# EUR-Lex - 52011PC0746 - EN

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# 52011PC0746

**Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings of collective investment in transferable securities (UCITS) and Directive 2011/61/EU on Alternative Investment Funds Managers in respect of the excessive reliance on credit ratings /* COM/2011/0746 final - 2011/0360 (COD) */**

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EXPLANATORY MEMORANDUM

1.           CONTEXT OF THE PROPOSAL

Regulation (EC) No 1060/2009 on credit
rating agencies[1]
(CRA Regulation) entered into full application on 7 December 2010. It requires
credit rating agencies (CRAs) to comply with rigorous rules of conduct in order
to mitigate possible conflicts of interest, ensure high quality and sufficient
transparency of ratings and the rating process. Existing CRAs had to apply for
registration and to comply with the requirements of the Regulation by 7
September 2010.

On 11 May 2011 an amendment to the CRA
Regulation[2]
(Regulation (EU) No 513/2011) was adopted, entrusting the European Securities
and Markets Authority (ESMA) with exclusive supervisory powers over CRAs
registered in the EU in order to centralise and simplify their registration and
supervision at European level.

However, a number of issues related to
credit rating activities and the use of ratings have not been sufficiently
addressed in the existing CRA Regulation. One of these issues is the risk of
overreliance on credit ratings by financial market participants, including undertakings
for collective investment in transferable securities (UCITS) and alternative
investment funds (AIFs)[3].

The European Commission pointed to these
open issues in its Communication of 2 June 2010 ("Regulating financial
services for sustainable growth")[4]
and in a consultation paper of the Commission services of 5 November 2011[5] announcing the need for a
targeted review of the CRA Regulation which is delivered with this proposal.

On 8 June 2011, the European Parliament
issued a non-legislative report on CRAs[6].
The report supports, inter alia, the need to enhance the regulatory framework
for credit rating agencies and to take measures to reduce the risk of
over-reliance of ratings.

At an informal ECOFIN meeting of 30 October
2010 the Council of the European Union acknowledged that further efforts should
be made to address a number of issues related to credit rating activities,
including the risk of over-reliance on credit ratings and the risk of conflict
of interests stemming from the remuneration model of rating agencies. The
European Council of 23 October 2011 concluded that progress is needed on
reducing overreliance on credit ratings.

At the international level, the Financial
Stability Board (FSB) issued in October 2010 principles to reduce authorities’
and financial institutions’ reliance on external ratings[7]. The principles call for
removing or replacing references to such ratings in legislation where suitable
alternative standards of creditworthiness are available and for requiring
investors to make their own credit assessments. Those principles were endorsed
by the G 20 Seoul Summit in November 2010.

2.           RESULTS OF CONSULTATIONS
WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS

The European Commission conducted a public
consultation from 5 November 2010 to 7 January 2011 presenting various options
to address the issues identified, including the question of over-reliance. The
Commission received approximately 100 contributions from stakeholders which
have been taken into account in drafting this proposal. A summary of the
responses to the consultation paper can be found at

http://ec.europa.eu/internal_market/securities/docs/agencies/summary-responses-cra-consultation-20110704_en.pdf.

On 6 July, the Commission services held a
roundtable in order to obtain further feedback from relevant stakeholders on
these issues. A summary of the roundtable can be found at

http://ec.europa.eu/internal_market/securities/docs/agencies/roundtable_en.pdf.

An impact assessment has been produced for
this proposal. It can be found at

http://ec.europa.eu/internal_market/securities/agencies/index_en.htm.

3.           LEGAL ELEMENTS OF THE
PROPOSAL

3.1.        Legal basis

It is necessary, in order to reduce the
risk of over-reliance of managers of UCITS and AIFs on credit ratings, to
introduce amendments to Directive 2009/65/EC of the European Parliament and of
the Council of 13 July 2009 on the coordination of law, regulations and
administrative provisions relating to the undertakings for collective
investment in transferable securities (UCITS)[8]
and Directive 2011/61/EU of the European Parliament and of the Council of 8
June 2011 on Alternative Investment Fund Managers[9]. The Commission is presenting
in parallel a proposal of Regulation for the amendment of the CRA Regulation,
based on Article 114 of the Treaty of the Functioning of the European
Union (TFUE).

However, that proposal of Regulation would
not be the appropriate legal instrument for the amendment of these directives.
On the one hand, those amendments include provisions which are not directly
applicable and need transposition into national law. On the other hand, the
proposal for the amendments of Directive 2009/65/EC and Directive 2011/61/EU should
rather be based on Article 53(1) of the TFUE, which provided the legal basis
for the latter Directive. Directive 2009/65/EC was based on the corresponding
Article 95 of the Treaty establishing the European Community.

