EUROPEAN COMMISSION 
Brussels, 15.11.2011 
SEC(2011) 1354 final 
  
COMMISSION STAFF WORKING PAPER 
IMPACT ASSESSMENT 
Accompanying the document 
Proposal for a Regulation 
amending Regulation (EC) No 106 0/2009 on credit rating agencies  
 
and a  
 
Proposal for a Directive 
 
amendin g Directive 2009/65/EC on coordination on laws, re gulations and administrative 
provisions relating to undertakings for collective investment in transferable securities 
(UCITS) and Directive 2011/61/EU on Alt ernative Investment Fund Managers 
{COM(2011) 747 final} 
{SEC(2011) 1355 final}  
 
 2/193  TABLE OF CONTENTS 
 
1. Introduction................................................................................................................ .. 4 
2. Procedural issues and consulta tion of interested Parties.............................................. 5 
2.1. Legislative process and consultation....................................................................... 5 2.2. Steering Group ........................................................................................................ 5 2.3. Impact Assessment Board ....................................................................................... 5 
3. Policy context.............................................................................................................. .6  
3.1. Role of CRAs and importance of ratings ................................................................ 6 3.2. Overview of the credit rating market ...................................................................... 7 3.3. International-level initiatives on CRAs................................................................... 7 
4. Problem Definition....................................................................................................... 8 
4.1. Overreliance on external credit ratings lead ing to "cliff" effects in capital markets
............................................................................................................................... 11 
4.2. Contagion effects of sovere ign debt rating changes.............................................. 14 
4.3. Limited choice of rating agencies and ratings for issuers and investors ............... 17 
4.4. Insufficient right of re dress for investors .............................................................. 18 
4.5. Potential conflicts of interest and other issues linked to credit rating 
methodologies and processes ................................................................................ 19 
4.6. The baseline scenario: how would the problem evolve without EU action? ........ 21 
4.7. Subsidiarity............................................................................................................ 22  
5. Objectives.................................................................................................................. . 23 
6. Identification and analysis of policy options ............................................................. 23 
6.1. Policy options to reduce relian ce on external credit ratings.................................. 24 
6.2. Policy options to mitigate the risks of c ontagion effects linked to sovereign debt 
ratings .................................................................................................................... 30 
6.3. Policy options to improve credit rating market conditions ................................... 39 6.4. Policy options to ensure right  of redress for investors .......................................... 46 
6.5. Policy options to reinforce independen ce of credit rating agencies and improve 
credit rating methodologi es and processes............................................................ 48 
7. Overall impact of the package.................................................................................... 54 
7.1. Cumulative impacts and synergies........................................................................ 54 
7.2. Proportionality of the package .............................................................................. 55 7.3. Impact on different stakeholders groups ............................................................... 56 7.4. Assessment of administrative burden and compliance costs................................. 57 7.5. Impact on EU budget............................................................................................. 59 7.6. Impact on fundamental rights................................................................................ 59 7.7. Social impact ......................................................................................................... 60 7.8. Environmental impact ........................................................................................... 60 7.9. Impact on SMEs .................................................................................................... 60 7.10. Coherence with other proposals ............................................................................ 60 7.11. Choice of legal instrument .................................................................................... 61 
7.12. Impact on third countries....................................................................................... 64 
8. Monitoring and evaluation ......................................................................................... 65 Annex I. Overview of existing CRA Regul ation and Possible new initiatives on CRAs 
(preferred options)...................................................................................................... 67 
Annex II. Stakeholder Consultation......................................................................................... 77 
 
 3/193  1 – Summary of Responses to the Public C onsultation Paper on new initiatives of CRAs 77 
2 – Roundtable on Credit Rating Agencies ......................................................................... 82 
Annex III. International context............................................................................................... 86 
1 – Overview ................................................................................................................... .... 86 
2 – Summary of FSB Report on overrelia nce to external credit ratings ............................. 87 
3 – Basel Committee on Banking Supervision.................................................................... 88 4 – IOSCO disclosure principles for public offe rings and listings of a sset-backed securities
............................................................................................................................... 90 
5 – Comparison of the existing regulatory  frameworks for CRAs in EU and US .............. 91 
6 – Regulatory Changes in the US vs. EU new initiatives on credit rating agencies........ 100 
Annex IV. Overview of CRA market..................................................................................... 105 Annex V. Overview of recent voluntary initi atives undertaken by major CRAs to enhance 
ratings quality........................................................................................................... 117 
Annex VI. Problem definition – ba ckground and technical details ....................................... 125 
Annex VII. Description of options......................................................................................... 147 Annex VIII. Analysis of the impact of policy options on stakeholders ................................. 154 
Annex IX. Encouraging an existing, independe nt EU structure or promote a brand new 
European Credit Rating Agency to issue sovereign debt ratings............................. 159 
Annex X. European Network of Small a nd Medium-sized Credit Rating Agencies............. 161 
Annex XI. European Credit Rating Agency........................................................................... 164 Annex XII. Assessment of administra tive burden and compliance costs .............................. 168 
Annex XIII. Coherence with ma in legislative initiatives....................................................... 182 
ANNEX XIV – Additional Technical Changes ..................................................................... 187 Annex XV. Measures against Over-relian ce on External Credit Ratings in CRDIV ............ 188 
Annex XVI. Glossary............................................................................................................ . 189 
 
 
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1. INTRODUCTION  
Regulation (EC) No 1060/2009 on credit rating agencies1 (CRA Regulation, CRA I) entered 
into full application on 7 December 2010. It requires  credit rating agencies (CRAs) to comply 
with rigorous rules of conduct in order to mitigat e possible conflicts of interest, ensure high 
quality and sufficient transparency of ratings and the rating process. Existing CRAs had to 
apply for registration by 7 Sept ember 2010 and had to comply w ith the requirements of the 
Regulation by that date. Competent authorities coordinated by the European Securities and 
Market Authority (ESMA)2 are currently assessing the remaining applications for 
registration.3 
Furthermore, on 11 May 2011 an amendment to the CRA Regulation (CRA II)4 was adopted, 
entrusting the European Securities and Markets Authority (ESMA)5 with exclusive 
supervisory powers over credit ratin g agencies registered in the EU in order to centralise and 
simplify their supervision at European level. From 1 July ESMA is empowered with 
comprehensive investigatory powers including th e possibility to demand any document or 
data, to summon and hear persons, to conduct on-site inspections and to impose 
administrative sanctions, fines and periodic penalty  payments. From that date ESMA is also in 
charge of any new application for registration. 
However, a number of issues related to credit rating activities and the use of ratings are not 
addressed in the existing CRA Regulation. These re late notably to the risk of over-reliance on 
credit ratings by financial market participants, the high degree of concen tration in the rating 
market and, to a certain extent, remuneration models used by the credit rating agencies.  
Although there are a number of smaller CRAs, the rating market is dominated by three major 
CRAs6 (Fitch, Moody's and Standard & Poors)7, with a combined market share above 95 % 
globally.8 Strong economies of scale in the sector as  well as reputation of CRAs, which is a 
crucial asset, limit market entry. The specificiti es of certain categories of ratings, notably 
                                                 
1  Regulation of the European Parliament and of th e Council on credit rating agencies of 16 September 
2009, OJ L 302, 17.11.2009. 
2  The European Securities and Market Authority (E SMA) has been established by Regulation (EU) No 
1095/2010 of 24 November 2010. It is an independent EU Authority that has been entrusted with the 
authorisation and supervision of CRAs, contributes to safeguarding the stability of the European Union's financial system by ensuring the integrity, transparency, efficiency and orderly functioning of 
securities markets, as well as enhancing investor protection. 
3  As of 17.8.2011 eight out of 35 applicant CRAs have been registered or certified and the remaining 
decisions on registration are expected in September 2011 (see ESMA list of registered CRAs in Annex 
IV. 1.1. 
4  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. 
5  Regulation (EU) No 1095/2010 of the European Parliament and of the Council established the 
European Supervisory Authority (European Secur ities and Markets Authority) (ESMA), OJ L 331, 
15.12.2010, page 84. 
6  A list of all registered CRAs can be found in Annex IV. 
7  Standard & Poor's and Moody's Investors Service have their head office and main management, 
administrative and supervisory bodies in the US. They operate in the EU  through subsidiaries 
established in several Member States. Moody's Investor Services is owned by Moody's Corporation 
(listed in New York Stock Exchange - NYSE). Standard & Poor's is owned by the American publisher Mc Graw-Hill (which is a listed entity at NYSE). F itch is dual-headquartered in New York and London 
and is a subsidiary of the French financial company Fimalac (listed in Euronext Paris). 
8  Finance – FAZ.NET, S & P, Mood y’s and Fitch: Brussels’ battle against the rating oligopoly, June 
2011. Available from: http://financesjourna l.com/finances/moodys-fitc h-brussels-battle-rating-
oligopoly-5972.html .   
 
 5/193  related to sovereign debt instruments, are no t sufficiently addressed either. In particular, 
during the recent Euro debt crisis9, CRAs were criticised with re gard to the transparency and 
quality of the sovereign debt ratings and the question was raised whether the EU regulatory 
framework for CRAs needed to be further streng thened to address this. Finally, conflicts of 
interest linked to the shareholder structure of CRAs and civil liability of CRAs are also not 
sufficiently addressed in the CRA Regulation. 
2. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES  
2.1. Legislative process and consultation 
Following the Communication of the European Commission ("Regulating Financial Services 
for Sustainable Growth") of 2nd of June 201010, in which the Commission announced the need 
to examine whether further regulation is ne eded in the area of CRAs, the European 
Commission conducted a public consultation from 5 November 2010 to 7 January 2011 to 
tackle issues not yet sufficiently addre ssed in the current regulatory framework.11 The 
Commission received approximately 100 contributi ons from stakeholders which have been 
taken into account in the Impact Assessmen t. A summary of responses to the public 
consultation paper can be found in Annex II section 1.   
On 8 June 2011 the European Parliament  issued a non-legislative report on CRAs.12 Among 
other proposals, the report suppor ts measures and initiatives th at would make market players 
(investors, banks, central banks) more engaged in risk analys is, reducing their over-reliance 
on ratings. In addition, the report  calls for support for the creat ion of networks of smaller 
CRAs and for the establishmen t of a European Credit Rati ng Foundation and supports the 
establishment of a civ il liability regime.  
On 6 of 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 in 
Annex II section 2.  
2.2. Steering Group 
A Steering Group for this Impact Assessment wa s formed by representatives of Directorate 
General Internal Market and Services, Direct orate General Competition, Directorate General 
Economic and Financial Affairs, Directorate General Enterprise, Directorate General Justice, 
Directorate General Budget, the Legal Service a nd the Secretariat General and met three times, 
on 28 January, 4 May and 14 July  2011. The contributions of th e members of the Steering 
Group have been taken into account in the cont ent and shape of this impact assessment. 
2.3. Impact Assessment Board 
DG MARKT services met the Impact Assessm ent Board on 5 of October 2011. The Board 
analysed this Impact Assessment and deliv ered its opinion on 7 October 2011. During this 
meeting the members of the Board provided DG MARKT services with comments to improve 
the content of the Impact Assessment that led to  some modifications of  this final draft.  
                                                 
9  A description and detailed analysis of the Euro debt crisis can be found in Annex VI.  
10  Communication from the Commission to the European Parliament, the Council, the European 
Economic and Social Committee a nd the European Central Bank. Regulating financial services for 
sustainable growth, COM(2010) 301 final. 
11  Notably related to overreliance on external credit ratings, sovereign debt ratings, competition in the 
rating industry, civil liability of credit rating agencies and conflicts of interest due to the "issuer-pays" 
model. 
12  European Parliament resolution of 8 June 201 1 on credit rating agencies: future perspectives, 
2010/2302(INI). Dr. Wolf Klinz was th e rapporteur of this resolution. 
 
