Credit Rating Agencies Regulation

02009R1060-20150621 → 02009R1060-20190101

Article 1 Subject matter This Regulation introduces a common regulatory approach in order to enhance the integrity, transparency, responsibility, good governance and independence of credit rating activities, contributing to the quality of credit ratings issued in the Union and to the smooth functioning of the internal market, while achieving a high level of consumer and investor protection. It lays down conditions for the issuing of credit ratings and rules on the organisation and conduct of credit rating agencies, including their shareholders and members, to promote credit rating agencies’ independence, the avoidance of conflicts of interest, and the enhancement of consumer and investor protection. This Regulation also lays down obligations for issuers, originators issuers and sponsors related third parties established in the Union regarding structured finance securitisation instruments.

02009R1060-20150621 → 02009R1060-20190101

Article 3 Definitions 1. For the purpose of this Regulation, the following definitions shall apply: (a) credit rating means an opinion regarding the creditworthiness of an entity, a debt or financial obligation, debt security, preferred share or other financial instrument, or of an … 344 unchanged words … undertaking; (k) financial instrument means any of the instruments listed in Section C of Annex I to Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instrumentsOJ L 145, 30.4.2004, p. 1.; (l) structured finance securitisation instrument means a financial instrument or other assets resulting from a securitisation transaction or scheme referred to in Article 4(36) 2(1) of Directive 2006/48/EC; Regulation (EU) 2017/2402 (Securitisation Regulation); (m) group of credit rating agencies means a group of undertakings established in the Union consisting of a parent undertaking and its subsidiaries within the meaning of Articles 1 and 2 of Directive 83/349/EEC as well as undertakings linked to … 862 unchanged words … 3 of Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financingOJ L 309, 25.11.2005, p. 15..

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Article 8 Methodologies, models and key rating assumptions 1. A credit rating agency shall disclose to the public the methodologies, models and key rating assumptions it uses in its credit rating activities as defined in point 5 of Part I of Section E of Annex I. 2. A credit rating agency shall adopt, implement and enforce adequate measures to ensure that the credit ratings and the rating outlooks it issues are based on a thorough analysis of all the information that is available to it and that is relevant to its analysis according to the applicable rating methodologies. It shall adopt all necessary measures so that the information it uses in assigning credit ratings and rating outlooks is of sufficient quality and from reliable sources. The credit rating agency shall issue credit ratings and rating outlooks stipulating that the rating is the agency’s opinion and should be relied upon to a limited degree. 2a. Changes in credit ratings shall be issued in accordance with the credit rating agency’s published rating methodologies. 3. A credit rating agency shall use rating methodologies that are rigorous, systematic, continuous and subject to validation based on historical experience, including back-testing. 4. Where a credit rating agency is using an existing credit rating prepared by another credit rating agency with respect to underlying assets or structured finance securitisation instruments, it shall not refuse to issue a credit rating of an entity or a financial instrument because a portion of the entity or the financial instrument had been previously rated by another credit rating agency. A credit rating agency shall record all instances where in its credit rating process it departs from existing credit ratings prepared by another credit rating agency with respect to underlying assets or structured finance securitisation instruments providing a justification for the differing assessment. 5. A credit rating agency shall monitor credit ratings and review its credit ratings and methodologies on an ongoing basis and at least annually, in particular where material changes occur that could have … 323 unchanged words … review issued ratings; (b) where errors have an impact on its credit ratings, publish those errors on its website; (c) correct those errors in the rating methodologies; and (d) apply the measures referred to in points (a), (b) and (c) of paragraph 6.

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02009R1060-20150621 → 02009R1060-20190101

Article 8c Double credit rating of structured finance securitisation instruments 1. Where an issuer or a related third party intends to solicit a credit rating of a structured finance securitisation instrument, it shall appoint at least two credit rating agencies to provide credit ratings independently of each other. 2. The issuer or a related third party as referred to in paragraph 1 shall ensure that the appointed credit rating agencies comply with the following conditions: (a) they do not belong to the same group of credit rating agencies; (b) they are not a shareholder or a member of any of the other credit rating agencies; (c) they do not have the right or the power to exercise voting rights in any of the other credit rating agencies; (d) they do not have the right or the power to appoint or remove members of the administrative or supervisory board of any of the other credit rating agencies; (e) none of the members of their administrative or supervisory boards are a member of the administrative or supervisory boards of any of the other credit rating agencies; (f) they do not exercise, or have the power to exercise, control or a dominant influence over any of the other credit rating agencies.

