Credit Rating Agencies

The European Securities and Markets Authority (ESMA) has today launched three public consultations on sustainable finance initiatives to support the European Commission’s (EC) Sustainability Action Plan in the areas of securities trading, investment funds and credit rating agencies (CRAs).

The first two consultations seek stakeholders’ input on draft technical advice for the integration of sustainability risks and factors into the Markets in Financial Instruments Directive II (MiFID II) (securities trading) and the Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings in Collective Investment in Transferable Securities (UCITS) Directive (investment funds). While the third consults on CRA guidelines aimed at improving the quality and consistency of disclosures of environmental, social and governance (ESG) factors when considered as part of a credit rating action.

The consultations focus on environmental, social and good governance considerations with regards to investment firms, investment funds and CRAs. The draft advice and proposed guidelines touch upon organisational requirements, operating conditions, risk management, conflicts of interest, product governance and disclosure requirements.

In order to ensure consistency, ESMA’s draft advice was developed in cooperation with the European Insurance and Occupational Pensions Authority (EIOPA), which has received a similar mandate regarding Solvency II and the Insurance Distribution Directive (IDD).

Next steps

The EC requested ESMA to provide technical advice on the integration of sustainability risks and factors in the UCITS Directive, AIFMD and MiFID II by 30 April 2019. ESMA, along with the consultations, will hold an open hearing on 4 February 2019 and will use the consultation feedback to finalise its draft advice to the EC. 

The Consultation Paper on credit ratings has a three-month consultation period with a view to publishing the final report before the end of July 2019.

Please provide your responses to each of the consulation paper(s) you wish to provide input on:

  1. Consultation on integrating sustainability risks and factors in MiFID II
  2. Consultation on integrating sustainability risks and factors in the UCITS Directive and AIFMD
  3. Consulation on Disclosure Requirements Applicable to Credit Ratings

The European Securities and Markets Authority (ESMA) has today updated its Questions and Answers (Q&As) on the Credit Rating Agencies Regulation (CRAR).

The Credit Rating Agencies Regulation (CRAR) requires a CRA to immediately notify errors in its rating methodologies or in their application to ESMA and all affected rated entities. This Q&A clarifies ESMA’s view as to what constitutes an error within the meaning of Article 8(7) of CRAR.  

The purpose of this Q&A is to provide a high level of transparency to entities directly supervised by ESMA regarding ESMA’s supervisory approach.

ESMA will periodically review these Q&As and update them where required.

The European Securities and Markets Authority (ESMA), the EU’s direct supervisor of credit rating agencies (CRAs), has registered today DBRS Ratings GmbH (DBRS RG) as a CRA under the CRA Regulation. The registration takes effect from 14 December 2018.

DBRS RG is based in Germany and intends to issue:

  • sovereign and public finance ratings;
  • structured finance ratings; and
  • corporate ratings of financials and non-financials

DBRS RG belongs to a group of CRAs and intends to endorse ratings issued by third-country CRAs of the group, based in the United States and Canada. Those CRAs are registered by and are subject to the supervision of the respective local competent authorities.

The CRA Regulation

The CRA Regulation seeks to ensure that credit ratings issued in the EU respect minimum standards of quality, transparency and independence by providing that only companies registered by ESMA as CRAs may lawfully issue credit ratings which can be used for regulatory purposes by credit institutions, investment firms, insurance and reinsurance undertakings, institutions for occupational retirement provision, management companies, investment companies, alternative investment fund managers and central counterparties.

In order to be registered as a CRA, a company must be able to demonstrate to ESMA that it can comply with the requirements of the CRA Regulation, including, most importantly, on:

  • the governance of CRAs and the management of conflicts of interest;
  • the development and application of methodologies for assessing credit risk; and
  • the disclosure of information to ESMA and to market participants.

Once registered, CRAs are subject to on-going supervision and monitoring by ESMA to ensure that they continue to meet the conditions for registration. ESMA will impose sanctions and/or penalties where it finds that a CRA has failed to meet its obligations under the CRA Regulation. The total number of CRAs registered in the EU is 27 CRAs. Amongst the 27 registered CRAs, four operate under a group structure, totalling 19 legal entities in the EU, which means that the total number of CRA entities registered in the EU is 42.

The European Securities and Markets Authority (ESMA) has published its annual market share calculation for EU registered credit rating agencies (CRAs).

The purpose of the market share calculation is to facilitate issuers and related third parties in their evaluation of a CRA with no more than 10% total market share in the EU.

The CRA Regulation (CRAR), under Article 8d, says that issuers or related third parties are required to consider appointing a CRA with no more than 10% total market share whenever they intend to appoint one or more CRAs to rate an issuance or entity.

Using the Market Share Calculation

The publication aims to guide the user through the requirements of Article 8d. It also provides background and guidance as to how the market share calculation is performed and should be used.

The structure and approach of the document is as follows:

  • Section 6 - Allows the user to identify CRAs with no more than 10% total market share;
  • Section 7 - Allows the user to identify the types of credit ratings offered by these CRAs;
  • Section 8 - Allows the user to assess the market presence of CRAs in different asset classes; and
  • Section 9 - Provides a link to a Standard Form and Supervisory Briefing the user can for documenting the non-appointment of a CRA with no more than 10% total market share.

This market share calculation is valid for use from its date of publication and applicable until the date of publication of the next Market Share Calculation in 2019.

ESMA welcomes feedback on the information presented in this market share calculation in future and invites market participants to send this by email to: CRA-info@esma.europa.eu

 

The European Securities and Markets Authority (ESMA), the EU’s direct supervisor of credit rating agencies (CRAs), has registered today A.M. Best (EU) Rating Services B.V. as a CRA under the CRA Regulation. 

The registration takes effect from today 3 December 2018. A.M. Best (EU) Rating Services B.V. is based in the Netherlands and intends to issue corporate ratings for insurance undertakings and corporate issuers that are not considered a financial institution or an insurance undertaking.

The CRA Regulation seeks to ensure that credit ratings issued in the EU meet minimum standards of quality, transparency and independence by providing that only companies registered by ESMA as CRAs may lawfully issue credit ratings which can be used for regulatory purposes by credit institutions, investment firms, insurance and reinsurance undertakings, institutions for occupational retirement provision, management companies, investment companies, alternative investment fund managers and central counterparties. 

In order to be registered as a CRA, a company must be able to demonstrate to ESMA that it complies with the requirements of the CRA Regulation, which covers inter alia:

  • the governance of CRAs and the management of conflicts of interest;
  • the development and application of methodologies for assessing credit risk; and
  • the disclosure of information to ESMA and to market participants. 

Once registered, CRAs are subject to on-going monitoring and supervision by ESMA to ensure that they continue to meet the conditions for registration. ESMA will impose sanctions and/or penalties where it finds that a CRA has failed to meet its obligations under the CRA Regulation. 

The total number of CRAs registered in the EU is 27 CRAs. Amongst the 27 registered CRAs, three operate under a group structure, totalling 17 legal entities in the EU, which means that the total number of CRA entities registered in the EU is 41.