 6/193   
The main comments were the following:  
- Strengthen the analysis of impacts for so me options and, specifically, on the proposed 
additional powers of the ESMA; 
- Improve the analysis on implications of the limited territorial and jurisdictional applicability 
of EU law when evaluating the eff ectiveness of individual measures; 
- Individual policy options shoul d be completed by a deeper a ssessment of the overall impact 
and proportionality of the preferred package of policy options; 
- Stakeholders' views should be discussed more ex tensively in the main text of the report.   
 
3. POLICY CONTEXT  
3.1. Role of CRAs and importance of ratings  
CRAs are companies recognised in the markets as  independent providers of credit opinions 
(ratings13). Their main business is to perform anal yses and to issue op inions regarding the 
creditworthiness of companies ("corporate") and governments ("sovereign"). They also 
provide credit opinions on a wide range of mo re complex financial debt instruments, 
including structured finance products.  
CRAs have a major impact on the financial market s, with ratings actions closely followed by 
investors, borrowers, issuers and governments. Investors rely on ratings as key information in 
determining investment decisions, depending on th e degree of risk they are willing to accept. 
The rating given to an issuer or security will a ffect the cost of raising capital. Very often, a 
deterioration of a debtor's cred itworthiness reflected in a rating change may trigger particular 
contractual obligations (e.g. imme diate debt repayment). Finally, there are references to credit 
ratings in financial regulation14, most prominently in the Capital Requirements Directive15 
(CRD), under which credit instituti ons are entitled to use ratings  for the calculation of their 
capital requirements. However – and with the in tention to reduce reliance on ratings - the 
proposal for a revised Capital Requirements Di rective (CRD IV), adopted by the Commission 
on 20 July 201116, provides banks with an in centive to use internal rath er than external credit 
ratings for the purposes of calculating regulatory capital. Also, financial institutions' internal 
risk management shall not rely solely  or mechanically on external ratings. 
Moreover, in the last few years the demand  for sovereign debt ratings has increased 
dramatically as more and more governments and financial institutions borrow on international bond markets. Sovereign credit ra tings have an important signall ing effect to investors and 
                                                
 
13  See definition in Article 3 (1) a of the CRA Regulation 
14   An overview of all references in EU financial regulation can be found in Annex 1 of the Commission 
consultation paper on CRAs of 5.11.2010, available from: 
http://ec.europa.eu/internal_market/consultations/docs/2010/cra/cpaper_en.pdf .  
15 Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the 
taking up and pursuit of the business of credit ins titutions (recast). OJ L 177, 30.6.2006, p. 1–200. An 
explanation on the Directive can be found in annex 9.1. 
16  COM(2011) 453 final and COM(2011) 452 final. 
 
 7/193  rating downgrades can lead  to "spillover effects"17, with a destabilizi ng impact on financial 
markets.18 
The euro area sovereign debt cris is has highlighted the interdep endence of different financial 
markets and the contagion effects that rating changes may exert on the broader euro area 
economy. Although government officials generally cooperate with credit rating agencies and 
should in principle anticipate s overeign credit rating changes, many euro area Member States 
have recently experienced unexpected sovereign downgrades. This observation prompts 
issuers, investors and regulators to question th e consistency, rationale and transparency of 
sovereign ratings, especially know ing that sovereign debt ratings  have a significant impact not 
only on funding costs of the affected country but  also on its financial sector and on the 
economies of other euro area Member States.19 
3.2. Overview of the credit rating market 
The credit rating market is oligopolistic and is effectively dominated by  three large agencies 
operating globally: Standard & Poor's, Moody’ s Investors Service and Fitch Ratings. 
Moody’s and Standard & Poor's have a combined market shar e of circa 80%, while Fitch’s 
market share is approximately 15%.20  In the United States, the SEC reported in 2011 that 
these same three firms issu ed 97% of outstanding ratings21 and earned over 98% of ratings 
revenues. Medium and smaller credit rating agencies often cater to very specific market needs. 
Among them, Dominion Bond Rating Service (DBRS), Japan Credit Rating Agency, Ltd. and 
Rating and Investment Information, Inc. are we ll established regional players (in Canada/US 
and Japan respectively) with ambitions to develo p their international market presence. Finally, 
there are a number of local rating agencies active in different countries, issuing rating 
opinions both for general purposes and for specialised uses; their impact on the global 
financial markets is nonetheless marginal. For mo re details on the CRA market structure, see 
Annex IV. 
3.3. International-level initiatives on CRAs 
Discussions on regulating CRAs have been very  lively not only in Europe but also on the 
international scene. A full description of the various initiatives summarized in this section can be found in Annex III.  
In October 2010 the Financial Stabi lity Board (FSB) endorsed principles
22 to reduce 
authorities’ and financial inst itutions’ reliance on ratings. This has been approved by the 
                                                 
17  Spill-over effects are externalities of economic activ ity or processes affecting those who are not directly 
concerned. In this particular case,  an externality (or transaction spill-over) is a cost, not transmitted 
trough prices, incurred by a party who did not agree to the action causing the cost. 
18  International Monetary Fund, World Economic and Financial Surveys Global Financial Stability Report, 
October 2010, page 5. Available from: http://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/text.pdf .  
19  The downgrades to near specula tive grade ratings of some Europe an countries have a systematic 
"spillover effects" across Euro zone countries. Th ere is strong correlation between the rating-based 
triggers used in banking regulation, CDS contracts, and investment mandates. The main finding is that 
rating downgrades have statistically significant spill over effects across countries  and financial markets. 
IMF Working Paper, Sovereign Rating News and Financial Markets Spillovers: Evidence from the 
European Debt Crisis, Rabah Arezki, Bertrand Candelon and Amadou N. R. Sy, 2011. Available from 
http://www.imf.org/external/pubs/ft/wp/2011/wp1168.pdf .   
20  See Handelsblatt of 5 July 2011, p. 6 ("Ratingagenturen- die unheimliche Macht") referring to CRA 
data and own research.  
21  US Securities and Exchange Commission (SEC ) 2011 Annual Report on  Nationally Recognised 
Statistical Ratings Organisations, page 7. 
22  FSB, principles for reducing reliance on CRA ratings, adopted on 27 October 2010. Available from: 
http://www.financialstabilityboard.org/publications/r_101027.pdf .  
 
 8/193  G20.23 The FSB principles aim to reduce the "cli ff" effects of ratings that can amplify 
procyclicality and cause systemic disruption. Ma rket participants are expected to make their 
own credit assessments and not to rely so lely or mechanistically on ratings.  
The FSB has asked standard setters and regulators to consider next steps that could be taken 
to translate the principles into policy approa ches tailored to specific financial sectors and 
market participants. In response to the G20 statements 24 and the FSB principles, the Basel 
Committee on Banking Supervision (BCBS) is curre ntly working on specific policy actions to 
reduce reliance on ratings in the regulatory fr amework and make several recommendations 
that will be included in the Basel III rules.25  
In the USA, the Dodd-Frank Wall Street Refo rm and Consumer Protection Act, (the Dodd-
Frank Act)26 has strengthened rules on CRAs. Among other things section 939A of the Dodd-
Frank Act requires federal agencies to review  how existing regulations rely on ratings and 
remove such references from their rules as appropriate. As a consequence, the Securities and Exchange Commission
27 (SEC) is currently exploring ways  to reduce regulatory reliance on 
external credit ratings and replace them with alternative criteria.28  
4. PROBLEM DEFINITION  
The problems described in the following sec tion can be grouped into six broad areas:  
• Overreliance on external credit ra tings leading to "cliff" effects29 in capital markets; 
• "Contagion effects of sovere ign debt rating changes;  
• Limited choice and competition in the credit rating market; 
• Insufficient right of redress for users of ra tings suffering losses due  to an inaccurate 
rating issued by a CRA that in fringes the CRA Regulation; 
• Potentially undermined independence of CRAs due to conflicts of interest arising from 
the "issuer-pays" model, ownership struct ure and long tenure of the same CRA; and 
• Insufficiently sound credit rating methodologies and processes. 
 
These problems are largely interrelated a nd could reinforce each others' effects. 
                                                 
23  G20 Seoul Summit leaders' Declaration,  11-12 November 2010. Available from: 
http://www.g20.org/Documents2010/ 11/seoulsummit_declaration.pdf .  
24  G20, Toronto G20 summit declaration, 26-27 June 2010. Available from:  
http://www.g20 .org/Documents/g2 0_declaration_en.pdf .  
25  These included, for example, proposals to remove or reduce certain "cliff effects" related to ratings 
from the internal-ratings based (IRB) approach and standardised approach (SA). In particular, the Ratings and Securitisation (RS) group is now working on addressing adverse incentives and cliff effects 
arising from the use of ratings through: (i) the reca libration of risk weights for securitisation exposures 
under the ratings-based approach, including to reduce "c liff effects"; (ii) the revi ew of the hierarchy of 
approaches in the securitisation framework with th e aim of reducing the predominant role played by 
external ratings; and, (iii) the enhancement of inte rnal assessment and due diligence requirements. Final 
proposals on these topics are expected to be completed in time for the September 2011 meeting of the Basel Committee. 
26  Dodd-Frank Wall Street Reform and Consumer Protection Act, 29 June, 2010.  
27  SEC Initiatives under New Regulatory Reform Law.  
28  SEC Proposes First in Series of Rule Amendments  to Remove References to Credit Ratings, 9 February 
2011. Available from: http://www.sec.gov/rules/proposed/2011/33-9186.pdf .  
29  "Cliff effects" are sudden actions that are triggered by a rating downgrade under a specific threshold, 
where downgrading a single security can have a disproportionate cascading effect. 
 
 9/193   
While some of these issues, notably issue of  overreliance and independence were already 
recognized when the CRA Regulation was first negotiated, the CRA Regulation did not fully 
address these issues but required the European  Commission to monitor them and make an 
assessment by the end of 2012.30 
                                                 
30  Article 39 (1) of the CRA Regulation. 
 
 10/193   
Requirements to use external credit 
ratings in le gislation
Excessive use of external ratings for 
internal risk management 
Lack of transparency on the 
sovereign rating process Investment strategies directly linked 
to ratings 
Insufficient information on structured 
finance products
Insufficient objectivity and 
completeness of the sovereign rating 
process 
Inappropriate timing of ratings 
publication 
High market concentration in the 
credit ratin g market
Potential conflicts of interest due to 
ownershi p structure
Potential conflicts of interest due to 
the "issuer- pays" model Lack of civil liability regimes in some 
Member StatesHigh barriers of entry into the market 
of credit ratings 
Lack of comparability of ratings 
Risk of regulatory arbitrage Overreliance on 
external ratings 
leading to 
procyclicality and 
"cliff" effects in 
capital markets 
 
 
 
Risks to  
market 
stability 
 
Low 
confidence 
in financial 
market 
 
Undermined 
investor 
confidence 
 
Undermined 
ratings 
quality  Contagion effects 
of sovereign debt 
rating changes 
 
Limited choice and 
competition in the 
credit-rating market 
Insufficient 
right of 
redress for 
investors 
Undermined 
independence of 
credit rating 
agencies
Insufficient communication and 
transparency of ratings and their 
underlying methodologies  
Inappropriate timing of ratings 
publication Insufficiently sound 
credit rating 
methodologies and 
processesProblem drivers Global problems Consequences 
 