02009R1060-20150621 → 02009R1060-20190101

Article 10 Disclosure and presentation of credit ratings 1. A credit rating agency shall disclose any credit rating or rating outlook, as well as any decision to discontinue a credit rating, on a non-selective basis and in a timely manner. In the event of a decision to discontinue a credit rating, the information disclosed shall include full reasons for the decision. The first subparagraph shall also apply to credit ratings that are distributed by subscription. 2. Credit rating agencies shall ensure that credit ratings and rating outlooks are presented and processed in accordance with the requirements set out in Section D of Annex I and shall not present factors other than those related to the credit ratings. 2a. Until disclosure to the public of credit ratings, rating outlooks and information relating thereto, they shall be deemed to be inside information as defined in, and in accordance with, Directive 2003/6/EC. Article 6(3) of that Directive shall apply mutatis mutandis to credit rating agencies as regards their duty of confidentiality and their obligation to maintain a list of persons who have access to their credit ratings, rating outlooks or related information before disclosure. The list of persons to whom credit ratings, rating outlooks and information relating thereto are communicated before being disclosed shall be limited to persons identified by each rated entity for that purpose. 3. When a credit rating agency issues credit ratings for structured finance securitisation instruments, it shall ensure that rating categories that are attributed to structured finance securitisation instruments are clearly differentiated using an additional symbol which distinguishes them from rating categories used for any other entities, financial instruments or financial obligations. 4. A credit rating agency shall disclose its policies and procedures regarding unsolicited credit ratings. 5. Where a credit rating agency issues an unsolicited credit rating, it shall state prominently in the credit rating, using a clearly distinguishable different colour code for the rating category, whether or not the rated entity or a related third party participated in the credit rating process and whether the credit rating agency had access to the accounts, management and other relevant internal documents for the rated entity or a related third party. Unsolicited credit ratings shall be identified as such. 6. A credit rating agency shall not use the name of ESMA or any competent authority in such a way that would indicate or suggest endorsement or approval by ESMA or any competent authority of the credit ratings or any credit rating activities of the credit rating agency.

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02009R1060-20150621 → 02009R1060-20190101

Article 39 Reports 1. By 7 December 2012, the Commission shall make an assessment of the application of this Regulation, including an assessment of the reliance on credit ratings in the Community, the impact on the level of concentration in the credit rating market, the cost and benefit of impacts of the Regulation and of the appropriateness of the remuneration of the credit rating agency by the rated entity (issuer-pays model), and submit a report thereon to the European Parliament and the Council. 2. By 7 December 2010, the Commission shall, in the light of discussions with the competent authorities, assess the application of Title III of this Regulation, in particular of the cooperation of the competent authorities, the legal status of CESR and supervisory practices. The Commission shall present a report on those matters to the European Parliament and to the Council, accompanied, where appropriate, by proposals for a review of that Title. That report shall include a reference to the Commission proposal of 12 November 2008 for a regulation on credit rating agencies and to the report of the Committee on Economic and Monetary Affairs of the European Parliament of 23 March 2009 relating to that proposal. 3. By 1 July 2011, the Commission shall, in the light of developments in the regulatory and supervisory framework for credit rating agencies in third countries, present a report to the European Parliament and to the Council concerning the effects of those developments and of the transitional provisions referred to in Article 40 on the stability of financial markets in the Union. 4. The Commission shall, after obtaining technical advice from ESMA, review the situation in the credit rating market for structured finance securitisation instruments, in particular the credit rating market for re-securitisations. Following that review, the Commission shall, by 1 July 2016, submit a report to the European Parliament and to the Council, accompanied by a legislative proposal if appropriate, assessing, in particular: (a) the availability of sufficient choice in order to comply with the requirements set out in Articles 6b and 8c; (b) whether it is appropriate to shorten or extend the maximum duration of the contractual relationship referred to in Article 6b(1) and the minimum period before the credit rating agency may re-enter into a contract with an issuer or a related third party for the issuing of credit ratings on re-securitisations referred to in Article 6b(3); (c) whether it is appropriate to amend the exemption referred to in the second subparagraph of Article 6b(2). 5. The Commission shall, after obtaining technical advice from ESMA, review the situation in the credit rating market. Following that review, the Commission shall, by 1 January 2016, submit a report to the European Parliament and to the Council, accompanied by a legislative proposal if appropriate, assessing, in particular: (a) whether there is a need to extend the scope of the obligations referred to in Article 8b to include any other financial credit products; (b) whether the requirements referred to in Articles 6, 6a and 7 have sufficiently mitigated conflicts of interest; (c) whether the scope of the rotation mechanism referred to in Article 6b should be extended to other asset classes and whether it is appropriate to use differentiated lengths of periods across asset classes; (d) the appropriateness of existing and alternative remuneration models; (e) whether there is a need to implement other measures to foster competition in the credit rating market; (f) the appropriateness of additional initiatives to promote competition in the credit rating market against the background of the evolution of the structure of the sector; (g) whether there is a need to propose measures to address contractual over-reliance on credit ratings; (h) the market concentration levels, the risks arising from high concentration, and the impact on the overall stability of the financial sector. 6. The Commission shall, at least annually, inform the European Parliament and the Council of any new equivalence decisions referred to in Article 5(6) that have been adopted during the reporting period.

