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Credit rating agencies

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Credit rating agencies

Credit rating agencies provide independent opinions regarding the creditworthiness of an entity, a debt or financial obligation, or a financial instrument.

Their ratings directly influence markets and the economy.

ACT

Regulation (EC) No 1060/2009 of the European Parliament and Council of 16 September 2009 on credit rating agencies (text with EEA relevance).

SUMMARY

The aim of this regulation is to regulate the activity of credit rating agencies with a view to protecting investors and European financial markets against the risk of malpractice. The aim is to guarantee the independence and integrity of the credit rating process and to improve the quality of the ratings issued.

Registration, rules of conduct and supervision: in order to be registered in the European Union (EU), credit rating agencies must:

  • avoid conflicts of interest: for example, credit rating analysts must not rate an entity in which they have a holding;
  • ensure the quality of their ratings and rating methods;
  • ensure a high degree of transparency: for example, by publishing an annual transparency report.

Since July 2011, the European Securities and Markets Authority (ESMA) has been responsible for registering credit rating agencies and has exclusive supervisory powers in relation to such agencies.

Changes introduced by the new rules

Less dependence on credit ratings

  • Financial institutions and investors are required to carry out their own evaluation of credit risks and must not rely solely or automatically on external ratings in order to evaluate the creditworthiness of an entity or financial instrument.

Better quality ratings of the sovereign debt of EU countries

  • Credit rating agencies must establish a schedule indicating the dates on which they will rate EU countries; the latter will be rated at least every six months.
  • In order to avoid market disruption, ratings may only be published once EU stock exchanges have closed, and at least one hour before they reopen.
  • Investors and EU countries must be informed of the facts and assumptions behind each rating.

Increased responsibility of credit rating agencies

  • A credit rating agency may be held liable if it infringes the regulation, either intentionally or through gross negligence, thereby causing damage to an investor or an issuer.

More independence and fewer conflicts of interest

  • A rotation rule requires issuers of complex structured financial instruments (re-securitisations) to change agency every four years.
  • Credit rating agencies must disclose situations where a shareholder holds 5 % or more of the agency’s capital or voting rights and 5 % or more of an entity rated by that agency. If both these holdings reach or exceed 10 %, the credit rating agency is not entitled to rate the entity.
  • It is forbidden to hold 5 % or more of the capital or voting rights of more than one credit rating agency, unless these agencies belong to the same group.

All available ratings will be published on a European rating platform, which will come into operation in June 2015.

Background

The EU regulation on credit rating agencies is part of the initiatives taken by Europe in response to the commitments undertaken by the G20 at the Washington Summit in November 2008.

Further information may be found below.

REFERENCES

Act

Entry into force

Deadline for transposition in the Member States

Official Journal of the European Union

Regulation No 1060/2009

7.12.2009.

-

OJ L 302 of 17.11.2009

Amending act(s)

Entry into force

Deadline for transposition in the Member States

Official Journal of the European Union

Regulation (EU) No 513/2011

1.6.2011.

-

OJ L 145 of 31.5.2011

Directive 2011/61/EU

21.7.2011.

22.7.2013.

OJ L 174 of 1.7.2011

Regulation (EU) No 462/2013

20.6.2013.

-

OJ L 146 of 31.5.2013

Directive 2014/51/EU

23.5.2014

31.3.2015

OJ L 153 of 22.5.2014

RELATED ACTS

Commission Delegated Regulation (EU) No 272/2012 of 7 February 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to fees charged by the European Securities and Markets Authority to credit rating agencies (Official Journal L 90 of 28.3.2012).

Commission Delegated Regulation (EU) No 446/2012 of 21 March 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to regulatory technical standards on the content and format of ratings data periodic reporting to be submitted to the European Securities and Markets Authority by credit rating agencies (Official Journal L 140 of 30.5.2012).

Commission Delegated Regulation (EU) No 447/2012 of 21 March 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council on credit rating agencies by laying down regulatory technical standards for the assessment of compliance of credit rating methodologies (Official Journal L 140 of 30.5.2012).

Commission Delegated Regulation (EU) No 448/2012 of 21 March 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to regulatory technical standards for the presentation of the information that credit rating agencies shall make available in a central repository established by the European Securities and Markets Authority (Official Journal L 140 of 30.5.2012).

Commission Delegated Regulation (EU) No 449/2012 of 21 March 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to regulatory technical standards on information for registration and certification of credit rating agencies (Official Journal L 140 of 30.5.2012).

Commission Delegated Regulation (EU) No 946/2012 of 12 July 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to rules of procedure on fines imposed to credit rating agencies by the European Securities and Markets Authority, including rules on the right of defence and temporal provisions (Official Journal L 282 of 16.10.2012).

Directive 2013/14/EU of the European Parliament and of the Council of 21 May 2013 amending Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision, Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) and Directive 2011/61/EU on Alternative Investment Funds Managers in respect of over-reliance on credit ratings (Official Journal L 145 of 31.05.2013):

The objective of this directive is to avoid situations where institutions for occupational retirement provision, UCITS management and investment companies, and alternative investment fund managers rely solely or automatically on credit ratings or use them as the sole criterion for risk assessment.

Report from the Commission to the Council and the European Parliament on the feasibility of a network of smaller credit rating agencies (COM(2014) 248 final)

The report assesses the feasibility of a network of smaller credit rating agencies in the EU and the way in which such a network could contribute towards strengthening the smaller agencies to render them more competitive players. The report suggests assessing the added value of a network of smaller credit rating agencies in the medium and long term based on an analysis of the effects of the new legislation.

Last updated: 25.09.2014

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