 
Figure 1.  Problem tree 
 
 11/193  4.1. Overreliance on external cred it ratings leading to "cliff" effects in capital 
markets 
Under certain economic conditions, market participants' mechanistic and parallel reliance on 
external ratings leads to herd behaviour31and "cliff" effects. This can entail both upward 
market bubbles and downward market spirals which could affect market stability. This 
became evident during the current financial cr isis when worsening economic forecasts put 
pressure on public finances. This, in tu rn, led to a downgrade of sovereign bonds32 below a 
threshold causing simultaneous selling off of debt instruments33 by many financial institutions 
and investors. Thus, overreliance on external rati ngs has exacerbated financial in-stability in 
individual countries, with negative eff ects on the European and global level. 
Use of credit rating in the regulatory regimes 
The current use of credit ratings in the regul atory regimes for banks, insurance undertakings 
and other financial institutions reinforces th is overreliance and discourages financial firms 
from undertaking their own risk assessments and  due diligence.  
Reference to external ratings in regulatory capital frameworks  of financial institutions may 
lead to sudden rises in capital requirements once a rating action occurs.34 In reaction to a 
financial instrument's significant downgrade, many firms using a regulatory approach relying 
on external ratings may decide in parallel to sell off the downgraded instrument which may 
cause a downward price spiral  with potential negative effects on financial stability.35  
In the banking sector the use of external ratings is explicitly envisaged by the Capital 
Requirements Directive36, which requires the use of external ratings for measuring capital 
requirements under the standardised approach.37 38 In the insurance sector, neither the existing 
framework of insurance39 and reinsurance40 directives (commonly refe rred to as "Solvency I") 
                                                 
31  Herd behaviour implies systematic and erroneous decision-making by a group. Intuitively, investors can 
be said to herd if they would have made an investment without knowing other investors’ decisions, but refrain from making that investment when they learn that others have decided not to do so. See The 
Financial Cycle, Factors of Amplification and possible Policy Implications for Financial and Monetary 
Authorities, Banque de France, Bulletin No 95, November 2001, p.68. Available from: http://www.banque-france.fr/gb/publications /telechar/autres_telechar/fincyc95.pdf
.  
32  Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis, 
Rabah Arezki, Bertrand Candelon, Amadou Sy, CESIFO Working Paper No. 3411, Category 7: Monetary Policy and International Finance, April 2011.  
33  See section 4.2. Contagion effect of sovereign debt ratings. 
34  There is evidence that credit ratings affect a firm ’s cost of capital specifically due to the regulations 
based on ratings. See Darren J. Kisgen Philip E. Straha n, Do regulations based on credit ratings affect a 
firm’s cost of capital?, March 2009. 
35  There spillovers from the Sovereign to the Banks and Banks to Sovereigns, International Monetary 
Fund, Global Financial Stability Report, Sovereigns, Funding and Systemic Liquidity. October 2010, p. 
4. Available from: http://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/text.pdf .   
36  Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the 
taking up and pursuit of the bu siness of credit institutions (r ecast) (OJ L 177/1, 30.6.2006). 
37  The standardised approach has received little resear ch attention even though  some estimates indicate 
that 30% of European banks have adopted it. Source: Patrick Van Roy, Credit Ratings and the 
Standardise Approach to Credit Risk in Basel II, p. 5. The European Central Bank, Working paper 
series No. 517, August 2005. Available from: http://www.ecb.int/pub/pdf/scpwps/ecbwp517.pdf .  
38  Articles 94, 96 Directive 2006/48/EC. 
39  Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002 concerning 
life assurance, OJ L 345/1, 19.12.2002. First Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of 
the business of direct insurance other than life assurance OJ L 228,16.8.1973; Council Directive 
78/473/EEC of 30 May 1978 on the coordination of laws, regulations and administrative provisions relating to Community co insurance OJ L151, 7.6.1978; Council Directive 87/344/EEC of 22 June 1987 
on the coordination of laws, regulations and admini strative provisions relating to legal expenses 
 
 12/193  nor the "Solvency II" Framework Directive41, which has revised the existing solvency regime 
and introduced risk-oriented solvency requirement s, contain any reference to external ratings. 
Such references may however be considered in the future implementing measures of the 
Solvency II framework directive in orde r to specify the standard formula. 
Reliance on external ratings for (credit/market)  risk management and investment decisions 
Use of external ratings for (credit/market) risk  management may lead to herd behaviour as a 
rating actions may trigger parallel reactions in many financial firms42, all relying 
mechanistically and solely on external ratings , issued by a small numb er of credit rating 
agencies.43  
Financial firms basing their investment decision s solely on external ra tings without carrying 
out their own risk assessment may not have the necessary understanding of the financial 
instrument in which they invest. Furthermor e, the publicly disclosed information about 
structured finance products is often insufficient for investors to adequately assess risks related 
to specific financial instruments and therefor e forces them to rely on external ratings. 
In a similar fashion investment policies and the mandates of portfolio and asset managers 
often make reference to external ratings wh en defining the minimum credit quality for a 
portfolio or performance benchmarks. Investors often require investment managers to adhere 
to minimum credit quality standa rds defined by external ratings.44 This provides a relatively 
simple and transparent mechanism for investors to  control and monitor the credit risk of the 
assets in which the manager invests. Even if the widespread use of ratings in investment 
policies, mandates and other commercial contra cts is not a direct consequence of EU 
legislation, it may exacerbate th e "cliff" effects associated with rating downgrades, where 
investment managers are obliged to sell off financial instruments no longer complying with 
the credit quality standards specified in their mandate or policy. The simultaneous sale of debt 
instruments triggered by a downgrade may result in losses to investors45 and increase market 
                                                                                                                                                         
insurance OJ L 185 4.7.1987, p.77; Second Council Directive 88/357/EEC of 22 June 1988 on the 
coordination of laws, regulations and administrative provisions relating to direct insurance other than 
life assurance and laying down provis ions to facilitate the effective exercise of freedom to provide 
services OJ L 172, 4.7.1988 p.1; Council Directive 92/49/EEC of 18 June 1992 on the coordination of 
laws, regulations and administrative provisions rela ting to direct insurance other than life assurance 
(third non life insurance Directive) OJ L 228, 11.8.1992. 
40  Directive 2005/68EC of the European Parliament and of the Council of 16 November 2005 on 
reinsurance, OJ L 323/1, 9.12.2005. 
41  Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the 
taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) , OJ L 335, 
17.12.2009. 
42  Credit institutions, investment firms, insurance and reinsurance undertakings, pension funds, investment 
managers. 
43  Moody’s (2001) describes three instances of rating-trigger-related "mutual assured destruction" during 
2000–01: (1) collapse of Enron: in that case, trading and other financial agreements gave counterparties 
the right to demand cash collateral, and lenders the right to demand repayment of outstanding loans 
once Enron’s credit rating declined below a certain level; (2) PG&E Corporation; (3) Southern California Edison Company. See IMF - Global Financial Stability Report - autumn 2010, p. 8. 
Available from: http://blogs.sciences-po.fr/recherche-pr edictions/files/2010/12/gfsr-201010-3-
sovereign_ratings-imf-global-stability1.pdf .    
44  Many investors have mandates limiting what they can invest in, and these are normally linked to ratings, 
so they will have a bucket allocated to triple-A se curities, to double-A and so on. If they cannot fill 
those buckets, then they cannot fulfil their mandate. See Banking Supervision and Regulation - 
Economic Affairs Committee, Chapter 6: Ratings Agencies, section 167, Parliament UK. Available 
from: http://www.publications.parliament.uk/pa/ld200809/ldselect/ldeconaf/101/10109.htm .  
45  The thousands of mortgage-related securities rated by Moody's in 2006, 83 % of those rated AAA were 
ultimately downgraded. The impact of these inflated ratings, and their subsequent mass downgrades, 
was far-reaching. CalPERS, on which one and a half  million Californians rely for their pension and 
 
 13/193  volatility.46 Another "cliff" effect may occur when  debt instruments downgraded below a 
certain threshold are re moved from bond market indices used as a benchmark for portfolios. 
Other references to external ratings 
There are also references to external ratings in  Member States' laws and regulations which are 
not required by EU legislation. In June 2009, the Joint Forum47 undertook a stock take of the 
use of ratings which showed the use of external credit ratings in the national legal orders of 
many EU Member States.48  
Furthermore, the ECB uses credit ratings for the purpose of defining se curities acceptable as 
collateral in market operations. The definition of eligible securities includes the requirement for the issuer to have a satisfactory credit ratin g from two or more of the leading credit rating 
agencies. This practice may induce banks to sell off securities once they lose their eligibility 
as collateral, which further reinforces "cliff eff ects". One could claim that, to a certain extent, 
this ECB policy also sends a wrong signal to th e whole banking industry what an acceptable 
level on external reliance should be. However, th e ECB stated in its contribution to the public 
consultation that it has started a process to  enhance and develop further its internal 
capabilities to independently assess the creditw orthiness of issuers fo r its own purposes. In 
this regard it should also be noted that the cr edit assessment framework of the Eurosystem is 
decided independently by the ECB Governing Council. 
Also the European Financial Stability Facility (EFSF)
49 framework agreement50 of 7 June 
2010 between the EFSF and the "euro-area Member  States" or "EFSF Sh areholders" sets out 
detailed operating conditions of the EFSF th at contain references to external ratings.51 The 
European Financial Stability Mechanism will be replaced by a new instrument as of 2013, the 
European Stability Mechanism (ESM). The treaty establishing the ESM52 does not contain 
any direct references to external ratings.  
For more detailed information on references to  ratings in EU Financ ial Regulation, see Annex 
VI. section 2.1.  
4.2. Contagion effects of sovereign debt rating changes 
Spillover and contagion effects 
                                                                                                                                                         
health benefits, estimated it lost $1 billion. It is estimated that pensioners in Ohio lost about half a 
billion dollars. The direct effect of these mass cr edit downgrades on retirement savings nationwide is 
almost certainly in the tens of billions of dollars. As a result of the financial collapse more broadly, 
Americans' retirement savings saw losses of about $2  trillion. Information source: Official letter from 
US Senate (Al Franken and Roger F. Wicker, US Senators) to Chairman of SEC (Mary L. Schapiro) on 
the implementation of the Franken-Wicker amendm ent on assigned credit ratings and also other 
relevant policy measures, 14 September 2011.  
46  Ibid Moody’s (2001). 
47  The Joint Forum was established in 1996 under the aegis of the Basel Committee on Banking 
Supervision (BCBS), the International Organiza tion of Securities Commissions (IOSCO) and the 
International Association of Insurance Supervisors (I AIS) to deal with issues common to the banking, 
securities and insurance sectors.  
48  The Joint Forum, Stocktaking on the use of credit ratings, June 2009. Available from: 
http://www.bis.org/publ/joint22.pdf .    
49  The EFSF is a "société anonym e" incorporated in Luxembourg. 
50  http://www.efsf.europa.eu/attachment s/efsf_framework_agreement_en.pdf .  
51  More particularly, point 2 (3) regarding issues of guarantees states that the EFSF may also request the 
Guarantors to issue Guarantees under this Agreemen t for other purposes which are closely-linked to an 
issue of Funding Instruments and which facilitates the obtaining and maintenance of a high quality rating for Funding Instruments issued by  EFSF and efficient funding by EFSF. 
52  Treaty establishing the European Stability Mechanism (ESM) signed on 11 July 2011, currently under 
ratification by the Eurozone Member States. http://www.efsf.europa.eu/attachments/esm_treaty_en.pdf .  
 
