Out-Law News 2 min. read

EU moves to strengthen regulatory control of credit rating agencies


The European Commission has adopted a package of measures designed to apply “stricter new rules” for the regulation of credit rating agencies (CRAs).

The European Commission has adopted a package of measures designed to apply “stricter new rules” for the regulation of credit rating agencies (CRAs).

Three regulatory technical standards (RTS), adopted on 30 September, set out disclosure requirements for issuers, originators and sponsors of structured finance instruments, the reporting requirements applicable to CRAs for the purpose of the European Rating Platform (ERP) and reporting requirements applicable to CRAs over fees to help the supervisory work of the European Securities and Markets Authority (ESMA).

In respect of structured finance instruments, the RTS specifies the content, frequency and presentation of the information that issuers, originators and sponsors of structured finance instruments established in the EU will jointly need to disclose on a website which the Commission said will be launched by ESMA.

The Commission said this will “improve investors’ ability to make an informed assessment of the risks related to such complex financial instruments”. The disclosure obligation “aims in particular at reducing investors’ dependence and reliance on credit ratings and reinforcing competition” between agencies, the Commission said.

The RTS relating to the ERP, to be set up by ESMA, will allow investors “to consult and easily compare all available credit ratings for all rated instruments”, the Commission said. This RTS “streamlines” the data reported by CRAs “in order to allow for more efficient data reporting” to ESMA. “It also integrates the existing reporting requirements for the purpose of historical performance data, available in the central repository established by ESMA, and for the purpose of ongoing supervision by ESMA.”

On reporting fees charged by agencies, the Commission said the RTS “sets out the content and format of data” on fees charged to CRA clients to be periodically reported to ESMA. Information collected will allow ESMA to verify “whether pricing practices are discriminatory and thereby facilitate fair competition and mitigate conflicts of interest”, the Commission said.

EU commissioner for the internal market and services Michel Barnier said the move marked “another step in improving transparency and restoring confidence in the financial system”.

Barnier said enhanced disclosure on structured finance instruments would enable investors to make “better-informed investment decisions on these products”. In addition, investors “will be better informed about all the available credit ratings issued by authorised agencies, as these will be published on a central platform to be set up and operated by ESMA”.

Reporting by CRAs on their pricing practices will allow ESMA “to ensure that they act in a non-discriminatory manner”, Barnier said.

The European Parliament and Council have one month to raise objections to the new standards and have the option of extending the period for a total of up to two months. After the objection period has expired, the standards will be published in the Official Journal of the EU and will enter into force 20 days after publication.

The EU’s regulation on CRAs (31-page / 1.37 MB PDF), part of Europe’s response to commitments made to the G20 group of nations, has been in force since December 2010. The regulation was amended in May 2011 to adapt it to the creation of ESMA, which has held all supervisory powers over agencies since July 2011.

The last regulatory package, which further reinforced the rules on CRAs, entered into force in June 2013 and included rules aimed at reducing over-reliance on credit ratings, improving the quality of sovereign debt ratings, making CRAs “more accountable for their actions, reducing conflicts of interest and increasing competition in the rating market”.

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