Credit rating agencies

SUMMARY OF:

Regulation (EC) No 1060/2009 on credit rating agencies

WHAT IS THE AIM OF THE REGULATION?

It seeks to regulate the activity of credit rating agencies to protect investors and European financial markets against the risk of malpractice.
Its aim is to guarantee the independence and integrity of the credit rating process and to improve the quality of the ratings issued.
It lays down conditions for the issuing of credit ratings and rules on the organisation and conduct of credit rating agencies, including their shareholders and members, to promote:
- credit rating agencies’ independence;
- avoiding conflicts of interest; and
- better consumer and investor protection.
Since the regulation was amended by Regulation (EU) 2017/2402 (Simpler, more transparent and more standardised securitisation) on common rules for securitisation*, it also lays down obligations for issuers and related third parties established in the EU regarding securitisation instruments. Regulation (EU) 2017/2402 replaced the original regulation’s wording ‘structured instruments’ by ‘securitisation instruments’.

KEY POINTS

Registration, rules of conduct and supervision

To be registered in the EU, credit rating agencies must:

avoid conflicts of interest: for example, credit rating analysts must not rate an organisation 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.

Over-reliance on credit ratings

Directive 2013/14/EU amended the regulation to require financial institutions and investors to carry out their own evaluation of credit risks, and not to rely solely or automatically on external ratings in order to evaluate the creditworthiness of an organisation or financial instrument.

Ratings of the sovereign debt of EU countries

Credit rating agencies must set up a schedule of dates on which they will rate EU countries; countries will be rated at least every 6 months.
To avoid market disruption, ratings may only be published after EU stock exchanges have closed, and at least 1 hour before they reopen.
Investors and EU countries must be informed of the facts and assumptions behind each rating.

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.

Independence and preventing conflicts of interest

A rotation rule requires issuers of complex securitisation instruments to change agency every 4 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 organisation 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 are published on a European rating platform by ESMA.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 7 December 2009 with the exception of rules on:

references to credit rating in prospectuses (Article 4(1)) which have applied since 7 December 2010; and
credit rating agencies established in non-EU countries (Article 4(3) points (f), (g) and (h) which have applied since 7 June 2011.

BACKGROUND

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

For more information, see:

Credit rating agencies (European Securities and Markets Authority)
Regulating credit rating agencies (European Commission).

KEY TERMS

Securitisation: transactions that enable a lender or other originator of assets — for example, a credit institution — to refinance a set of loans or assets (e.g. mortgages, car leases, consumer loans, credit cards) by converting them into securities. The lender or originator organises a portfolio of its loans into different risk categories, tailored to the risk versus reward requirements of investors. Returns to investors are generated from the cash flows of the underlying loans.

MAIN DOCUMENT

Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (OJ L 302, 17.11.2009, pp. 1-31)

Successive amendments to Regulation (EC) No 1060/2009 have been incorporated into the original document. This consolidated version is of documentary value only.

RELATED DOCUMENTS

Report from the Commission to the European Parliament and the Council on alternative tools to external credit ratings, the state of the credit rating market, competition and governance in the credit rating industry, the state of the structured finance instruments rating market and on the feasibility of a European Credit Rating Agency (COM(2016) 664 final, 19.10.2016)

Commission Delegated Regulation (EU) 2015/1 of 30 September 2014 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to regulatory technical standards for the periodic reporting on fees charged by credit rating agencies for the purpose of ongoing supervision by the European Securities and Markets Authority (OJ L 2, 6.1.2015, pp. 1-23)

Commission Delegated Regulation (EU) 2015/2 of 30 September 2014 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 make available to the European Securities and Markets Authority (OJ L 2, 6.1.2015, pp. 24-56)

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, 5.5.2014)

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 (OJ L 145, 31.05.2013, pp. 1-3)

See consolidated version.

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 defense and temporal provisions (OJ L 282, 16.10.2012, pp. 23-26)

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 (OJ L 140, 30.5.2012, pp. 14-16)

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 (OJ L 140, 30.5.2012, pp. 32-52)

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 (OJ L 90, 28.3.2012, pp. 6-10)

last update 09.04.2019