 14/193  The recent market developments have highlight ed the magnitude of the potential impact of 
sovereign ratings which goes far beyond the i mmediate effects on the bond markets of the 
rated countries and can result in negative spillovers across ma rkets and even across countries 
which have significant economic linkages. Th e multiple effects of sovereign ratings on 
financial markets can be described as follows: 
• Firstly, sovereign debt ratings play a crucia l role in determining a country's borrowing 
costs. Empirical evidence53 shows that sovereign rating events have a statistically and 
economically significant effect on  yield spreads.54 It is worth observi ng that available 
research shows that there is asymmetry in mark et reactions, i.e. while there is a significant 
reaction of sovereign yield spreads (and partic ularly CDS spreads) to  negative events, the 
reaction to positive events is much more muted.55 
• Secondly, sovereign rating events may have spillover effects within the country across 
markets  (from government bond markets to corporat e bond markets to equity markets) 
with huge impact on the cost and access to ex ternal funding for wide range of entities 
(including public administrations, local gov ernments and financial institutions). A 
sovereign rating is indeed one of the factor s which heavily influences the assessment of 
the counterparty risk and serves often as a general benchmark for all other credit ratings 
for all the entities located in the country. Furt hermore, the highest rating possible for most 
entities located in a coun try is often capped by the country's own rating.  
Multiple examples over the past year of a downgrade of a Member State immediately 
followed by a downgrade of financ ial institutions of that country illustrate the importance 
of a sovereign rating for ratings of fina ncial institutions located in the country 
experiencing a rating change. An example of this relation between sovereign ratings and 
ratings of financial institutions can be illu strated by the recent dow ngrade of Portugal by 
Moody's on the 6th of July 2011 followed by a downgrad e of four Portuguese financial 
institutions the following day. Another exam ple is provided by the downgrade of Italy by 
Standard and Poor’s on 20 September 2011 and by Moody’s on 4 October 2011 which 
were followed a few days after by the downgrad e of some of the major Italian financial 
and non-financial companies and local authorities. 
• Finally, sovereign debt ratings may trigger contagion effects beyond the borders of the 
country directly affected by the rating event. Economic literature56 demonstrates that the 
                                                 
53  Sovereign downgrades have a negative impact on sovereign bond yield spreads and can have spillover 
effects as demonstrated by: Alfonso, Furceri, Gomes, "Credit ratings and the Euro Area Sovereign Debt 
crisis" University of Freiburg, 2011, p3. As an example, yield spread of Portugal sovereign debt rose on 2-year and 10-year sovereign bonds rose to respec tively 8.971% and 8.766% after the downgrade by 
Moody's on 5 April 2011 from A3 to Baa1, following an earlier Moody's downgrade of 2 notches on 
16 March 2011.  
54  The yield spread is the difference between the quoted rates of return on two different investments, 
usually of different credit quality. An analysis of  spread developments around the time of rating 
announcements shows that sovereign downgrades are followed by rising sovereign spread changes as 
demonstrated in "European Economic Forecast, Sp ring 2011", Staff Work ing document, European 
Commission; Directorate General Economic and Financial Affairs, pag. 44-45.  
55  See Antonio Afonso, Davide Furceri, Pedro Gomes, Sovereign ratings and financial markets linkages. 
Application to European data. ECB paper n. 1347, June 2011. It is also interesting to observe that 
according to the Authors the reac tion of CDS spreads to negative  rating events has increased 
considerably after the beginning of the crisis (i.e. the 15.9.2008 – day of Lehman bankruptcy). 
56  Rabah Arzeki, Bertrand Candelon and Amandou N.R.Sy, IMF Working Paper, Sovereign Rating News 
and Financial Markets Spill-overs: Evidence from the European Debt Crisis, March 2011, WP/11/68. The paper demonstrates that sovereign downgrades have statistically and economically significant spill-
over effects both across countries and financial markets. Their magnitude depends on the type of 
announcement, the specific country a ffected by the rating decision and the specific CRA that issued the 
 
 15/193  excessive prominence given to sovereign de bt ratings by market actors, including 
financial institutions and institutional investors, generates cliff effects57 within the 
economy of the downgraded or upgraded countr ies as well as in  economically linked 
regions. Also in this context it has been shown that negative announcements have the most significant effects
58, particularly from lower rated c ountries to higher rated countries, 
with potential contagion of neighbouring countries. 
Factors amplifying spill-over effects 
Recent market developments show that negative spill over effects attached to sovereign rating 
changes are amplified by a series of factors (' drivers') which can exacerbate a situation of 
crisis and result in spreading financial instability across markets and countries. In view of the implications of sovereign ratings on the wide r economy the hereafter described problems and 
drivers suggest the application of  the precautionary principle.  
The first problem driver behind the describe d spill-over effects relates to overreliance on 
external ratings, which was addressed in sectio n 4.1. In the event of a sovereign downgrade, 
ratings-based rules
59, such as regulatory cap ital requirements and ECB collateral guidelines, 
can prompt automatic sell-off orders of sove reign debt, creating spill-over effects to the 
broader economy. The recent events affecting particularly the euro area sovereign debt 
markets provide a good illustration of these mechanisms. 
Another factor which is relevant in amplifying contagion effects of sovereign ratings is the 
important degree of subjectivity of  the sovereign rating processes and to some extent the lack 
of consistency of CRA’s behaviour over time. Indeed recent research  show a substantial 
increase of the 'arbitrary component' of th e sovereign ratings over the recent years, 
particularly in 2009 and 201060, and point at the existence of subjective biases in favour or 
against the rated nations to (partly) explain th e differences in sovereign ratings given by two 
of the major Rating Agencies.61 This could be explained, inte r alia, by the higher reputational 
risk attached to rating misspecification in a cont ext of economic crisis and lack of investor's 
confidence which may lead CRAs to be 'keener ' on lowering sovereign ratings (while CRAs 
could be keener to attr ibute higher ratings in boom times, when investor 's trust tends to rise).62  
The lack of consistency of CRAs' behaviour can prompt market over (or under)reactions since 
the markets do not 'understand' sufficiently the message the Rating Agency is trying to 
communicate when it ventures an opinion on the future solvability of the country.  
                                                                                                                                                         
rating. Furthermore, they find evid ence that downgrades to near spec ulative grade ratings for relatively 
large economies such as Greece ha ve a systematic spill-over effect. 
57  Cliff effects in this context are sudden actions th at are triggered by a rating downgrade under a specific 
threshold. They may for instance occur if a specific sovereign debt is downgraded to non-investment 
grade and following this downgrade many investment managers have to sell off this instrument when it no longer corresponds to their investment policies or mandates.  
58  Ferreira and Gama demonstrate that sovereign rati ng downgrades are associat ed with an economically 
and statistically significant negative return spread in stock market of neighbourhood countries while upgrades abroad have no discer nible impact. Furthermore they s how that geographic distance is 
inversely related to the spillover impact. See Ferreira and Gama, Does sovereign debt ratings news spill 
over to international stock markets, Journal of Banking & Finance, 2007.   
59  Rabah Arzeki, Bertrand Candelon and Amandou N.R.Sy, IMF Working Paper, Sovereign Rating News 
and Financial Markets Spillovers: Evidence from th e European Debt Crisis, March 2011, WP/11/68. 
60  See Gartner, Griesbach and Jung, PIGS or Lambs? The European Sovereign Debt Crisis and the Role of 
Rating Agencies, Univerity St. Gallen, 2011.  
61  See S. Iyengar, Are Sovereign Credit Ratings objective and Transparent? IUP Journal of Financial 
Economics, 2010. The Author argues, comparing Moody's and S&P's sovereign ratings of 1995 with those of 2007, that: 1) there has been considerable increase in the average di fference in the ratings 
provided by the two agencies; 2) th e differences in their ratings are due to the subjective assessments of 
the countries by the two rating agencies.  
62  See Afonso and Gomes, Do fiscal imbalances deteriorate sovereign debt ratings?, ISEG, 2010 
 
 16/193  Moreover recent events showed that some rate d countries have questioned the accuracy of 
sovereign ratings and have complained that possibly not all the avai lable and up-to-date 
information being used and not all relevant s cenarios being taken into  account. This could 
reinforce the feeling that rating events are ba sed more on subjective perceptions rather than 
objective indicators and parameters. Examples are provided by the cases of the downgrading 
by Standard and Poor's of Greek sovereign cr edit on 29 March 2011 and of the change by the 
same Rating Agency of the outlook for Italy fr om stable to negative on 21 May 2011. In both 
cases the Ministries of Finances  of both Countries complained about the lack of accuracy of 
the rating agency. In particular in the first case Greek authoritie s complained about the lack of 
an adequate assessment of the latest European  Council's decisions and, in the second case, 
Italian authorities criticized th e worsening of the outlook wit hout any justification due to 
changes in the fundamentals of the country  and only on the basis of the subjective 
appreciation of a risk of "political gridlock63  
Another problem driver specific to sovereign ratings is the lack of transparency on the 
sovereign rating process both in terms of insu fficient disclosure of the methodology and of 
underlying assumptions64 and in terms of inadequate communication with the issuers. 
Reasons for changing sovereign ratings ar e sometimes inadequately communicated and, 
despite the level of disclosure required by Article 10 of Regulati on 1060/2009, often remain 
unclear to the public, which may trigger signi ficant investor overreactions. Investors do not 
always have all the necessary informati on (on models, on underlying assumptions, on 
indicators, on the weight given to the different indicators) to fully decrypt the rationale behind 
the sovereign rating event. This in turn can st rengthen the perception of the relevance of the 
subjective component of ratings and send out  the wrong signals to the investors.  
This is also applicable to the rated country's public authorities which do not always have 
sufficient understanding of the variables and methodologies used by the rating agency and 
cannot always check in advance the accuracy of  the information on which the rating is based 
nor challenge, where appropriate , the conclusions of the rating agency. The current enforced 
notification period of 12 hours, ap pears to not be adequate for sovereigns to verify if the 
rating event is based on accurate and up-to-date da ta. This increases the risk of incorrect or 
outdated data not being timely removed before th e rating process is finalised, which in turn 
can undermine the quality of the sovereign rating issued. An example of this problem is the 
downgrade of Greece and Spain by Moody's, three days and one day respectively before the 
Council meeting on the extension of the EFSF support package by 440€ billion on 11 March 
2011, when it appeared that the informati on in the package under negotiation was not 
completely reflected in the rating process. Anothe r example of the risks of incorrect data used 
for sovereign ratings by rating agencies was hi ghlighted after the recent downgrade of the US 
in August 2011.65 
                                                 
63  See press releases of the Ministry of Finance of the Hellenic Republic on 29 March 2011 ("Press release 
on the downgrade of Greek sovereign credit by Standard and Poor's") and  of the Italian Ministry of the Economy – Treasury on 21 May 2011 ("Tesoro: l'Italia rispetterà gli impegni presi").Other examples in 
that sense are provided by the four-notch downgrade of Portugal on 5 July 2011 by Moody's which 
unleashed strong criticism by, inter alia, the German Minister of Finance W. Schauble for not being substantiated by adequate analytical elements and by the downgrade of the USA by Standard and Poor's 
on 5 August 2011 which was heavily criticized by th e US administration after Treasury officials had 
discovered that the rating agency's estimates of the government's discretionary spending was $2 trillion 
too high. See for instance Reuters, Obama officials attack S&P’s credibility after downgrade, 6 August 
2011, available at http://www.reuters.com/ article/2011/08/06/usa-rating-sp-error-
idUSN1E77500420110806. 
64  It should be noted that Regulation 1060/2009 on rating agencies has introduced transparency 
requirements for all types of ratings. However, there are no specific rules for sovereign ratings.  
65  The downgrade of the USA by Standard and Poor's on 5 August 2011; available at 
http://www.reuters.com/article/2011/08/06/ usa-rating-sp-error-idUSN1E77500420110806 .  
 
