In 2009, the European Union ("EU") enacted legislation regulating credit rating agencies ("CRAs") in order to address the criticisms raised during the financial crisis that highlighted certain issues arising from conflicts of interest and a lack of transparency in the ratings process.1
The EU Regulation on Credit Rating Agencies (the "CRA Regulation") came into force on 7 December 2009, introducing new obligations on CRAs designed to improve the independence, quality and transparency of ratings.2 CRAs operating in the EU are subject to registration in order for their ratings to be used for regulatory purposes in the EU. Along with other EU member states, the United Kingdom ("UK") has proceeded to implement the CRA Regulation by passing the UK Credit Rating Agencies Regulations 2010, which will come into effect 7 June 2010.3
Recently, however, CRAs have been back in the spotlight for their role in the ongoing sovereign debt crisis in the Eurozone, particularly in relation to their decision to downgrade the credit ratings of Greece, Portugal and Spain.
On 17 May 2010, Michel Barnier, EU's Internal Market Commissioner, announced that the EU Commission will publish proposals in June 2010 for further regulations concerning CRAs, to be implemented by the end of 2010. The focal point of the new proposals is the centralised, pan-EU registration and supervision of CRAs through the European Securities and Markets Authority ("ESMA"). ESMA is one of the new EU supervisory authorities being created as part of the broad reform of EU financial supervisory framework and will replace the Committee of European Securities Regulators ("CESR") from 1 January 2011. As a further means of improving transparency, it is also proposed that EU regulators be given access to the CRAs' rating methodologies and past ratings information. The new proposals may also require CRAs to share some of the data on which their ratings are based.
On 17 May 2010, CESR launched two public consultations4 on its guidance relating to the enforcement practices and the assessment of credit rating methodologies under the CRA Regulation. Under Article 21(3) of the CRA Regulation, CESR is obliged to issue the guidance by 7 September 2010. Accordingly, CESR has set out its proposals in the latest consultation papers and invited comments from market participants by 18 June 2010.
We summarise CESR's proposals in relation to both sets of guidance below
Guidance on the Enforcement Practices under Article 21.3(a)
In the first consultation paper, CESR outlined the information that the competent authorities of the EU member states should receive from CRAs and the type of meetings that they should hold with the CRAs, in order to help them understand how the CRAs operate and to investigate any risks as they arise.
The draft guidance does not cover the supervisory measures or sanctions that the competent authorities may impose under the CRA Regulation. Those will be addressed in a separate CESR guidance, which will not be made public.
CESR noted that the draft guidance may be modified to reflect the precise powers and responsibilities of ESME as they are determined.
Enforcement practices as part of ongoing supervision: collection of periodic information and ad hoc requests
As part of ongoing supervision, competent authorities should require the CRA to provide them with information and data, in periodic reports or upon request, relating to the following:
Operational reports (monthly):
ratings activities (e.g., new issues, ratings reviews and withdrawals, issuers and transactions rated or monitored, broken down by type of credit rating); methodologies reviews (including any back-testing), and key findings and actions taken; costs and revenues generated by each type of credit ratings; staff turnover and promotions (e.g., the committee chairman or person approving ratings), broken down by type of credit ratings; any internal review performed on rating models and processes; and " any changes in the location of lead analysts or outsourcing arrangements. 2. Compliance reports (monthly or...