Credit Rating Agencies

Consultation on Draft Guidelines on “as stringent as” notion in the CRA Regulation

This paper may be of interest to users of credit ratings, credit rating agencies and entities interested in applying to be a registered CRA.

This consultation follows on from the updated Guidelines on endorsement (November 2017), and comes in response to requests from the industry.  

The aim of the proposed supplementary guidance is twofold:

The European Securities and Markets Authority (ESMA), the EU’s direct supervisor of credit rating agencies (CRAs), has registered SPMW Rating Sp. z o.o. as a CRA under Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (CRA Regulation), with effect from 15 March 2018. SPMW Rating Sp. z o.o. is based in Poland, issuing sovereign and public finance ratings and corporate ratings.

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 make sure 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 SPMW Rating Sp. z o.o. registration brings the total number of CRAs registered in the EU to 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.

The European Securities and Markets Authority (ESMA) has today published its 2017 Annual Report and 2018 Work Programme setting out its main supervisory activities for credit rating agencies (CRAs), trade repositories (TRs), and third country central counterparties (TC-CCPs) in the EU. ESMA supervises eight registered TRs, 26 registered CRAs and four certified CRAs from third-countries. The report also details ESMA’s supervisory activities and achievements in 2017.   

Steven Maijoor, Chair, said:

“Our achievements in 2017 demonstrate how ESMA’s supervisory responsibilities play a key role in the EU’s objective of protecting investors and promoting financial stability.

ESMA has developed an improved risk assessment process and framework for TRs and CRAs, which allows us to better identify and evaluate supervisory risks. Our work on a number of common areas of focus for CRAs and TRs – internal controls, cloud computing, Brexit, fees, ancillary services – have delivered positive results and aided the development of supervisory tools.

Looking forward into 2018, ESMA will implement its new direct supervisory role under the Securities Financing Transactions Regulation. Our supervision will help to increase the transparency of shadow banking activities. In addition, ESMA will continue to actively engage with CRAs and TRs regarding strategy, governance, operational matters, and preparations for when the United Kingdom leaves the EU.

Finally, with the application of the Securitisation Regulation in January 2019, there will be significant preparatory work in 2018 with regards to the applications for registration of securitisation repositories.” 


2018 Supervisory Priorities

For CRAs and TRs in the EU, the key supervisory themes identified for 2018 are based on ESMA’s risk-based approach. In 2018, ESMA will prioritise its supervision on the quality of the credit rating process, including CRAs’ validation practices and the quality of data reported by TRs. ESMA will also continue to focus on information technology and internal control, in addition to governance structures and management quality. Common themes in the supervision of both TRs and CRAs on which ESMA will perform further work include Brexit, fees charged by CRAs and TRs, cloud computing and preparing guidelines for periodic information. The work on Brexit will be key for ESMA in 2018. By the end of the year all supervised entities should be ready if the UK leaves the EU under a cliff-edge scenario.

The report details the priority areas for supervision that ESMA has identified for TC-CCPs in 2018. These include assessment of 15 pending applications for recognition as TC-CCPs and monitoring the potential risks TC-CCPs might import into the EU. In addition, ESMA will monitor the impacts of Brexit on the third country CCP regime.   

2017 Achievements

ESMA’s supervisory work in 2017 delivered a number of concrete results. Important achievements were:

  • the work on fees charged by CRAs and TRs (which resulted in the publication of a thematic report at the beginning of January 2018);
  • the thematic review following the publication of the guidelines on validation;
  • the publication of the Endorsement Guidelines for CRAs;
  • Guidelines on Portability for TRs;
  • various Q&As for CRAs and TRs; and
  • ESMA’s Data Quality Action Plan delivered improvements in the quality of data reported by TRs.


Supervisory investments and enforcement

ESMA also launched investigations into the system development lifecycle of a TR and access to TR data by National Competent Authorities (NCAs). Further investigations into changes of analytical approach, rigorousness of CRA methodologies, interactions between CRAs and issuers and the issuance process of structured finance ratings were also carried out. ESMA also took enforcement action, most notably by levelling a fine of €1.24 million on a CRA for infringements of the CRA Regulation.   

The number of entities supervised by ESMA also grew in 2017. ESMA registered two additional TRs, the first new TRs since the end of 2013, bringing the total number of TRs registered in the EU to eight. The number of CRAs supervised by ESMA remained unchanged following the registration one new CRA and the withdrawal of another. 

The European Securities and Markets Authority (ESMA) has published a Thematic Report on fees charged by Credit Rating Agencies (CRAs) and Trade Repositories (TRs), following the conclusion of ESMA’s supervisory review of the current fee structures in the credit rating and trade repository industries.

In conducting its review, ESMA has collected and analysed information from publically available resources, periodical submissions to ESMA and dedicated requests for information from supervised entities. ESMA also maintained regular engagement with users of credit rating and trade repositories services who provided further information.

Based on this evidence, the Thematic Report provides ESMA’s views on the application of the requirements that fees charged by CRAs should be non-discriminatory and cost-based, and TRs provide non-discriminatory access and charge publicly disclosed and cost-related fees. It equally identifies the areas for improvement regarding transparency and disclosure, the fee-setting process and the interaction with entities related to CRAs and TRs. Going forward, these areas will form the core of ESMA’s supervisory focus.

Supervisory concerns

The three main areas that raise supervisory concerns are:

·         Transparency and disclosure – CRAs/TRs need to ensure sufficiency and clarity of information provided to actual and potential clients as well as to ESMA.

o   CRA clients should be able to understand the key elements of the fee schedule, reasons for deviations from it, in addition to the reasons of price increases/decreases;  

o   TRs can achieve more transparency through reducing complexity and increasing comparability of fee schedules, as well as disclosing sufficient information to enable clients to estimate any additional reporting cost;

·         Fee-setting process – CRAs/TRs need to ensure that cost is a key pricing factor and sufficient controls are in place to demonstrate that the regulatory objectives regarding pricing are met;

·         Interaction with entities related to CRAs and TRs

o   CRAs need to ensure that provision of rating related services by affiliated entities does not conflict with the non-discrimination and cost-based principles;

o   TRs that are part of a group need to ensure that intra group transactions are on reasonable terms and on an arm’s–length principle to prevent discriminatory access and unfair cost allocation.

Steven Maijoor, Chair, said:

“ESMA has found that there are areas for significant improvement by both CRAs and TRs in their current fee practices, particularly in the areas of transparency and disclosure. While some improvements have been made, in the context of the overall findings, ESMA will give supervisory priority to the issues identified regarding  transparency and disclosure, the fee-setting process and interaction with entities related to CRAs and TRs.

 “ESMA also obtained valuable insights from users and will continue such interaction as an additional information source in monitoring CRAs and TRs’ pricing and commercial practices. The ultimate aim is to ensure that customers know exactly what they are paying for and how the fees they are charged are set.”

Next Steps

ESMA will continue to engage with both supervised entities and their clients to ensure effective application of the fee provisions, e.g. on costs, price deviations and controls in place.

ESMA may also decide to provide further supervisory guidance to ensure compliance with the relevant requirements.