 17/193  Another problem driver is repr esented by the timing of ratings publication has proved to be 
not suitable for the specific relevance and poten tial impact of sovereign ratings on markets. 
Actually current practices of publishing sovereig n ratings when markets are open, particularly 
when this happens just before markets close, en tails the risk of stimulating market volatility.66 
This was the case, for instance, of the downgrade of Greece by Standard & Poor's on 27 April 2010, which occurred a few days before the adop tion by the Council of the EU of the rescue 
package on 6 May 2010, which at the time of th e decision of the Agency was still under 
negotiation.  
Finally, CRAs have been criticised for lagging rather than leading the market and for not 
revising sovereign ratings in a timely manner.
67  
4.3. Limited choice of rating agencies a nd ratings for issuers and investors 
The analysis of the structure of the market fo r rating services unveils a level of concentration 
which is significantly high (see Annex IV). Th is entails limited choice of rating services 
providers both for investors and issuers, the ex istence of economic rents for rating agencies 
and most likely higher prices. Furthermore,  the market is characterised by relevant 
"reputational" barriers which can prevent new potential competitors to enter the market (for more information, see Annex VI. section 2.3) . Moreover existing le gislation on capital 
requirements further aggravates the problem cr eating additional obstacles to potential new 
actors. Indeed, ratings of new market entrants cannot always be used for regulatory capital 
purposes unless they are recognized as Exte rnal Credit Assessment Institution (ECAI) by 
banking supervisors (see below). 
For investors, beyond the issues mentioned abov e, the high market concentration emphasizes 
the problem of overreliance on the fe w international rating agencies. 
High profit margins
68 of the existing CRAs and limited transparency of pricing suggest that 
there are risks of high pricing in the market of credit ratings.69 Moreover the limited 
availability of service providers  reduces the elasticity of the demand, i.e. issuers have limited 
possibilities to change their CRA if they are not satisfied with its performance. Furthermore, 
some segments of issuers, particularly SMEs or small sovereigns, might experience difficulty 
to obtain a rating as not all ma rket segments are adequately covered by the existing rating 
agencies or ratings might be too expensive for these issuers. This can substantially limit capabilities of small and medium sized  issuers to access capital markets.  
Furthermore, as said above, competition is ha mpered by the existence of strong economies of 
scope and of scale and by the relevance of re putation in the market for credit ratings. 
                                                
 
66  Opening remarks by the chairman of the IMF, International Monetary Fund at the IMF High–Level 
Roundtable Washington DC, March 18, 2011. Available from: http://www.imf.org/external/np/speeches/2011/031811.htm
.  
67  Rabah Arzeki, Bertrand Candelon and Amandou N.R.Sy, IMF Working Paper, Sovereign Rating News 
and Financial Markets Spill-overs: Evidence from the European Debt Crisis, March 2011, WP/11/68. 
The paper explains that rating agencies have been slow in reacting towards a potential EU sovereign 
crisis as very limited rating activities of European sovereigns were observed until October 2008. Since that date a large amount (of mainly negative) downgrades have occurred. See also P. Artus, Are the 
credit rating agencies' country ratings partly to bl ame for the public debt crisis?, Natixis Flash 
Economics, May 2010 which clearly shows through  a comparison between CDS markets and ratings 
movements for Portugal, Spain, Greece and Ireland that rating changes follow financial market 
movements instead of preceding them. 
68  For example S&P reported an operational margin of 45 percent in 2010, McGraw Hill 2010 Annual 
Report, p. 24. Accessible from: http://www.mcgraw-hill.com/a bout/annual_rep ort/ar2010.pdf . 
69  Fabian Dittrich, The Credit Rating Industry: Comp etition and Regulation, 2007, p100. Available from:  
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991821 . 
 
 18/193  Moreover ratings from newly registered CRAs ca n face restricted uptake by the market also 
because they cannot be used for regulatory cap ital purposes if they ha ve not been recognised 
as External Credit Assessment Institution (ECAI) by banking supervisory authorities 
according to Article 81(2) in connection wi th Annex VI, part 2 of Directive 2006/48.70 As 
shown in Annex V, only 3 CRAs have been recogni sed as eligible ECAI from the majority of 
national supervisors while all other CRAs have obtained ECAI status in only a very limited 
number of Member States,71 thus limiting the choice for issuer s and investors of CRAs whose 
ratings can be used for regulatory purposes.72 Measures to address this issue have been 
adopted in the proposal for CRD IV.73 
Another factor hindering competition is the abse nce of a standardized rating scale which can 
be particularly detrimental for small CRAs' ra tings lacking a well established international 
status.  
A further barrier to entry can be represented by  the fact that some i ssuers and investors are 
sometimes unaware of all the existing providers  of rating services. However, it should be 
noted that the CRA Regulation partially addresses this prob lem by requiring registration74 of 
all rating agencies and subse quent publication on the ESMA  website which should improve 
the visibility and credibility of new rating agen cies establishing themselves on the EU market. 
A list of authorized CRAs (see Annex IV section 1) has been published in the 'Europa' 
website since June 2011 and is now available on the ESMA website75 since the latter took 
over all the competences and du ties related to the supervisio n of CRAs on 1 July 2011. 
4.4. Insufficient right of redress for investors 
Currently, the CRA Regulation does not establish a specific civil liability regime itself.76 
Investors' claims against CRAs are legally diffi cult to treat under the predominant issuer-pays 
model, where investors do not have a contractua l relationship with the CRA (contrary to other 
financial actors such as banks, insurance companies which usually have a contractual 
relationship with their clients, for instance, an  insurance contract, investment advice contract 
etc). Consequently, an investor suffering a loss due to a flawed rating, in breach of the CRA 
Regulation, can not base clai ms for compensation directly77 on contract law. Whether and 
under what conditions an investor  can claim compensation based on the law of tort or delict 
varies largely according to the le gal orders of Member States.78 Often, liability of CRAs vis-à-
vis investors outside contractual relationships is  subject to restrictive conditions so that in 
                                                 
70  Article 2 (3) of the CRA Regulation states that regi stration is only a precondition to obtain ECAI status 
under Directive 2006/48/EC. According to Article 81 (2) in connection with Annex VI Part 2, 2.1 of 
Directive 2006/48 banking supervisory authorities shall only recognize an ECAI as eligible for capital 
requirement purposes if its ratings are recognised in  the market as credible and reliable which may be 
implied by a relevant market share of the ECAI.  
71  All other CRAs have obtained ECAI status in 6 or less Member States in July 2010. 
72  This is particularly relevant for issuers aiming to sell their debt instruments in an international context, 
requiring an ECAI status in all Member States. 
73  The legislative proposal on Capital Requirement Directive IV was adopted by the Commission on 20 
July 2011. ECAI statute is addressed in Article 130 (2) and article 262 (2) of COM (456), which 
outlines that all registered or certified CRAs under the CRA regulation are eligible ECAIs.  
74  Article 14 of the CRA Regulation. 
75  The list is available at http://www.esma.europa.eu/popup2.php?id=7692 .  
76  Nerveless, Recital 69 of the CRA Regulation stat es that any claim against a CRA in relation to any 
infringement of the provisions of this Regulation should be made in accordance with the applicable 
national law on civil liability. 
77  In Germany there is discussion regarding whether the contract between the CRA and the issuer could 
somehow encompass the investors ("Vertrag mit Schut zwirkung für Dritte"). However, it is unclear 
whether a court would accep t this reasoning.  
78  For more detailed information see Annex VI, section 2.4. 
 
 19/193  practice investors do not seem to have an effect ive right of redress. Th is is confirmed by the 
very limited case law in EU Member States on CRAs' civil liability to wards investors. Also, 
the fact that the conditions under which invest ors can claim damage against CRAs are often 
either not very clear or left to courts' disc retion may in practice prevent investors from 
claiming damage even in cases of clear infringements and gross negligence.  
It is not satisfactory that it is often difficult fo r investors to claim damage from CRAs. This is 
not consistent with the general principle of ci vil law that each person infringing its obligations 
towards another person acting negligently or with  intent, thereby causing damage to the other 
person, should be held liable. Investors have an evident interest in good quality ratings as they 
use ratings as a basis for invest ment decisions. This implies th at CRAs have an obligation of 
due care towards investors as specified in  many requirements of the CRA Regulation.79 
 Differences between Member States' civil liabilities regimes applicable to CRAs lead to different levels of protecti on for investors and could ev en incentivise forum shopping 
whereby CRAs try to achieve the application of the law of a Member State where civil 
liability for infringements of the CRA Regulation is less likely. 
The results of ESMA Survey on Member States' ci vil legal orders in re spect of provisions on 
which investors could base claims against CRA s having infringed the CRA Regulation can be 
found in Annex VI. section 2.4. This shows that  in some Member States, including Poland 
and Sweden, such civil claims would not be possible. 
4.5. Potential conflicts of interest and ot her issues linked to credit rating 
methodologies and processes 
Conflicts of interest due to remuneration models 
One of the sources of potential conflict of interest is the prevailing remuneration model under 
which an issuer solicits and pays a CRA to rate its own debt inst ruments ("issuer-pays 
model"). There is empirical evidence that larg e issuers of structured finance instruments 
received more favourable ratings than smaller issuers during the booming period leading to 
the financial crisis which can be explained by the fact that  especially larger issuers 
contributing significantly to th e income of a CRA, used thei r bargaining power to achieve 
higher ratings (which were not justified).
80 In fact under the issue r-pays model CRAs have a 
financial incentive to generate business from ra ted issuers, risking the issuance of overinflated 
ratings in order to increase or keep business. 
                                                 
79  E.g. the obligation of a CRA to take all necessary measures to ensure that the information it uses in 
assigning a credit rating is of sufficient quality (Art . 8 (2) CRA Regulation) or the obligation to monitor 
and regularly update its credit ratings (Art. 8 (5) CRA Regulation) are obviously in the interest of 
investors. Breaching these obligations may lead to faulty ratings and could cause damage to investors who have based investment decisions on these ratings. 
80  Jie (Jack) He, Jun ‘QJ’ Qian, Philip E. Strahan; Are all ratings created equal? The impact of issuer size 
on the pricing of mortgage-backed securities; July 2011. Available from: 
https://www2.bc.edu/~strah an/Ratings-July2011.pdf . The authors show that stru ctured finance issues of 
large issuers were better rated than those of smaller issuers of comparable quality during the financial 
crisis. This shows the conflict of interests of the issuer pays model (large issuers can use their 
bargaining power to achieve higher ratings which are not justified). The paper concludes that " there is a 
robust relation between issuer size and the market prices of mortgage-backed securities conditional on 
ratings, and conflicts between the interests of issuers (who pay for ratings) versus those of investors 
(who consume ratings) may explain this relationship". 
 
 20/193  The CRA Regulation introduced some provisions81 to mitigate conflicts of interests related to 
the issuer-pays model. These provisions aim at m itigating conflicts of interests with regard to 
the issuer-pays model by requiring  transparency and disconnecti ng the interest of the staff 
involved in the rating activity from the remunera tion paid by the rated entity. In addition, the 
CRA Regulation requires staff to regularly rotate  within the CRA so th at analysts only deal 
with a specific entity for a limited time. However, these measures do not fully address the conflicts of interest due to the issuer pays model.  An important  issuer may decide to be rated 
on a continuous basis by his "p referred CRA" which in turn cr eates an incentive for this CRA 
to favour ratings of this issuer contributing si gnificantly to its income. Even if the individual 
rating analyst does not profit direct ly from the continued business re lationship to an issuer, the 
CRA as an organisation does. Increased transparen cy does not help as l ong as the issuer pays 
model applies on such a broad basis, so that it is difficult for invest ors to find a CRA whose 
remuneration model is less conflicted. Also th e CRA Regulation acknowl edged that further 
action may be needed to address conflicts of  interest regarding the issuer-pays model by 
mandating the Commission to assess the appropriateness of this remuneration model by end of 2012.
82 
Other alternative payment models are the "investor/subscriber-pays" and the "public 
utility/government" model. Neither of thes e remuneration models is however free from 
conflicts of interest. 83 
The importance of reputation in rating business has also a "lock-in effect"84 whereby issuers 
remain with the same CRA for a lo ng period. This is due to the fact that if an issuer considers 
switching a rating agency, it would create a suspicion among investors and can lower 
investors' trust in issuers. This lock-in effect is at its strongest when issuers consider changing 
to new market entrants with a shorter track record. 
Conflicts of interest due to shareholder structure 
As regards conflicts of interests due to th e shareholder structure it could bring a CRA's 
independence into question when a CRA rates its controlling shareholders. It is also 
problematic if shareholders controlling a CRA own or invest in products rated by the CRA 
they control or the same group of investors have  significant stakes in more than one large 
CRA, as they may have an incentive to influen ce the rating in their own interest. Finally, the 
fact that an undertaking linked to  a credit rating agency provides consultancy services to an 
entity which is later rated by that credit rating agency raises concerns.  
Lack of transparency of rating methodologies 
The lack of transparency of rating methodologies  contributes to further uncertainty in the 
market and thus has an important role for market stability. Current  rules on methodologies 
only require disclosure of unde rlying assumptions for struct ured finance products, creating 
varying degrees of transparency for different asset classes. In addition, investors are not 
always well aware of the reasons for cha nges of methodologies and their impact on 
subsequently issued or revised ratings. This coul d cause a risk of disruption in the case that a 
revised methodology is misunderstood.                                                  
 
81  CRAs have to disclose to the public the names of the rated entities from which they receive more than 5 
% of their annual income (Art 6 (2) in conjunction with Annex I Section B 2). Rating analysts may not 
be involved in any negotiation regarding fees with a rated entity and their remuneration shall not depend on the remuneration received from the rated entity (A rt. 7 (2), (5) of the CRA  Regulation). CRA staff 
has to rotate regularly, see Article 7 (4 ) in connection with Annex I, C, 8. 
82  See Article 39 (1) of the CRA Regulation. 
83  See Annex VI 2.5.2. and 2.5.3.  
84  Fabian Dittrich, The Credit Rating Industry: Compe tition and Regulation, 2007, p80-83. Available from:  
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991821 .  
 
