensure that they are rigorous, systematic and continuous and subject to validation based on historical experience. The Guidelines clarify ESMA’s expectation that a CRA must review its credit ratings and methodologies on an ongoing basis and at least annually. The Guidelines focus in particular on quantitative measures, and the purpose of the Guidelines is to increase the quality of such quantitative measures used by requiring CRAs to review their methodologies and to support the Regulatory Technical Standards on ratings methodologies. The Report follows a consultation published by ESMA on July 13, 2016. The Report provides a summary of the responses received and a qualitative assessment of the potential costs and benefits of the Guidelines. The Guidelines are to be translated into the official languages of the EU and will apply two months after the date of publication of those translations on ESMA’s website.
View ESMA’s Final Report.
International Organization of Securities Commissions Consults on Other Products and Services Offered by Credit Rating Agencies
The International Organization of Securities Commissions published a consultation paper on the use of non-traditional products or services offered by credit rating agencies. IOSCO considers that these types of products and services are important because market participants use them to make investment and other credit-related decisions and issuers and obligors use them to make decisions about whether to obtain a credit rating from a particular CRA. Examples of the products and services include private ratings, confidential ratings, expected ratings, indicative ratings, prospective ratings, provisional ratings, preliminary ratings, credit default swap spreads, bond indices, research and portfolio assessment tools. IOSCO groups these products and services into six categories, providing descriptions for each category, namely: research, private, non-final, part of rating process, outside rating process and hybrids. IOSCO is seeking views on whether the other CRA products identified in the six groups are consistent with CRAs' and their users' understanding of the CRA industry, including whether the Code of Conduct and IOSCO CRA Principles apply to other CRA products. The consultation closes on December 5, 2016.
View the consultation paper.
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.
US Federal Financial Institutions Examination Council Revisions to Information Security Booklet
The US Federal Financial Institutions Examination Council issued a revised Information Security booklet, which is part of the FFIEC’s IT Examination Handbook. The Information Security booklet summarizes the factors necessary to an effective information security program. The booklet sets forth updated guidelines for examiners evaluating the adequacy of information security programs of financial institutions and describes the following aspects of effective information security operations, which include (i) effective threat identification, assessment and monitoring and (ii) incident identification assessment and response. In addition, the booklet discusses assurance reports (addressing IT system design and operation) and testing of information security programs as methods to assess and achieve the effectiveness of such programs.
View FFIEC's IT Handbook.
European Banking Authority Final Report on Communications under the Audit Directive
The European Banking Authority published its final report on guidelines for communication between regulators supervising credit institutions and statutory auditors and audit firms carrying out the statutory audit of credit institutions. The Audit Regulation requires that effective dialogue must be established between regulators supervising credit institutions on the one hand and the statutory auditors and audit firms carrying out the audit of those firms on the other. The EBA’s guidelines include an underlying general framework that should underpin communication between regulators and auditors at all times. The guidelines include seven principles and detailed guidance relating to the main elements of effective communication. The seven principles address: (i) the scope and relevance of information shared; (ii) requests by regulators for information from auditors; (iii) the sharing of information with auditors by regulators; (iv) methods of communication and communication channels; (v) the identity, competence and knowledge of participants in the communication between regulators and auditors collectively; (vi) the frequency of information-sharing between regulators and auditors; and (vii) communications between regulators and auditors collectively (such as a group of auditors, or a professional body representing auditors) .
The guidelines will be transposed into the official languages of the EU and will apply from March 31, 2017.
View the Final Report.
European Securities and Markets Authority Fines Fitch for Breach of EU Regulations
The European Securities and Markets Authority issued Fitch Ratings Limited with fines totaling €1.38 million for numerous allegedly negligent breaches of the requirements relating to sovereign ratings set out in the EU Credit Rating Agencies Regulation.
On January 26, 2012, Fitch informed Slovenia of its intention to downgrade its sovereign rating, whilst providing no information establishing the grounds for its intention. Fitch subsequently sent such information on the following day, but, three hours after doing so, it made a public announcement of the sovereign rating downgrade. ESMA found Fitch to be in breach of the requirement under the CRA Regulation that a credit rating agency must inform the rated entity at least 12 hours before publication of the credit rating and of the principal grounds on which the order is based to give the entity an opportunity to highlight any factual errors to the CRA.
