The purpose of Article 8.3 is to ensure that CRAs’ methodologies are developed, utilized and reviewed in such a way as to produce a well informed and well founded opinion on the credit worthiness of a rated entity and/or financial instrument. This guidance therefore sets out the steps that will be taken by competent authorities to monitor CRAs compliance with this Article.
After registration, CRAs must notify competent authorities of any material change in their rating methodologies (either global or on a specific asset class) and related analytical documentation including rating factors, criteria and/or parametric assumptions where relevant (e.g. basic scenario, correlation, probability of default, loss given default, expected/unexpected loss, loss curve, expected recovery rates, loss severity, etc, where appropriate).
The CRAs should submit the following information:
- written policies and procedures ensuring on an ongoing basis that credit rating methodologies are rigorous, systematic, continuous and subject to appropriate validation;
- detailed description of the process for developing and reviewing methodologies and how methodologies are used in the main stages of the rating process. This description should include detail on the interaction between analysts developing methodologies and staff involved in the actual rating of the securities concerned as well as the sign-off process; and
- detailed description of how methodologies are implemented including a description of the processes in place to ensure consistency of approach in applying rating methodologies to credit ratings. In particular the role of rating committees and senior management should be elaborated.
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