 21/193  Pre-notification of ra tings to issuers  
Recent events have also raised an issue of th e timing of publication of ratings. There is a 
question if a rated issuer is  properly informed in advance of the rating publication. The 
current CRA Regulation require s that CRAs communicate 12 hours85 in advance of the 
publication of a rating and the principle grounds on which a ra ting is based. In practice, 
issuers find that if the time pe riod includes out of office hours (f or example, overnight, public 
holidays) there is little time to check potential ly complex data and draw the attention of the 
CRA to factual errors. 
4.6. The baseline scenario: how would the pr oblem evolve without EU action?  
Without coordinated EU action, the problems in the five main policy areas would be unlikely 
to be resolved in spite of the CRA Regulation and ESMA's role as supervisor for CRAs since 
1 July 2011.  
If sectoral financial legislation in the EU remains unchanged, many financial institutions 
would use credit ratings to calculate regulator y capital in a mechanis tic fashion and would 
solely base their internal risk  management on credit ratings. Such overreliance means that 
investors would continue to react simultaneous ly to downgrades, maintaining herd behaviour 
and causing the "cliff" effect  of disorderly markets with  sudden price corrections and 
contagion effects.  
Insufficient transparency would continue to exis t especially in the area of sovereign debt 
ratings. Governments would have limited time to  assess underlying data on which ratings are 
based and determine if all relevant informati on has been taken into account. In addition, rating 
agencies could continue to issue sovereign ratings at particularly sensitive times during 
trading, i.e. immediately ahead of auctions, dur ing the syndication process or just before the 
close of business of European tr ading venues. Furthermore, inve stors would continue to have 
a limited explanation on rating changes and might continue to act on the basis of insufficient 
understanding of sovereign rating. In combinati on with the problem of overreliance, the risks 
of further spill-over effects and market di sorder linked to sove reign downgrades would 
continue to exist. Consequently, risks undermin ing market stability in EU financial markets 
would remain. Furthermore, funding costs of S overeigns could continue to be affected by 
market reactions on insufficiently tran sparent sovereign rating changes.  
In the absence of EU-level action, the current structure of the CRA market would be unlikely 
to change quickly.  
Over time more small and medium rating agenci es are expected to register under the CRA 
Regulation and will start operatin g with an EU license offering alternative credit opinions to 
investors. However, new market en trants will most likely continue  to have difficulties to gain 
reputation even though the re gistration requirement of th e CRA Regulation may have 
improved the situation. Furthermore,  these new entrants are expect ed to remain niche players, 
offering a service with is not comparable in te rms of rated instrument s, geographic reach and 
reputation, with the dominant mark et players. It is possible that  over a period of 5 to 10 years 
one of the new market entrants could evolve towards a more sizable new market player.  
Differences between Member States' civil liability  regimes applicable to CRAs could result in 
forum shopping, whereby CRAs chose jurisdictions where civil liability for infringements of 
the CRA Regulation is less likely. Despite a common EU regulatory framework for CRAs this 
situation may result in diverse levels of protect ion for investors. While it could be argued that 
the CRA Regulation, which has empowered ES MA to impose sanctions on CRAs for having 
                                                 
85  Annex I D I (3) of the CRA Regulation. 
 
 22/193  infringed the Regulation, alrea dy provides sufficient incentives to CRAs to comply with the 
rules, this does not improve the situation for investors. The possibility of sanctioning CRAs is 
not a substitute for an efficient right of redre ss for investors. Sanctions imposed in the public 
interest do not compensate investors for thei r losses; a functioning sanctioning system and 
efficient right of redress for investors allowi ng for private enforcement are complementary 
instruments.   
Despite the current CRA Regulation's provisions ai med at reducing conflicts  of interest some 
conflicts of interest in the CRA market main ly due to the issuer-p ays model would remain. 
Since under the issuer-pays model CRAs have a fi nancial interest in generating business from 
rated firms, there is still the risk that firms pay for higher ratings. The potential conflicts of 
interest imply threats to financial stability, as well as for investor protection and market 
integrity.86 
4.7. Subsidiarity 
According to the principle of s ubsidiarity (Article 5.3 of the TEU), EU level-action should be 
taken only when the aims envisaged cannot be achieved sufficiently by Member States alone 
and can therefore, by re ason of the scale or effects of th e proposed action, be  better achieved 
by the EU. The preceding analysis shows that although all the problems outlined above have 
important implications for individual Member States, their overall imp act can only be fully 
perceived in a cross-border context. This is be cause ratings can be issued in one country for 
financial instruments issued in another, so that  action taken on a national level might not have 
any effect, as ratings could continue to be issued  and used if they were produced in a different 
EU or even third country jurisd ictions. As a result, na tional responses to cr edit rating issuance 
risk being circumvented or ineffective without  EU-level action. Theref ore any further actions 
in the field of CRAs can best be achieve d by a common effort. Accordingly, EU action 
appears appropriate in light of the principle of subsidiarity. 
                                                 
 
86  Orderly markets usually do not have volatile price swings and prices are competitive, reflecting the true 
value of the good or service. 
 
 23/193  5. OBJECTIVES  
 
Contribute to reducing the risks to financial stability and restoring investor and other market participants confidence 
in financial markets and ratings qualityGeneral objectiveSpecific objectives1. Diminish the impact 
of “cliff" effects on 
financial institutions and 
markets by reducing 
reliance on external 
credit ratings2.Mitigate risks of 
contagion 
effects linked to 
sovereign debt ratings3.Improve credit rating 
market conditions with a 
view to improve ratings 
quality4.Ensure right of redress 
for investors 5.Improve ratings 
quality by reinforcing 
independence of credit 
rating agencies and 
promoting sound credit
rating processes and 
methodologies
Reduce references 
to external credit ratings 
in EU legislation
Strengthen internal risk
management in financial 
firms
Promote the use of 
internal rating models 
for the calculation of 
regulatory capital 
requirementsOperational objectivesImprove transparency 
of sovereign ratings and 
their methodologies
Improve the timing and 
frequency of sovereign 
ratings publication
Improve communication
between CRAs and 
sovereign issuersIncrease the choice of 
credit rating providers
Improve comparability 
and quality of information
on credit ratings and 
on CRAsIncrease civil liability 
of CRAs
Reduce a risk of 
regulatory arbitrage 
between EU Member 
StatesReduce the risk of 
conflict of interest due 
to ownership structureReduce the risk of 
conflict of interest 
due to a prevailing 
“issuer-pays” model
Enhance transparency on 
structured finance 
productsImprove transparency 
of ratings and their 
methodologies
Improve communication
between CRAs and 
issuersContribute to reducing the risks to financial stability and restoring investor and other market participants confidence 
in financial markets and ratings qualityGeneral objectiveSpecific objectives1. Diminish the impact 
of “cliff" effects on 
financial institutions and 
markets by reducing 
reliance on external 
credit ratings2.Mitigate risks of 
contagion 
effects linked to 
sovereign debt ratings3.Improve credit rating 
market conditions with a 
view to improve ratings 
quality4.Ensure right of redress 
for investors 5.Improve ratings 
quality by reinforcing 
independence of credit 
rating agencies and 
promoting sound credit
rating processes and 
methodologies
Reduce references 
to external credit ratings 
in EU legislation
Strengthen internal risk
management in financial 
firms
Promote the use of 
internal rating models 
for the calculation of 
regulatory capital 
requirementsOperational objectivesImprove transparency 
of sovereign ratings and 
their methodologies
Improve the timing and 
frequency of sovereign 
ratings publication
Improve communication
between CRAs and 
sovereign issuersIncrease the choice of 
credit rating providers
Improve comparability 
and quality of information
on credit ratings and 
on CRAsIncrease civil liability 
of CRAs
Reduce a risk of 
regulatory arbitrage 
between EU Member 
StatesReduce the risk of 
conflict of interest due 
to ownership structureReduce the risk of 
conflict of interest 
due to a prevailing 
“issuer-pays” model
Enhance transparency on 
structured finance 
productsImprove transparency 
of ratings and their 
methodologies
Improve communication
between CRAs and 
issuers 
Figure 2.  Objectives 
The identified objectives are coherent with the EU's funda mental goals of promoting 
harmonious development of economic activities, a high degree of competitiveness, and a high 
level of consumer protection, including the safety of citizens' economic interests (Article 169 
TFEU). 
6. IDENTIFICATION AND ANALYSIS OF POLICY OPTIONS  
This section presents the policy options for eac h objective, provides anal ysis of comparative 
advantages and disadvantages of different optio n in order to achieve these objectives (section 
5). Sections 6.1 to section 6.5 deal with sp ecific objectives 1 to  5 respectively.  
An analysis in a table format in each sec tion is made against the following criteria:  
(1) impact on stakeholders, which include investors, issuers, financial companies, credit ratings agencies, 
sovereigns and regulators. 
(2) effectiveness (the extent to which the option is likel y to fulfil the objectives formulated in section 5).  
(3) cost-effectiveness (the extent to which the objectives are likely to be met having considered the costs of 
implementing the option).  
 
 24/193  We use the following scoring system when presenting im pacts on stakeholders, effi ciency and effectiveness: 
magnitude of impact compared to the baseline scenario (t he baseline is indicated as 0): ++ strongly positive; + 
positive; – – strongly negative; – negative; +/– both positive and negative ≈ marginal/neutral; ? uncertain; n.a. 
not applicable. 
The presented policy options are not necessarily mutually ex clusive, but also can be co mplementary. In the latter 
case, there are two or more preferred optio ns to deal with a specific objective. 
In the tables presenting the policy options "financial fi rms" are understood as credit institutions, investment 
firms, insurance, assurance and reinsurance undertakings, undertakings for collective investment in transferable 
securities (UCITS) and institutions fo r occupational retirement provision.  
 