Therefore, it appears appropriate that the
draft amendments to Directive 2009/65/EC and 2011/61/EU are presented in a
proposal for a Directive based on Article 53(1) TFUE.

3.2.        Subsidiarity and
proportionality.

According to the principle of subsidiarity
(Article 5(3) of the TUE), action at the EU level should be taken only where
the aims envisaged cannot be achieved sufficiently by Member States alone and
can therefore, by reason of the scale and effects of the proposed action be
better achieved by the EU. The business of credit rating agencies is global and
has been regulated at EU level. Ratings used by a credit rating agency based in
one Member State are used and relied upon by market participants throughout the
EU. Similarly, EU legislation has provided for a prudential regulatory
framework for investment funds, whether UCITS of AIFs, which allows authorised
funds to operate throughout the EU. Failures or a lack of regulatory framework
in one specific Member State could adversely affect market participants and financial
markets EU-wide. Therefore, sound regulatory rules applicable throughout the EU
are necessary to protect investors and markets from possible shortcomings.
Therefore, any further action to reduce the over-reliance on credit ratings by
UCITs and AIFs can best be achieved by EU action.

The proposed amendments are also
proportionate, as required by Article 5(4) TUE. The amendments do not exceed
what is necessary to achieve their objectives. The provisions on the reduction
of the reliance on credit ratings are integrated into the general obligation
for management and investment companies (as regards UCITS) and AIFMs (as
regards AIFs) to employ risk-management processes or systems. The provisions
proposed are very similar to the ones recently proposed by the Commission as
regards credit institutions[10].

This proposal supplements the Commission
proposal, submitted in parallel, for a Regulation amending the CRA Regulation,
which contains other provisions regarding, inter alia, the reduction of
the excessive reliance by market participants on credit ratings. Further to
setting this general principle on the avoidance of over-reliance, the proposal
for the amendment of the CRA Regulation provides for some measures that should
facilitate investors’ achievement of that objective. Hence, it foresees that
investors should be able to have access to additional information disclosed to
the market by credit rating agencies and issuers of structured finance
instruments. Credit rating agencies should disclose information on their rating
methodologies and underlying assumptions, on any proposed changes to their methodologies
or on specific information on certain types of credit ratings, such as sovereign
ratings. Issued credit ratings should also become easily comparable for investors
thanks to the European Rating Index (EURIX) to be operated by ESMA and
incorporating harmonised rating scales. Issuers of structured financed
instruments should provide more information on their products to the market,
including information on the credit quality and performance of the individual
underlying assets of the structured finance instrument, the structure of the
securitization transaction, the cash flows or any collateral supporting a
securitisation exposure. This additional information should facilitate that
investors, such as UCITS or AIFs, could make their own credit risk assessments
and need not systematically and mechanically rely on credit rating agencies to
assess the creditworthiness of the instruments, in particular structured finance
instruments, in which they invest.

3.3.        Explanation of the
proposal

3.3.1.     Amendment of Directive
2009/65/EC on UCITS

Directive 2009/65/EC provides for the
regulation at the EU level of UCITS. UCITS meeting certain conditions are
therefore allowed to operate across the Union. Article 51 of this Directive
established some prudential requirements as regards risk management. It
requests in particular that a management or investment company managing UCITS
should employ a risk-management process which enables it to monitor and measure
at any time the risk of the positions and their contribution to the overall
risk profile of the portfolio. The Commission received delegated powers to
specify, through delegated acts, the criteria for assessing the adequacy of the
risk management process employed by those managing the UCITS.

Article 1 of the proposal amends Article 51
of Directive 2009/65/EC as regards the risk management process:

–
point (1) introduces a requirement for the
management or investment company not to solely or mechanistically rely on
external credit ratings for assessing the creditworthiness of the UCITS assets.
External credit ratings may be used as one factor among others in this process
but shall not prevail;

–
point (2) proposes corresponding amendments to
the existing empowerments for the Commission to adopt delegated acts with a
view to specifying the provisions of Article 51(1) of 2009/65/EC.

3.3.2.     Amendment of Directive
2011/61/EC on managers of AIFs

Similarly, Directive 2011/61/EU provides
for the regulation at the EU level of managers of alternative investment funds
(AIFs). AIFs meeting certain conditions are therefore allowed to operate across
the Union. Article 15 of Directive 2011/61/EU established some prudential
requirements as regards risk management. It requests in particular that the
manager of an AIF should implement adequate risk-management systems in order to
identify, measure, manage and monitor appropriately all risks relevant to each
AIF investment strategy and to which each AIF is or may be exposed. The
Commission received delegated powers to specify, through delegated acts, the
risks management systems to be employed by the managers of AIFs in relation to
the risks they incur on behalf of the AIFs they manage.

