Credit Rating Agencies
Credit Rating Agencies
ESMA is the single direct supervisor of Credit Rating Agencies (CRAs) within the EU.
What is the CRA Regulation and what does it cover?
The CRA Regulation introduced a common approach to the Regulation and Supervision of CRAs within the European Union. This approach was designed to enhance the integrity, responsibility, good governance and independence of credit rating activities to ensure quality ratings and high levels of investor protection.
There are also a number of implementing and delegated acts adopted by the European Commission and Technical Standards developed by ESMA within its scope of action, including Technical Standards for implementing the CRA Regulation.
Registration and certification are core activities within ESMA’s supervisory responsibilities. For ESMA it is vitally important that the gateway to registered status is guarded diligently and applicants are granted registration only if they demonstrate their ability to meet all the regulatory requirements.
The Registration Process Explained
The registration procedure is defined by Articles 14 to 18 of the CRA Regulation. The process is composed of two stages.
In the completeness phase, the applicant is requested to submit a substantial amount of information on, inter alia, its business plans, resourcing arrangements, governance structures, policies and procedures for ensuring compliance with the CRA Regulation, as well as their rating methodologies. Commission Delegated Regulation 449/2012 with regard to regulatory technical standards on information and certification of credit rating agencies sets out the information that applicants for registration should submit to ESMA.
The completeness phase is then followed by the compliance phase, when ESMA carries out a detailed analysis of whether the applicant’s proposal fully meets the requirements of the CRA Regulation.
The specific timelines for both the completeness and the compliance phases are defined in Articles 15 to 18 the CRA Regulation. Commission Delegated Regulation 447/2012 laying down technical standards for the assessment of compliance of credit rating methodologies is used to assess applicants’ compliance with Article 8(3) of the CRA Regulation.
Please note that ESMA may decide to reopen the completeness phase described in Article 15(4) of Regulation (EC) No 1060/2009 on the basis of the applicant’s submission of new information during the compliance phase referred to in Article 16 of that Regulation, provided that ESMA considers it appropriate and receives the written and unambiguous consent of the applicant.
At the end of the compliance assessment, the decision on whether the applicant is given registered status is made by ESMA’s Board of Supervisors, which consists of senior representatives of the National Competent Authorities (NCAs) from each EU Member State.
A fee will be payable at outset of the registration process. The calculation of fees, as defined by Commission Delegated Regulation EU/272/2012 (the “Fees Regulation”) is based on a several factors such as numbers of employees, whether the applicant has or plans to have branches in another Member State or third country, or whether it intends to issue ratings on structured finance instruments.
If you would like to receive further information on the registration process please contact the Supervision Department at CRAfirstname.lastname@example.org
For further details on the Certification Regime please refer to the Credit Rating Agencies International Section.
Any firm that is established in the EU and is carrying out credit rating activities in the EU without being registered with ESMA is operating in breach of Articles 2(1) and 14(1) of the CRA Regulation. Action, leading to supervisory measures and fines will be systematically taken by ESMA against firms that conduct credit rating activities without registration or, where appropriate, certification in the EU. Any firm planning to issue credit ratings should immediately apply to ESMA for registration.
PERIMETER ASSESSMENT EXPLAINED
Under its perimeter strategy, ESMA uses a variety of sources to identify firms potentially providing credit rating activities without registration, such as internal and external referrals, and desk-based reviews of the public domain.
A “credit rating” is an opinion on creditworthiness expressed using a ranking system of rating categories. Credit ratings are:
- issued on a professional basis;
- linked to a specific financial instrument, an obligation, or an issuer;
- require analytical input from rating analysts;
- disclosed publicly or distributed by subscription.
When assessing whether firms’ activities fall under the scope of CRA Regulation, ESMA considers the exemptions listed in Article 2(2) of the CRA Regulation.
For instance, if a creditworthiness assessment is solely derived from summarizing and expressing data, based on a pre-established statistical system or model, and no substantial rating-specific analytical input is included in the assessment, the product is considered a “credit score”. Regardless of the way certain firms may choose to market their credit scores (e.g. “rating” or similar), this product does not fall under the scope of the CRA Regulation. This in practice means that the requirements ensuring independence, objectivity, and quality – as stipulated in the CRA Regulation – do not apply to credit scores, and ESMA does not supervise this product.
As best practice, ESMA recommends that firms (including CRAs) publicly distributing in the Union credit scores marketed or labelled as “ratings”, which are not credit ratings, provide clear and prominent disclosure that these products are not credit ratings issued in accordance with the CRA Regulation and are not supervised by ESMA.
For further information please refer to the applicable ESMA Guidelines and Recommendations on the Scope of the CRA Regulation.
If you have any information which may assist ESMA’s perimeter strategy or are a firm that would like clarification as to whether it is engaging in credit rating activities as defined under Articles 2(1) and 14(1) of the CRA Regulation please contact the Supervision Department at CRAemail@example.com.
Ongoing supervision and investigations
The risk-based framework is the pillar of ESMA's supervision for CRAs. Following the registration, ESMA supervises the registered entities through a combination of desk-based supervisory activities and investigation. As part of its desk-based supervisory activities, ESMA:
- Analyses the periodic information that CRAs submit to ESMA.
- Analyses complaints received by market participants.
- Reviews notifications of material changes to the initial conditions from registration.
- Monitors ratings data submitted to ESMA by CRAs.
As part of its supervisory activity, ESMA also conducts investigations that may or may not involve on-site visits.
ESMA has the power to take appropriate enforcement action where it discovers a breach of the CRA Regulation. These actions can range from the imposition of fines to the withdrawal of registration.
If you are an employee or a former employee of a CRA, please visit the Whistleblowers' Corner. If you do not fall into this category but wish to submit a complaint about a credit rating agency, please fill in this form and email it to CRAfirstname.lastname@example.org. In the subject title of your email, please state "Complaint about credit rating agency".
Fees paid by CRAs and market share
CRAs whose revenues are higher than 10 millon euros pay an annual supervisory fee to ESMA.
Annual Market Share Calculation
One of the objectives of the CRA Regulation is to increase competition in the markets for credit ratings by encouraging issuers to use smaller credit rating agencies. To this end Article 8d(1) of the CRA Regulation states that where issuers or related third parties intend to appoint at least two CRAs to rate an issuance or entity, they shall consider appointing at least one CRA with no more than 10% of the total market share. They will consider this where the issuer or related third party finds that such a CRA is capable of rating the relevant issuance or entity and there is such a CRA available to rate the issuance or entity in question.
Where an issues does not appoint at least one CRA with no more than 10% of the total market share, the issuer or related third party shall document this. The obligations in Article 8d are supervised and enforced at national level by sectoral competent authorities.
To help issuers and related third parties carry out this evaluation, Article 8d(2) of the CRA Regulation requires ESMA to annually publish on its website a list of CRAs registered in the European Union (EU), indicating their total market share and the types of credit ratings issued by each CRA.