A more extensive description of policy options can be found in Annex VII. The analysis of 
the impact of these options on different st akeholder groups is given in Annex VIII an 
assessment of compliance costs and administra tive burden is provided in Annex XII.  
6.1. Policy options to reduce reliance on external credit ratings 
 Policy options 
1. No policy change 
2. Reduce reliance on external ratings by enhancing internal ri sk management and promoting the use of internal rating models 
for regulatory purposes 
3. Require credit institutions, investment firms, insur ance and reinsurance undertakings to use more than one rating   
4. Improve disclosure requirements for issuers of structured finance pr oducts on an ongoing basis 
These options are not mutually exclusive. Options  2 and 4 can be combined with each other. 
Option 1 – No policy change 
Taking no policy action raises the probability that market play ers would continue to rely 
heavily on external credit ratings and fail to carry out sufficient due diligence, increasing the risk of market instability.  
At the international level, the Basel Comm ittee (BCBS) is undertaking work to reduce 
reliance on ratings in its rules. The Worki ng Group on Liquidity will seek to reduce the 
importance of ratings as a criterion for defi ning liquid assets. This would increase the 
importance of alternativ e criteria before the liquidity requirement becomes binding in 2015.
87 
The Ratings and Securitisation Working Group has already deve loped certain language to 
ensure better due diligence vis-à- vis credit risk. This forms part  of the Basel III package. The 
work of the Ratings and Securi tisation Working Group is planned to be finalised by the end of 
2011. These requirements would have to be impl emented into the sectoral EU legislation. 
However, this option has shortcomings. Firs t, Basel essentially deals with capital 
requirements for banks, meaning that other financ ial sectors would remain  not addressed if no 
action were to be taken at the EU level. Second,  also as far as banks are concerned the current 
situation leaves scope for the continued risk of procyclicality and cliff-effects in capital 
markets. It is unclear whether eventual requireme nts from other sources su ch as Basel will be 
sufficient to reduce overreliance on external credit ratings, and when they would be 
implemented by EU Member States. Third, making no policy change could potentially 
aggravate the consequences of the currently on-going euro area sovere ign debt crisis and 
                                                 
87  See Section 4.6. The baseline scenario: how would the problem evolve without EU action? 
 
 25/193  result in a heavy burden on taxpayers bearin g the risk of rescuing failing systemically88 
important institutions.89  
Option 2 – Reduce reliance on external rating s by enhancing internal risk management 
and promoting the use of internal ra ting models for regulatory purposes 
Remaining references to external ratings in se ctoral EU financial re gulation (see Annex VI 
section 2.1), including the guidelines from  the European Supervisory Authorities90, shall be 
addressed in the forthcoming reviews of these acts. Subject to separa te impact assessments, 
these references would be removed, substantially  reduced or replaced by other criteria to 
measure the creditworthiness of a rated instrument or an issuer. The criteria to be chosen may 
differ for each specific sector in order to take into consideration the specificities surrounding 
each category of financial actors. This approach  would also be in line with the approach 
followed in the US (e.g., see Annex III. Section 6 which includes changes proposed by the US 
SEC, but also by other US regulatory bodies). 
It should also be made sure that references to external ratings are avoided to the extent 
possible in any future EU legislation includi ng technical standards and guidelines of the 
European Supervisory Authorities; concerni ng this issue a clear obligation would be 
introduced in EU regulation for European Superv isory Authorities to consider other solutions 
than pure reliance on ratings. 
Moreover, it should be acknowledged that ther e will be a degree of voluntary reliance on 
ratings by small and individual investors which cannot be addressed by regulatory measures. 
Nevertheless, automatic and mechanical relian ce on external credit ratings by regulated 
financial firms could be reduced. 
Most responses to the public consultation from respondents in  several categories, including 
industry associations, governments and regulators  and rating agencies favoured a requirement 
for firms to conduct their own due diligence  without relying exclusively on ratings. 
 
Require all financial firms to strength en their internal risk management  
Firstly, the financial firms (credit institutions, investment firms, insurance and reinsurance) 
with material and complex91 credit risk exposures would be  required to strengthen their 
internal risk assessment by develop ing and using internal rating models. 
The advantages of this sub-option compared to option 1 are as follows. As this option is in 
line with FSB principle III.2.a,92 it would ensure cohere nce at international level. Furthermore, 
                                                 
88  Banks, insurance companies and pension funds continue to be perceived as key “systemic” institutions 
in many financial systems post-crisis. See Guidance  to Assess the Systemic Importance of Financial 
Institutions, Markets and Instruments: Initial Consid erations—Background Paper, Report to the G-20 
Finance Ministers and Central Bank Governors, prepared by FSB, IMF, Bank for International 
Settlements, October 2009. Available from: http://www.imf.org/external/np/g20/pdf/100109a.pdf .     
89  See Annex VI Problem definition – background and technical details, figure 9. Cumulated financial 
sector stabilisation operations and their impact on government debt and contingent liabilities (2008-10). 
90  See Annex VI, section 2.1, Money market funds.   
91  A good proxy for large or complex exposures is ex posures of "large or sophisticated institutions" for a 
sectoral legislation where entities are mainly exposed  to credit risk (e.g. banking sector). This would 
also allow applying the proportionality principle in sectors where credit risk is usually not the 
predominant risk of large or sophisticated entities (e .g. insurers). Finally, this would also capture the 
pending developments on complex exposures such as securitisation that are being discussed in Basel. 
 
 26/193  it would address the second shortc oming of option 1, as the deve lopment and use of internal 
rating models would enhance the capacity for inte rnal credit assessment of firms with material 
and complex credit risk exposures. It would meet the third operational objective and would 
overall contribute to the specific objective of diminishing the impact of "cliff" effects on 
financial institutions and markets by reducing reli ance on external credit ratings. The internal 
rating models would contribute to  ensuring that credit risks ar e adequately managed. It would 
partially address the first and third shortcomings  of option 1, as a requirement to develop and 
use internal rating models for all credit in stitutions, investment firms, insurance and 
reinsurance undertakings (firms) with material and complex cred it risk exposures at the EU 
level should give a greater degree of conf idence in financial institutions for market 
participants.  
However, also this sub-option has disadvantages . First, although the ong oing costs associated 
with this sub-option would be proportional to each individual financial firm, the total ongoing 
costs for relevant financial sectors could be substantial. In addition, a model where every 
financial institution performs its own rating analysis does not guarantee a better quality and transparency of ratings. A system of internal  ratings can prove bene ficial for the macro-
financial stability only if internal rating methodo logies are carefully and accurately reviewed 
and approved by a competent authority. The need  to validate internal rating methodologies 
would clearly create an addi tional burden for CRAs supe rvisors. Second, since the 
standardised approaches relying on external credit  ratings would continue to be authorized for 
small institutions or institutions  whose exposure to credit risk is  less material or less complex 
(for which the development of internal models  would be disproportionate), such institutions 
would still be vulnerable to abrupt ratings ch anges and exposed to the higher market risk 
compared to those with internal credit a ssessments. Furthermore, like option 1, no policy 
change for small institutions could result in the need to rescue failing institutions and, 
consequently increase risks to taxpayers.   
Nevertheless, most respondents to the public cons ultation favoured this op tion as they felt that 
financial institutions and all holders of secur ities – particularly la rge institutions – should 
understand the risks associated with their expo sures. They should ther efore be subject to 
rigorous due diligence standards and face financ ial and regulatory incentives to meet them. 
 
The financial firms (credit institutions, in vestment firms, insurance and reinsurance 
undertakings, asset managers and investment funds ) would be required to strengthen their 
own internal risk managemen t for investment decisions.  
This sub-option has a number of advantages. Fi rstly it would go toward s reducing the risk of 
overreliance (FSB principle II)
93 and III.3.a.94  Second, it would meet the second operational 
                                                                                                                                                         
92  Larger, more sophisticated banks within each jurisdic tion should be expected to assess the credit risk of 
everything they hold (either outright or as colla teral), whether it is for investment or for trading 
purposes. FSB Report on Principles for Reducing Reliance on CRA Ratings, 27/10/2010. Available 
from: http://www.financialstabilityboard.org/publications/r_101027.pdf .  
93  Reducing market reliance on CRA ratings: banks, market participants and institutional investors should 
be expected to make their own credit assessments , and not rely solely or mechanistically on CRA 
ratings. FSB Report on Principles for Reducing Reliance on CRA Ratings, 27/10/2010. Available from: 
http://www.financialstabilityboard.org/publications/r_101027.pdf .  
94  Investment managers should conduct risk analysis commensurate with the complexity and other 
characteristics of the investment and the materiality of their exposure, or refrain from such investments. They should publicly disclose information about their risk management approach, including their credit 
 
 27/193  objective and would overall contribute to the specific objective of  reducing reliance on 
external credit ratings and mitigating the risk of cliff-effects. The downgrades would no 
longer necessarily lead to immediate sell-offs. In  case of asset managers and investment funds, 
the end-investors would justifiably expect thei r appointed investment managers to exercise 
judgement in their investment decisions, rather than allowing rating cha nges dictate selling or 
buying decisions without due consideration. Invest ment managers would also be required to 
disclose their investment policie s, including their approach to  credit assessment, and seek 
regular management review. Third, since this opt ion would apply to all financial firms (credit 
institutions, investment firms, insurance and reinsurance undertakings and asset managers and 
investment funds), it should enhance overall investor confidence in these markets and 
contribute effectively to fi nancial stability.      
One disadvantage of this opt ion is the compliance cost for firms with internal risk 
management, which would include, for example,  legal advice, access to capital market 
information sources and a framework of technologi es to manage internal risks. On the other 
hand, ongoing costs would be moderate as many fi rms already have in place their own risk 
management systems. A second disadvantage is the uncertainty of whet her it is possible to 
impose such restrictions on an investment mand ate that is a commercial agreement between 
two parties. Great care would have  to be taken in considering a ny rules in this area, as there 
could be a significant impact on smaller investors that do not have the resources to perform all 
their research internally. In addition, it is unc ertain whether risk a ssessment performed by 
asset managers would be unbiased and free of conf licts of interest.  Fi nally, this option has a 
strong cost element: requiring a multitude of mark et participants to duplicate the process of 
information gathering and information assessm ent would multiply the associated costs and 
thereby reduce the efficiency of financ ial intermediation at large.     
 
Promote the use of internal rating models for the calcul ation of regulatory capital 
requirements   
This sub-option has the advant age over option 1 that it would help to reduce reliance on 
external credit ratings in the calculation of the regulatory capital requirements. Credit 
institutions, investment firms, insurance a nd reinsurance undertakings  using the "standard 
approach"95 based on external ratings for calculati ng their regulatory ca pital requirements, 
would be required to assess if th e inherent credit risk  of an exposure is significantly higher 
than the one corresponding to the capital require ment assigned under the "standard approach"  
based on external ratings (or the absence thereof).  
Furthermore, the credit institutions, investment  firms, insurance and reinsurance undertakings 
would also be requ ired to reflect the higher degree of credit ri sk in the evalua tion of their 
overall capital adequacy. This implies that thes e firms would have to check the quality of the 
rating assessments they use in the standardised a pproach and, if the outcome of the analysis is 
negative, would have to deviate from that rating assessment.  
Moreover, all credit institutions, investment firms, insurance and reinsurance undertakings 
would be treated equally and apply the same rule s regardless of their size or level of risk 
exposure. This would contribute to improving investor confidence in financial markets and 
would mitigate the risk of cliff-effects on financial institutions and markets.                                                                                                                                                         
 
assessment processes. FSB Report on Principles for Reducing Reliance on CRA Ratings, 27/10/2010. 
Available from:  http://www.financialstabilityboard.org/publications/r_101027.pdf .  
95  "Standardised approach" for credit institutions (ban ks) and "standard approach" for (re) insurers.    
 