International Guidance on Cyber Resilience for Financial Market Infrastructures Published
The Bank for International Settlements' Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions published Guidance on cyber resilience for financial market infrastructures. The Guidance supplements the CPMI-IOSCO Principles for Financial Market Infrastructures and aims to assist FMIs to improve their cyber resilience. The Guidance is not intended to impose additional standards on FMIs, but rather to provide FMIs with further detail on how they can enhance their cyber resilience capabilities and limit the increasing risks that cyber threats pose to financial stability. FMIs are expected to take a risk-based approach to implementing the Guidance and to act immediately to improve their cyber resilience, taking the Guidance into account. In particular, FMIs are expected to develop plans by June 2017 to improve their capability to meet the two-hour return to operations requirements.
View the Guidance on cyber resilience for financial market infrastructures.
European Securities and Markets Authority Update on CRA Reporting
The European Securities and Markets Authority published an update on reporting obligations in relation to information on structured finance instruments which ESMA receives under the Credit Rating Agency Regulation. The CRA Regulation was originally based on the Code of Conduct Fundamentals for CRAs published by the International Organization of Securities Commissions. ESMA is required under the CRA Regulation to set up a website where information on SFIs can be published to enable reporting entities – originators, issuers and sponsor entities - to submit data files containing the relevant information in accordance with their reporting requirements. EMSA is required to issue technical instructions by July 1, 2016, to assist with the reporting obligations that will apply from July 1, 2017. ESMA has reported that it will not be in a position to receive information on SFIs from reporting entities by January 1, 2017, as it is currently unable to set up a website or issue the technical instructions. This is because there is no legal basis for funding the website. ESMA expects the new securitization legislation currently being finalized to provide clarity on the future obligations regarding reporting on SFIs.
View the update.
European Securities and Markets Authority Publishes 2015 Annual Report and Workplan for 2016
The European Securities and Markets Authority published a report providing an overview of its 2015 supervisory work relating to Credit Rating Agencies and Trade Repositories and setting out its workplan for 2016. ESMA's focus for 2016 includes: (i) improving the quality of credit ratings; (ii) improving trade repository quality data and data access; (iii) improving CRA governance and strategy; (iv) devoting resources to its enforcement work where it is aware of facts that may be infringing regulatory requirements; and (v) enhancing international cooperation with third country supervisors.
View the report.
European Court of Auditors Publishes Report on European Securities and Markets Authority as Single Credit Rating Agencies Supervisor in the European Union
The European Court of Auditors published a report on the role of the European Securities and Markets Authority as the single supervisor of Credit Rating Agencies in the European Union. The report covers the period from when ESMA took over the role of supervisor for CRAs from national regulators in July 2011 until September 2015. It aims to assess whether ESMA has effectively established itself as the CRA supervisory body for the EU. The report states that ESMA has set good foundations in a short amount of time, but that significant risks still need to be addressed in the future. The ECA recommends, amongst other things, that ESMA should: (i) document its assessment of all regulatory requirements for credit rating methodologies throughout the registration process; (ii) update its supervisory manual and handbook on a regular basis so as to take into account the knowledge and experience it has gained; (iii) contemplate developing further guidance on disclosure requirements to improve the methods of disclosure of CRAs; (iv) examine certain possible conflicts of interest in a structured manner, regarding rating analysts’ trading activities and financial transactions, so as to mitigate the risk of insider trading; and (v) enhance the traceability of the risk identification process, documenting changes to risk level as well as the prioritization of risks and following up on high-risk areas that could benefit from further supervisory attention.
View the report.
European Banking Authority Letter to European Commission on Revised Deadlines for Delivery of Technical Standards
The European Banking Authority published a letter dated December 18, 2015 addressed to the European Commission in which the EBA requests delays to the dates by which the EBA is required to prepare technical standards and reports under the Capital Requirements Directive, the Capital Requirements Regulation, the EU Bank Recovery and Resolution Directive, the European Market Infrastructure Regulation and the Credit Rating Agencies Regulation. The EBA states that for the most part it has not been able to deliver its mandates according to deadlines due to a persistent shortage in resources and the need to prioritize other workstreams. The EBA invites the Commission to request the EBA to fulfil its mandates within new time limits.
View the EBA's letter.