Article 2 of the proposal amends Article 15
of Directive 2011/61/EU as regards the risk management systems:

–
point (1) introduce a requirement for the AIF
Manager not to solely or mechanistically rely on external credit ratings for
assessing the creditworthiness ofthe AIF assets. External credit ratings may be
used as one factor among others in this process but shall not prevail;

–
point (2) proposes corresponding amendments to
the existing empowerments for the Commission to adopt delegated acts with a
view to specifying the provisions of Article 15(1) of Directive 2011/61/EU.

3.3.3.     Transposition

The proposal provides for a transposition
period of 12 months.

4.           BUDGETARY IMPLICATION

The Commission's proposal has no impact on
the European Union budget.

2011/0360 (COD)

Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT
AND OF THE COUNCIL

amending Directive 2009/65/EC on the
coordination of laws, regulations and administrative provisions relating to
undertakings of collective investment in transferable securities (UCITS) and
Directive 2011/61/EU on Alternative Investment Funds Managers in respect of the
excessive reliance on credit ratings

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE
COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union, and in particular Article 53(1) thereof,

Having regard to the proposal from the
European Commission,

After transmission of the draft legislative
act to the national Parliaments,

Having regard to the opinion of the
European Central Bank[11],

Having regard to the opinion of the
European Economic and Social Committee[12],

Acting in accordance with the ordinary
legislative procedure,

Whereas:

(1)
Directive 2009/65/EC of the European Parliament
and of the Council[13]
provides for regulation at Union level of undertakings of collective investment
in transferable securities (UCITS). Similarly, Directive 2011/61/EU of the
European Parliament and of the Council[14]
provides for regulation at the Union level of managers of alternative
investment funds (AIFs). Both directives establish prudential requirements as
regards risk management by management or investment companies managing UCITS or
managers of AIFs, respectively.

(2)
An effect of the financial crisis has been that
investors, including UCITS and AIFs, rely excessively on credit ratings to
carry out their investments on debt instruments, without necessarily conducting
their own assessments of the creditworthiness of issuers of such debt
instruments. In order to improve the quality of the investments made by UCITS
and AIFs and, therefore, to protect investors in those funds, it is appropriate
to require the persons managing UCITS and AIFs to avoid relying exclusively and
automatically on external credit ratings when assessing the risk involved in
the investments made by the UCITS and AIFs they manage. The general principle
on the avoidance of excessive reliance on external credit ratings should
therefore be integrated into the risk management processes and systems of the
managers of UCITS and AIFs, and adapted to their specificities.

(3)
In order to specify further the general
principle on overreliance that should be introduced into Directives 2009/65/EC
and 2011/61/EU, the power to adopt acts in accordance with Article 290 of the
Treaty on the Functioning of the European Union should be delegated to the
Commission in particular to ensure that managers of UCITS and AIFs are
effectively prevented from over-relying on external credit ratings for
assessing the creditworthiness of the assets held by UCITS or AIFs. It is
appropriate in this regard to amend the powers of the Commission in those
Directives to adopt delegated acts in respect of the general provisions
regarding risk management processes and systems employed by the managers of
UCITS and AIFs. It is of particular importance that the Commission carry out
appropriate consultations during its preparatory work, including at expert
level.

(4)
The relevant measures should be complementary to
other provisions in Regulation (EU) No 1060/2009 of the European Parliament and
of the Council of 16 September 2009 on credit rating agencies[15] as amended by Regulation (EU)
No [xxx/xxxx] of the European Parliament and of the Council of [xxx xxx xxxx]
amending Regulation (EU) No 1060/2009[16].
Those provisions set the general objective of reducing excessive reliance by
investors on external credit ratings and should facilitate the achievement of
that aim.

(5)
Since the objective of this Directive, namely to
contribute to the reduction of the excessive reliance of UCITS and AIFs on
external credit ratings when making their investments, cannot be sufficiently
achieved at the Member State level and can therefore, by reason of the
pan-Union structure and impact of the activities of UCITS, AIFs and credit
rating agencies, be better achieved at the Union level, the Union may adopt
measures, in accordance with the principle of subsidiarity as set out in
Article 5 of the Treaty on the European Union. In accordance with the principle
of proportionality, as set out in that Article, this Directive does not go
beyond what is necessary in order to achieve those objectives.

