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Stricter rules for credit rating agencies to enter into force
As of 20 June, credit rating agencies (CRAs) will have to follow stricter rules which will make them more accountable for their actions. The new rules also aim to reduce over-reliance on credit ratings while at the same time improving the quality of the rating process. Credit rating agencies will have to be more transparent when rating sovereign states.
Michel Barnier, Commissioner for Internal Market and Services, said: “I am very pleased that just one and a half years after the Commission made its proposal, we have reached the stage when the legislation enters into force. Under the new legislation, credit rating agencies will have to be more transparent and accountable when rating sovereign states. The new rules will also contribute to increased competition in the ratings industry currently dominated by a few market players and will reduce the over-reliance on ratings by financial market participants. This is an important step towards restoring financial stability and trust in financial institutions and will help to avoid further crises.”
Credit rating agencies (CRAs) are major players in today's financial markets. Rating actions have a direct impact on the actions of investors, borrowers, issuers and governments. For example, a corporate downgrade can have consequences on the capital a bank must hold and a downgrade of sovereign debt can make a country's borrowing more expensive. Despite the adoption of European legislation on credit rating agencies in 2009 and 2010, the developments in the context of the euro debt crisis have shown the need for the regulatory framework to be strengthened. As a result, in November 2011 the Commission put forward proposals to reinforce the regulatory framework and deal with outstanding weaknesses. The new rules enter into force on 20 June 2013.
What will change with the new rules?
1. Reduced overreliance on credit ratings
In line with our G20 commitments, the new rules will reduce reliance on external ratings, requiring financial institutions to strengthen their own credit risk assessment and not to rely solely and mechanistically on external credit ratings. European Supervisory Authorities should also avoid references to external credit ratings and will be required to review their rules and guidelines and where appropriate, remove credit ratings where they have the potential to create mechanistic effects. The regulatory package also contains a Directive introducing the principle to reduce reliance on external ratings in sectoral legislation for collective investment funds (UCITS), alternative investment fund managers (AIFMD) and institutions for retirement provision (IORPD).
2. Improved quality of ratings of sovereign debt of EU Member States
To avoid market disruption, rating agencies will set up a calendar indicating when they will rate Member States. Such ratings will be limited to three per year for unsolicited sovereign ratings. Derogations remain possible in exceptional circumstances and subject to appropriate explanations. The ratings will only be published on Fridays after close of business and at least one hour before the opening of trading venues in the EU. Furthermore, investors and Member States will be informed of the underlying facts and assumptions on each rating which will facilitate a better understanding of credit ratings of Member States.
3. Credit rating agencies will be more accountable for their actions
The new rules will make rating agencies more accountable for their actions as ratings are not just simple opinions. Therefore, the new rules ensure that a rating agency can be held liable in case it infringes intentionally or with gross negligence the CRA Regulation, thereby causing damage to an investor or an issuer.
4. Reduced conflicts of interests due to the issuer pays remuneration model
The Regulation will improve the independence of credit rating agencies and help eliminate conflicts of interest by introducing mandatory rotation for certain complex structured financial instruments (re-securitisations). There are also limitations as regards the shareholding of rating agencies. To mitigate the risk of conflicts of interest, the new rules will require CRAs to disclose publicly if a shareholder with 5% or more of the capital or voting rights of the concerned CRA holds 5% or more of a rated entity, and would prohibit a CRA from rating when a shareholder of a CRA with 10% or more of the capital or voting rights also holds 10% or more of a rated entity.
To ensure the diversity and independence of credit ratings, the Regulation prohibits ownership of 5% or more of the capital or the voting rights in more than one CRA, unless the agencies concerned belong to the same group (cross-shareholding).
5. Publication of ratings on a European Rating Platform
All available ratings will be published on a European Rating Platform, available as from June 2015. This will improve the comparability and visibility of ratings of financial instruments rated by rating agencies registered and authorised in the EU. This should also help investors to make their own credit risk assessment and contribute to more diversity in the rating industry.
As part of the package, the Commission will also review the situation in the rating market and report to the European Parliament and the Council on the appropriateness of the development of a special European system for creditworthiness assessments of sovereign debt. By 31 December 2016, the Commission should submit a report to the European Parliament and to the Council on the appropriateness and feasibility of supporting a European credit rating agency dedicated to assessing the creditworthiness of Member States’ sovereign debt and/or a European credit rating foundation for all other credit ratings.
The G20 summit in Washington (2008) aimed to ensure that no institution, product or market was left unregulated at EU and international levels. The EU Regulation on Credit Rating Agencies (Regulation 1060/2009), in force since December 2010, was part of Europe's response to these commitments. The Regulation was amended in May 2011 to adapt it to the creation of the European Securities and Markets Authority (ESMA) which has been attributed all supervisory powers over credit rating agencies since July 2011.
The new regulatory package, which reinforces the existing rules on credit rating agencies, consists of a Regulation and a Directive:
Regulation 462/2013 of the European Parliament and of the Council of 21 May 2013 amending Regulation (EC) No 1060/2009 on credit rating agencies
Directive 2013/14/EC of the European Parliament and of the Council of 21 May 2013 amending Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision, Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) and Directive 2011/61/EU on Alternative Investment Funds Managers in respect of over-reliance on credit ratings
See also MEMO/13/571
More information on credit rating agencies
Chantal Hughes (+32 2 296 44 50)
Audrey Augier (+32 2 297 16 07)