Final Report on Sound Practices for Large Intermediaries on Credit Assessment Policies
The International Organization of Securities Commissions published its final report on sound practices at large intermediaries relating to the assessment of creditworthiness and the use of external credit ratings. The report analyses responses to the survey conducted by IOSCO and proposes sound practices for regulators of large intermediary firms to consider in supervising such firms. Large intermediary firms may also find the proposed practices useful when they consider implementing their internal credit assessment policies and procedures. The report is intended to enhance the implementation of the Principles for Reducing Reliance on CRA Ratings issued by the Financial Stability Board. The proposed sound practices for regulators include requiring large intermediaries to: (i) establish an independent credit assessment function; (ii) involve senior management in implementing the credit assessment process; (iii) ensure the relevant committees have sufficient information on the credit risks posed to their firms; (iv) establish an appropriate oversight structure to ensure the credit assessment process is properly implemented; (v) avoid exposure to particular credit risks whenever the firm does not have the internal capability to independently and adequately assess the exposure; (vi) incorporate a wide variety of qualitative measures into robust credit assessment processes; and (vii) avoid mechanistically relying on external credit rating agency ratings.
View the report.
Luxembourg Referred to European Court of Justice for Failure to Implement EU Legislation on Reducing Reliance on Credit Ratings
The European Commission announced that it had referred Luxembourg to the Court of Justice of the EU for failing to transpose the EU Directive on reducing over-reliance on credit ratings into national legislation. The Directive was due to be transposed by all EU Member States by December 21, 2014. The referral follows a written notice served on Luxembourg by the Commission in January 2015 and an Opinion filed in June 2015. According to the Directive, investors should not overly rely on credit ratings when assessing the risks related to investments made by institutions for occupational retirement provision, Undertakings for the Collective Investment in Transferable Securities and Alternative Investment Funds.
View the announcement.
European Securities and Markets Authority Publishes Discussion Paper on Validation and Review of Credit Rating Agencies' Methodologies
The European Securities and Markets Authority published a discussion paper seeking views on the validation and review of Credit Rating Agencies methodologies and on quantitative and qualitative techniques used as part of the validation of CRA methodologies, as required under the Credit Rating Agency Regulation. The CRA Regulation requires CRAs to use rigorous, systematic and continuous methodologies based on historical experience. The discussion paper sets out validation practices in the credit rating industry and notes the good practices perceived by ESMA in its recent supervisory investigation on validation. The discussion paper also seeks views on how CRA methodologies are deemed to be good predictors of credit worthiness and what CRAs should do to meet the requirements under the CRA Regulation to ensure that systemic credit rating anomalies identified through back-testing are addressed in the appropriate way. Responses are due by February 19, 2016.
View the discussion paper.
European Securities and Markets Authority Reports on Aspects of EU Regulation of Credit Rating Agencies
The European Securities and Markets Authority published a final report on the possibility of establishing mappings of credit ratings published on the European Rating Platform (a public website to be launched by ESMA in 2016 which will allow comparability of all ratings given by rating agencies registered and authorized in the EU), as required under the amended Credit Rating Agencies Regulation. Credit rating mapping would assist users of credit ratings in comparing ratings given by different credit agencies for the same entities. ESMA recommends that the European Commission not take any action at this point in terms of mapping and that ESMA should instead focus on constantly updating its information and data which allows users of credit ratings to carry out their own research. ESMA also published two sets of technical advice to the European Commission. The first is on reducing sole and mechanistic reliance on external credit ratings which considers the measures in place to date to reduce reliance on credit ratings and recommends that efforts should focus on removing reliance on credit ratings instead of trying to remove references to credit ratings in all EU legislation. The second is on competition, choice and conflicts of interest in the credit rating industry which considers the impact of certain provisions of the CRA Regulation on competition, conflicts of interest and structured finance instruments which were introduced in 2013. The European Commission must report to the European Parliament and Council by December 31, 2016 on whether references to credit ratings in EU legislation should be removed when the latest provisions of the CRA are implemented. ESMA proposes to reassess the implementation of the CRA Regulation within the next three to five years.
View the report and technical advice.
European Securities and Markets Authority Registers New Credit Rating Agency
The European Securities and Markets Authority approved the registration of modeFinance S.r.l., as a credit rating agency under the Credit Rating Agencies Regulation. ModeFinance is based in Italy, and its credit ratings may now be used for regulatory purposes within the European Union.