(6)
Directive 2009/65/EC and Directive 2011/61/EU should
therefore be amended accordingly,

HAVE ADOPTED THIS DIRECTIVE:

Article 1

Amendments to Directive 2009/65/EC

Article 51 of Directive 2009/65/EC is amended
as follows:

(1)          in paragraph 1, the first
subparagraph is replaced by the following:

'A management or investment company shall
employ a risk-management process which enables it to monitor and measure at any
time the risk of the positions and their contribution to the overall risk
profile of the portfolio. In particular, it shall not solely or mechanistically
rely on external credit ratings for assessing the creditworthiness of the UCITS
assets.';

(2)          in paragraph 4, point (a) is
replaced by the following:

'(a)    criteria for assessing the adequacy of
the risk management process employed by the management company in accordance
with the first subparagraph of paragraph 1. These criteria shall ensure that
the management company is prevented from relying solely or mechanistically on
external credit ratings for assessing the creditworthiness of the UCITS
assets;'.

Article 2

Amendments to Directive 2011/61/EU

Article 15 of Directive 2011/61/EU is
amended as follows:

(1)          in paragraph 2, the first
subparagraph is replaced by the following:

'AIFMs shall implement adequate risk management
systems in order to identify, measure, manage and monitor appropriately all
risks relevant to each AIF investment strategy and to which each AIF is or may
be exposed. In particular, AIFMs shall not solely or mechanistically rely on
external credit ratings for assessing the creditworthiness of the AIF assets.';

(2)          in paragraph 5, point (a) is
replaced by the following:

'(a)    the risks management systems to be
employed by AIFMs in relation to the risks which they incur on behalf of the
AIFs they manage. These risk management systems shall prevent AIFMs from relying
solely or mechanistically on external credit ratings for assessing the
creditworthiness of the AIF assets.'.

Article 3

Transposition

1.           Member States shall bring
into force the laws, regulations and administrative provisions necessary to
comply with this Directive by XX XXXX [12 months from the date of entry into
force of the directive] at the latest. They shall forthwith communicate to the
Commission the text of those provisions and a correlation table between those
provisions and this Directive.

When Member States adopt those provisions, they
shall contain a reference to this Directive or be accompanied by such a
reference on the occasion of their official publication. Member States shall
determine how such reference is to be made.

2.           Member States shall
communicate to the Commission the text of the main provisions of national law
which they adopt in the field covered by this Directive.

Article 4

Entry into force

This Directive shall enter into force on
the twentieth day following that of its publication in the Official Journal
of the European Union.

Article 5

Addressees

This
Directive is addressed to the Member States.

Done at Brussels,

For the European Parliament                       For
the Council

The President                                                 The
President

[1]               Regulation (EC) No 1060/2009 of the European
Parliament and of the Council of 16 September 2009 on credit rating agencies,
OJ L 302, 17.11.2009.

[2]               Regulation (EU) No 513/2011 of the European
Parliament and of the Council of 11 May 2011 amending Regulation (EC) No
1060/2009 on credit rating agencies, OJ L 145, 31.5.2011.

[3]               Overreliance on external credit ratings occurs when
financial institutions and institutional investors rely solely or
mechanistically on ratings issued by credit rating agencies while neglecting
their own due diligence and internal risk management obligations. Overreliance
on credit ratings may lead to herding behaviour of financial actors, e.g.
parallel selling-off of debt instruments after that instrument has been
downgraded below investment grade, which may affect financial stability – in
particular when the few big rating agencies err collectively in their
assessments.

[4]               COM(2010)301 final.

[5]               Available at http://ec.europa.eu/internal_market/consultations/2010/cra_en.htm.

[6]               http://www.europarl.europa.eu/oeil/FindByProcnum.do?lang=en&procnum=INI/2010/2302.

[7]               http://www.financialstabilityboard.org/publications/r_101027.pdf

[8]               OJ L 302, 17.11.2009, p.32.

[9]               OJ L 174, 1.7.2011, p.1.

[10]             Commission proposal of 20 July 2011 for a Directive of
the European Parliament and of the Council on the access to the activity of
credit institutions and the prudential supervision of credit institutions and
investment firms and amending Directive 2002/87/EC of the European Parliament
and of the Council on the supplementary supervision of credit institutions,
insurance undertakings and investment firms in a financial conglomerate, COM(2011)
453 final. See point (b) of Article 77.

[11]               OJ C , , p. .

[12]               OJ C , , p. .

[13]               OJ L 302, 17.11.2009, p.32.

[14]               OJ L 174, 1.7.2011, p.1.

[15]               OJ L 302, 17.11.2009, p. 1.

[16]               OJ L [...], [...], p. [...].