02 October 2015

ESMA sees progress in reform of EU credit rating industry

ESMA finds that the EU CRA Regulation has improved the governance and operation of CRAs but that it is too soon to comprehensively assess the impact of measures regarding competition and conflicts of interest included in the CRA Regulation of 2013.

The European Securities and Markets Authority  has published two sets of Technical Advice  and a Report on the regulation of credit rating agencies  in the EU. These papers provide an overview of competition and insight into the market dynamics of this industry. They also consider measures to provide stronger controls around credit ratings for structured finance instruments and to reduce reliance on credit ratings.

ESMA’s key findings at this stage include that the dynamics of the CRA industry are more complex than initially foreseen and high fees charged and regular fee increases imposed by some CRAs suggest there may be little effective competition in some specific markets within the EU at present. ESMA also notes it would benefit from further supervisory powers regarding independent non-executive directors and enhanced enforcement powers, including the ability to impose fines which better reflect the turnover of the CRAs operating in the EU. 

Technical Advice on Reducing Sole and Mechanistic Reliance on Credit Ratings

ESMA reports on ongoing efforts to reduce sole and mechanistic reliance on credit ratings and finds references to credit ratings still remain in national and EU legislation, as well as within the collateral frameworks of some central banks. As it may not be practical to remove all of these references, ESMA notes that future action should focus on mitigating mechanistic reliance on credit ratings rather than removing them from legislation entirely. 

Report on the Possibility of Establishing one or more Mappings of Credit Ratings Published on the European Rating Platform 

In 2016 ESMA will launch the European Rating Platform (ERP) which is a platform that allows users to compare credit ratings issued by different CRAs. ESMA’s report concludes that rather than establishing one or more mappings of credit ratings published on the ERP, ESMA should instead focus on improving the information, data and tools available to users of the ERP so that they can carry out their own assessments. 

 Full press release

Technical Advice on Competition, Choice and Conflicts of Interest in the CRA industry

Technical Advice on Reducing Sole and Mechanistic Reliance on Credit Ratings

Report

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