Board of International Organization of Securities Commissions Seeks Better Understanding of Credit Rating Agency Industry
The Board of the International Organization of Securities Commissions approved a project specification for its Committee 6 on Credit Rating Agencies. The goal of the project is to help the Board gain an improved understanding of the credit rating industry as well as CRA products other than those that are disclosed to subscribers, such as private ratings, confidential ratings, scoring and other tools that can be used for risk assessments. The collected data will aid discussions between C6 members, issuers and users of other CRA products and other parties.
View the questionnaire.
View the press release.
European Securities and Markets Authority Issues Public Notice to European Credit Rating Agency
The European Securities and Markets Authority issued a public notice to EU credit rating agency DBRS Ratings Limited for failing to comply with corporate governance, compliance and record-keeping requirements under the EU Credit Rating Agencies Regulation. ESMA found DBRS to have governance arrangements whereby the board of directors and a body called the Executive Group worked alongside one another. There was however no delegation by the directors to the Executive Group and the two bodies did not report to each other. ESMA also found that DBRS failed to have adequate policies or maintain decision-making procedures and organizational structures which clearly specified responsibilities and reporting lines. DBRS was fined €30,000 for acting negligently in record-keeping failings.
View the public notice.
European Guidelines on Periodic Information Reporting Requirements for Credit Rating Agencies
The final guidelines on periodic information to be submitted by Credit Rating Agencies to the European Securities and Markets Authority were published on June 23, 2015. The guidelines apply to CRAs registered in the EU, but not to certified CRAs. They set out the information that CRAs should submit to ESMA on a quarterly, semi-annual and annual basis, including for the calculation by ESMA of supervisory fees and CRA market share. The guidelines will apply from August 23, 2015.
View the final guidelines.
International Organization of Securities Commissions Publishes Final Report on Good Practices on Reducing Reliance on CRAs in Asset Management
The International Organization of Securities Commissions published its final report titled Good Practices on Reducing Reliance on credit rating agencies in Asset Management, which lists a set of eight good practices intended to help asset managers avoid over-reliance on external credit ratings in the industry. To address concerns, IOSCO recommends that the Financial Stability Board consider potential ways to reduce possible investor overreliance on external ratings which are driven by regulatory requirements, such as those in the Basel framework or the Solvency regime applicable to insurers. The report highlights the importance of asset managers having the appropriate expertise and processes in place to evaluate and manage the credit risk associated with their investments.
View the IOSCO Final Report.
International Organization of Securities Commissions Consults on Sound Practices for Large Intermediaries
The International Organization of Securities Commissions published a consultation on sound practices at large intermediaries, discussing alternatives to the use of credit ratings in assessing creditworthiness. The report lists thirteen draft practices to be considered by large market intermediaries when developing internal credit assessment policies. These aim to encourage the implementation of efficient alternative methods to assess creditworthiness and reduce the overreliance on credit rating agencies. These draft practices are to be considered also by regulators when overseeing market intermediaries. The draft sound practices include: (i) establishing independent credit assessment functions separate from other business units; (ii) incorporating diverse qualitative and quantitative measures into robust assessment processes; and (iii) improving credit risk assessment practices to ensure that firms remain well informed on the latest developments that might have an adverse effect on the firm. A final report will be prepared after responses to the consultation have been considered. Responses to the consultation are due by July 8, 2015.
View the consultation.
EU Central Ratings Repository Updated
The European Securities and Markets Authority announced that the latest set of statistical data on the performance of credit ratings is available in the Central Ratings Repository. CEREP contains information on credit ratings issued by credit rating agencies which are either registered or certified in the European Union and is intended to assist investors in assessing the performance and reliability of credit ratings on different types of ratings, asset classes and geographical regions.
View ESMA's announcement.
Revised International Code of Conduct Fundamentals for Credit Rating Agencies
The International Organization of Securities Commissions published its revised Code of Conduct Fundamentals for Credit Rating Agencies as part of a report on the issue. IOSCO consulted in 2012 on revisions to the Code to take into account the number of credit rating agencies that have become subject to supervision by national or regional authorities since the recent financial crisis. The updated Code (i) aims to enhance provisions on protecting the integrity of the credit rating process, managing conflicts of interest, providing transparency and safeguarding non-public information; (ii) adds measures on governance, training and risk management; and (iii) adds new definitions for key terms and revising existing definitions and terminology. The revised Code of Conduct Fundamentals for Credit Rating Agencies is intended to synchronize with the national and regional frameworks for supervision and oversight of credit rating agencies whilst remaining the international standard for credit rating agency self-governance.