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ANNEX I INDEPENDENCE AND AVOIDANCE OF CONFLICTS OF INTEREST Section A Organisational requirements 1. The credit rating agency shall have an administrative or supervisory board. Its senior management shall ensure that: (a) credit rating activities are independent, including from all political and economic influences or constraints; (b) conflicts of interest are properly identified, managed and disclosed; (c) the credit rating agency complies with the remaining requirements of this Regulation. 2. A credit rating agency shall be organised in a way that ensures that its business interest does not impair the independence or accuracy of the credit rating activities. The senior management of a credit rating agency shall be of good repute and sufficiently skilled and experienced, and shall ensure the sound and prudent management of the credit rating agency. At least one third, but no less than two, of the members of the administrative or supervisory board of a credit rating agency shall be independent members who are not involved in credit rating activities. The compensation of the independent members of the administrative or supervisory board shall not be linked to the business performance of the credit rating agency and shall be arranged so as to ensure the independence of their judgement. The term of office of the independent members of the administrative or supervisory board shall be for a pre-agreed fixed period not exceeding five years and shall not be renewable. The dismissal of independent members of the administrative or supervisory board shall take place only in case of misconduct or professional underperformance. The majority of members of the administrative or supervisory board, including its independent members, shall have sufficient expertise in financial services. Provided that the credit rating agency issues credit ratings of structured finance securitisation instruments, at least one independent member and one other member of the board shall have in-depth knowledge and experience at a senior level of the markets in structured finance securitisation instruments. In addition to the overall responsibility of the board, the independent members of the administrative or supervisory board shall have the specific task of monitoring: (a) the development of the credit rating policy and of the methodologies used by the credit … 1,819 unchanged words … ancillary services provided for the rated entity or any related third party. 5. A credit rating agency shall ensure that rating analysts or persons who approve ratings do not make proposals or recommendations, either formally or informally, regarding the design of structured finance securitisation instruments on which the credit rating agency is expected to issue a credit rating. 6. A credit rating agency shall design its reporting and communication channels so as to ensure the independence of the persons referred to in point 1 from … 2,015 unchanged words … debt instruments submitted to it for their initial review or for preliminary rating. Such disclosure shall be made whether or not issuers contract with the credit rating agency for a final rating. II. Additional obligations in relation to credit ratings of structured finance securitisation instruments 1. Where a credit rating agency rates a structured finance securitisation instrument, it shall provide in the credit rating all information about loss and cash-flow analysis it has performed or is relying upon and an indication of any expected change in the credit rating. 2. A credit rating agency shall state what level of assessment it has performed concerning the due diligence processes carried out at the level of underlying financial instruments or other assets of structured finance securitisation instruments. The credit rating agency shall disclose whether it has undertaken any assessment of such due diligence processes or whether it has relied on a third-party assessment, indicating how the outcome of such assessment impacts on the credit rating. 3. Where … 1,115 unchanged words … of that Directive shall be provided by the credit rating agency irrespective of whether it is subject to Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bidsOJ L 142, 30.4.2004, p. 12..

02009R1060-20150621 → 02009R1060-20190101

ANNEX III List of infringements referred to in Article 24(1) and Article 36a(1) I. Infringements related to conflicts of interest, organisational or operational requirements 1. The credit rating agency infringes Article 4(3) by endorsing a credit rating issued in a third country without … 333 unchanged words … the fifth paragraph of point 2 of Section A of Annex I, by appointing members of the administrative or supervisory board that do not have sufficient expertise in financial services; or, where the credit rating agency issues credit ratings of structured finance securitisation instruments, by not appointing at least one independent member and one other member of the board who has in-depth knowledge and experience at senior level of the markets in structured finance securitisation instruments. 9. The credit rating agency infringes Article 6(2), in conjunction with the sixth paragraph of point 2 of Section A of Annex I, by not ensuring that the independent members of the administrative or supervisory board perform the tasks of … 1,069 unchanged words … activity. 24. The credit rating agency infringes Article 6(2), in conjunction with point 5 of Section B of Annex I, by not ensuring that rating analysts or persons who approve ratings do not make proposals or recommendations regarding the design of structured finance securitisation instruments on which the credit rating agency is expected to issue a credit rating. 25. The credit rating agency infringes Article 6(2), in conjunction with point 6 of Section B of Annex I, by not designing its reporting or communication channels … 1,240 unchanged words … The credit rating agency infringes the second subparagraph of Article 8(4) by not recording all instances where in its credit rating process it departs from existing credit ratings prepared by another credit rating agency with respect to underlying assets or structured finance securitisation instruments or by not providing a justification for the differing assessment. 46. The credit rating agency infringes the first sentence of the first subparagraph of Article 8(5) by not monitoring its credit ratings other than sovereign ratings or by not reviewing … 1,923 unchanged words … working hours of the rated entity and at least a full working day before publication of the credit rating or the rating outlook. 8. The credit rating agency infringes Article 10(3) by not ensuring that rating categories that are attributed to structured finance securitisation instruments are clearly differentiated using an additional symbol which distinguishes them from rating categories used for any other entities, financial instruments or financial obligations. 9. The credit rating agency infringes Article 10(4) by not disclosing its policies or procedures regarding unsolicited credit ratings. 10. The credit rating agency infringes Article 10(5) by not providing the information as required by that paragraph when issuing an unsolicited credit rating or by not identifying an unsolicited credit rating as such. 11. The credit rating agency infringes Article 11(1) by not fully disclosing or immediately updating information relating to the matters set out in Part I of Section E of Annex I.

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