European Securities and Markets Authority Publishes Guidelines on Credit Rating Agencies Reporting Requirements
The European Securities and Markets Authority published a final report including guidelines on the periodic information that is to be submitted by Credit Rating Agencies to ESMA in the context of ESMA’s ongoing supervision. The guidelines detail the kind of information that CRAs should regularly submit to ESMA on a quarterly, semi-annual and annual basis, so that ESMA can carry out its ongoing supervision of CRAs consistently. This includes information related to: (i) financial revenues and costs; (ii) staff turnover, vacancies and key promotions; and (iii) board minutes, court, arbitration and other dispute resolution proceedings. The guidelines will enter into force two months after they have been published on ESMA’s website.
View the guidelines
European Securities and Markets Authority Consults on Extension of Disclosure Requirements for Private and Bilateral Structured Finance Instruments Transactions
The European Securities and Markets Authority issued a call for evidence on the disclosure obligations required for Structured Finance Instruments under the Credit Ratings Agency Regulations and extending those requirements to private and bilateral SFI transactions. The call for evidence seeks to gather information on whether ESMA should make a distinction between private and bilateral transactions when considering the extension of the requirements, and if so, how the two terms should be defined. ESMA will then seek to ascertain whether the disclosure requirements can be used in their entirety for both private and bilateral SFI transactions or whether any additional issues should be taken into account to adapt the requirements to each type of transaction. An extension of the disclosure requirements would then be phased in for private and bilateral transactions. ESMA will analyze the evidence it has received to revise the current Regulatory Technical Standards under the Credit Ratings Agency Regulations. Comments on the consultation may be submitted until May 20, 2015.
View the call for evidence
European Securities & Markets Authority Sets Out Work Plan for Supervision of Credit Rating Agencies
The European Securities and Markets Authority published its annual report on its supervision of credit rating agencies and trade repositories. In the report, ESMA sets out its work plan for credit rating agencies in 2015 which will focus on credit rating agency’s governance, risk management and internal decision making processes and their business development processes. ESMA aims to gain a better understanding of how these processes influence the process of issuing credit ratings. ESMA also intends to continue with the thematic and individual investigations that it is already conducting such as the review and validation of rating methodologies and IT internal controls and information security.
View ESMA's report.
International Organization of Securities Commissions Seeks Information on Other Products Provided by Credit Rating Agencies
The International Organization of Securities Commissions announced the launch of a project aiming to obtain greater understanding of the credit rating industry and certain other products or services available other than traditional credit ratings publicly disclosed by credit rating agencies. The project will consider products such as other ratings provided by credit rating agencies (for example, private, one-time or regional ratings), scoring, credit and rating assessments and research. Relevant parties are requested to respond to the request for information by March 23, 2015.
View the announcement.
European Securities & Markets Authority Seeks Evidence on the Credit Rating Industry
The European Securities & Markets Authority published a call for evidence on the impact of the EU Credit Rating Agencies Regulation on the credit rating industry and the development of markets for structured finance instruments. ESMA is seeking evidence of how the Credit Rating Agencies Regulation is achieving the objectives of stimulating competition between credit rating agencies, improving the choice of credit rating agencies available and minimizing conflicts of interests in the industry. The evidence received will be analyzed by ESMA in its development of technical advice to the European Commission as required under the Credit Rating Agencies Regulation. Evidence is required by March 31, 2015 and ESMA must provide its advice by September 2015.
View documents relating to call for evidence.
Regulatory Technical Standards under EU Credit Ratings Agencies Regulation Published in Official Journal of the European Union
Three Delegated Regulations of Regulatory Technical Standards required under the Credit Ratings Agencies Regulation were published in the Official Journal of the European Union:
1. Delegated Regulation for the periodic reporting on fees charged by credit rating agencies for the purpose of ongoing supervision by the European Securities and Markets Authority. This applies from January 26, 2015.
2. Delegated Regulation for the presentation of the information that credit rating agencies make available to ESMA. This applies from June 21, 2015.
3. Delegated Regulation on disclosure requirements for structured finance instruments. This applies from January 1, 2017.
The objectives of the CRA Regulation include strengthening the existing EU legislation on credit rating agencies, reducing financial institution reliance on external credit ratings and improving competition in the credit ratings industry.
View the Regulations.