 28/193  One disadvantage of this option is the cost  of compliance and administrative burden on 
relevant financial sectors as a whole. Howeve r, it could be argued th at the cost would be 
proportional with respect to the individual financial firms.  
Option 3 – Require credit institutions, inve stment firms, insurance and reinsurance 
undertakings to use more than one rating if available  
This option has a number of advantages over op tion 1. First, requiring credit institutions, 
investment firms, insurance and reinsurance undertakings to use more than one rating issued 
by different CRAs would improve the accuracy of capital requirement calculations as the 
calculation would be based on more opinions.96 It may also possibly mitigate to some extent 
"cliff" effects since the effect  of a significant downgrade by one CRA may be reduced by the 
fact that financial firms would also ta ke into account ratings of other CRAs.  
However, option 3 also has a number of risks and disadvantages. Some respondents to the 
public consultation argued that certain types of  structured finance instruments and covered 
bonds are frequently only rated by one CRA and this proposal would th erefore have only a 
limited impact on markets. In order to compensate for this, a minimum of two credit ratings for structured finance instrume nts could be required. Furthermore, the requirement to use 
more than one rating could also negatively affect competition: investors would most likely 
look for ratings available from the existing la rge CRAs which would be favoured over small 
CRAs with limited availability of ratings unless the rotation of CRAs was introduced. 
Moreover, the potential benefits of this indivi dual option on reducing overreliance are likely 
to be limited since the ratings issued by diff erent CRAs, with regard to one issuer or 
instrument, tend to be similar.
97 However, the requirement for two independent ratings would 
likely increase the quality of ratings of those in struments which require special expertise, such 
as in the case of structured finance instruments.    
Option 4 – Improve disclosure requirements fo r issuers of structured finance products 
on an ongoing basis 
This option would provide investors on an on going basis with information on structured 
finance instrument, and in particular inform ation on the performance of the underlying asset 
pool. This would enable financial firms a nd institutional investor s to conduct own due 
diligence and assess the credit/market risk of a structured finance instrument by themselves 
and, as a consequence, reduce their reliance on  external ratings. Additionally, other credit 
rating agencies (not mandated by the issuer) w ould be in a position to provide unsolicited 
ratings based on publicly available information. 
Many responses to the public consultation favoured  disclosure of info rmation on structured 
finance instruments to all market participan ts as they felt disclosure under the current 
framework was not sufficient an d additional disclosure woul d enhance their ability to 
understand ratings and conduct their ow n assessments and due diligence. 
                                                 
96  The Basel II rules already allow (but do not requir e) the use of more than one rating within the capital 
determination process, even though only one is ultima tely used to set risk weights: If there are two 
assessments by ECAIs chosen by a bank that map two different risk weights, the higher risk weight will 
be applied. If there are three or more assessments, the determination of risk weights should refer to the assessments corresponding to the two lowest risk weights, with the higher of the two then applied. 
97  According to a 2006 report by the French AMF, even where ratings for a gi ven issuer differ between 
CRAs, the difference is typically just one notch. AM F 2006 Report on rating agencies, Part II, Fund 
management rating, January 2007. Available at: http://www.amf-
france.org/documents/general/7641_1.pdf . 
 
 29/193  According to Article 11 and Annex VIII of the Commission Implementing Regulation of the 
Prospectus Directive98 issuers of asset-backed securities have to disclose information on the 
securities, the underlying assets, structure and cash flow of the transaction. However, such 
disclosure is only mandatory when asset back ed securities are offered to the public or 
admitted to trading on a regulated market, while post issuance reporting is voluntary.99  
This option would entail some costs for the issu ers of structured finance instruments being 
required to disclose existing information on structured finance instruments on an ongoing 
basis. Moreover, the impact on  reducing overreliance as such could be limited by the capacity 
of investors to risk assess these comp lex financial instruments by themselves.  
The summary of the analysis of different opti ons to achieve specific objective 1 (diminish the 
impact of “cliff" effects on financial instituti ons and markets by reducing reliance on external  
credit ratings) is presented in the table below. The analysis of the impact of these options on 
different stakeholder groups is given in Annex VIII. 
 
 Effectiveness Efficiency 
Option 1 (baseline) n.a. n.a. 
Option 2 
(Reduce reliance on external ratings by promoting the use of alternative credit assessment models) (++) would reduce overreliance and cliff 
effects;Would improve quality of investment decisions and make herding behaviour and investment bubbles less probable.  
Financial firms with material credit risk 
would be required to develop and use internal models to calculate capital requirements. This would considerably reduce overreliance on external ratings and 
reduce cliff effects. 
 However, the effectiveness would be limited if there is  a high correlation between internal and external ratings and/or re-
assessments do not lead to deviation from 
external rating.  (+) increased costs for financial firms. 
However considered to  be cost effective 
given the benefits for firms and financial stability. 
Option 3 (Require credit institutions, investment 
firms, insurance and reinsurance 
undertakings to use more than one rating, if available) (+/0) An effect of reducing reliance is likely 
to be limited due to converging ratings 
(-) potentially negative impact on 
competition in the market as investors would most probably choose for another large existing CRA. (-) limited effect on overreliance combined 
with increased compli ance costs for market 
participants to search and use available 
ratings that are not currently obliged to use more than one rating leads to a conclusion that it is not a cost-effective option. 
Option 4 
(Improve disclosure requirements for 
issuers of structured finance products on an ongoing basis)  (+) more incentives for own due diligence, 
but the impact on reducing overreliance is 
likely to be limited. (+/0) there would be additional compliance 
costs, but also indirect costs if there is 
unlimited access to critical price sensitive information data, but it is considered a cost-effective option as it regards making existing information available to all interested 
parties. 
To conclude, based on the analysis above, the highest scoring op tions in terms of 
effectiveness and efficiency are options 2 and 4 which are compatible with  each other. If these 
options were pursued, financial firms would use more internal models for measuring credit 
                                                 
98  Commission Regulation (EC) No 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the 
European Parliament and of the Council as regards information contained in prospectuses as well as the 
format, incorporation by reference and publication of such prospectuses and dissemination of 
advertisements. 
99  According to Annex VIII item 4.1. of the Prospectus Implementing Regulation post issuance reporting 
is voluntary unless it is considered to be a signifi cant new factor, material mistake or inaccuracy 
according to Article 16 of Directive 2003/71/EC (Prospectus Directive).  
 
 30/193  risk and would re-assess capital requirements, which are currently based on external ratings. 
The increase of information disclosure for st ructured finance instruments would enable 
investors to perform an adequate risk assessm ent. Eventually, overreliance on external ratings 
would be reduced, thus leading to mitigation of "cliff effects" in the market. 
Furthermore, with regard to overreliance issues  it should be acknowledged that there will be a 
degree of voluntary reliance on ratings by sma ll and individual investors which cannot be 
addressed by regulatory measures. Neverthele ss, automatic and mechanical reliance on 
external credit ratings by regulated  financial firms could be reduced. 
The first of these policy measures (option 2)  to limit overreliance are in line with the 
principles of the Financial St ability Board that were includ ed in the new proposal for the 
modification of the Capital Re quirements Directive (CRD IV100). The main provisions are (1) 
require that banks' investment decisions must ne ver rely solely and mechanistically on ratings 
but always form their own internal credit opini on on every exposure; (2) require banks with a 
material number of exposures in a given portfolio (be it sovere igns, banks, or corporates) to 
develop internal ratings for that  portfolio; (3) require (smaller) banks that do not use internal 
ratings to compare their internal credit opinion  to the capital requirement resulting from an 
external rating. If the internal assessment shows that for a give n loan, the external rating and 
the resulting capital requirement are too favourab le compared to the internal credit opinion, 
the bank will be required to hold additional capital; (4) supervis ion of CRD IV will performed 
by the European Banking Authority EBA to ensure  proper application of these measures (see 
Annex XV). 
6.2. Policy options to mitigate the risks of co ntagion effects linked to sovereign debt 
ratings 
 
Policy options 
1. No policy change 
2. Require CRAs to publish a full research report  on sovereign debt ratings and allocation of staff 
3. Require CRAs to publish sovereign ra tings after closing of EU trading venues 
4. Require CRAs to conduct the sovere ign debt ratings process more frequently 
5. Extend powers of competent authoritie s (ESMA) to scrutinise rating methodologies 
6. Require (EU) sovereigns to publish a standardised set of  data on economic performance to enable credit risk assessment 
7. Grant ESMA the power to restrict or ban temporarily  sovereign debt ratings in exceptional situations 
8. Encourage an existing, independent EU structure or a brand new European Credit Rating Agency to issue sovereign credit 
ratings 
9. Prohibit sovereign debt ratings 
 
The full description of policy options is presente d in Annex VII. Options  2, 3, 4, 5, 6, 7 and 8 
can be combined and can complement each other. Option 9 is not compatible with the 
previous options which imply that the activity  of issuing sovereign ratings is allowed. 
Option 1 - No policy change 
                                                 
100  The legislative proposal on Capital Requirement Directive IV was adopted by the Commission on 20 
July 2011.  
 
 31/193  Under this option, insufficient tran sparency would continue to ex ist in the area of sovereign 
debt ratings.  
Even though some initiatives to enhance the quality  of the sovereign rating process have been 
undertaken on a voluntary basis by major CRAs, as described in Annex V, their effectiveness 
in mitigating the problem is expected to be in perspective. rather limited Indeed, the initiatives 
adopted so far appear to be limited in scope , resulting basically in an update and improved 
disclosure of sovereign rating methodologies and do not provide any effective solution to all 
the remaining problem drivers presented in section 4.2 above. Moreover, measures which 
have been adopted individuall y by the agencies on a purely  voluntary basis would raise 
serious issues concerning their harmonization and enforceability.   
As a result, governments would continue to suffer from the limited time to assess accuracy 
and reliability of the ra ting process and to verify whether all relevant information has been 
properly factored in or not into the final out comes. In addition, rating agencies would be 
allowed to continue issuing sovereign ratings even at particularly sensitive times, i.e. 
immediately ahead of auctions, during the syndi cation process or just before the close of 
business of European trading venues.  
Investors would continue to have limited info rmation on rating changes and might continue to 
(over)react to rating changes on the basis of an  insufficient understand ing of sovereign rating. 
As a result, considering also the interaction with the other problem drivers described above, 
the risks of relevant spill-ove r effects and financial markets disruptions linked to sovereign 
downgrades would continue to persist.  
Furthermore, stability of EU Member States w ould remain subject to the risk of investors 
over-reactions to insufficiently transparent so vereign rating changes with the potential 
negative spill-over effects de scribed in par. 4.2 above.  
Option 2 - Introduce a re quirement for CRAs to publish a full research report on 
sovereign debt ratings and allocation of staff 
This option would enhance the ca pacity of investors to interpret the ratings since more 
detailed information on the underlying analysis and on the justification of ratings would be 
made available to them. In the consultation pr ocess, overall, a large amount of stakeholders, 
including some rating agencies considered th at sovereign ratings should not be treated 
fundamentally different from other ratings. However, some Member States and industry 
stakeholders considered that more transparen cy of sovereign rations would be welcomed, 
particularly regarding methodol ogies and publication of the fu ll research reports underlying 
ratings. This is expected to enable invest ors to better understand the rationale behind the 
sovereign debt ratings and to complement the judgement of the CRAs with their own 
assessment. Consequently, this option would al so contribute to achieving the objective of 
reducing reliance on ratings as i nvestors would be in a better position to dete rmine their own 
opinion on a certain sovereign. As  a result the risk of market disruption and negative spill-
overs following a downgrade of a sovereign would be reduced.  
In order to enhance the transparency of the process, additional figur es on the allocation of 
staff could be made available as well. This would enable investors and market actors in 
general to better judge whether the CRAs devote adequate resour ces to the sovereign rating 
process and, consequently, reliability and quality of their sovereign ratings. 
Since rating agencies would be asked to disclose  information which is already available, this 
option is expected to impl y limited additional costs a nd administrative burden.  
Option 3 - Introduce a requirement for CRAs to publish sovereign ratings after closing 
of EU trading venues 
 
 32/193  Currently, ratings are sometimes published at sensitive period during trading, when not all 
investors can be always fully aware of changes of ratings and reasons for such changes. This 
could result in market disruptio n when ratings are publ ished during or just before closing of 
trading when investors sell of ba sed on unexpected rating changes.  
This option would keep these risks to the mi nimum but ensure that publication of ratings 
cannot happen during particularly sensitive tradi ng hours, i.e. immediately ahead of auctions, 
during the syndication process or just before the close of business of European trading venues. 
Instead, all relevant information on credit ra tings would be disseminated among all market 
participants and investor s outside trading hours. 
All investors would thus have sufficient time to react properly to rating events on the basis of 
a well founded assessment of th e underlying analysis and a ssumptions on which the credit 
event has been based.  
As a result this provision would mitigate the risk of spreading of rumours during trading 
thereby reducing the probability of herding beha viour and market distortion. In this respect 
this measure is expected to limit risks of spi ll-over effects and contribute to enhance market 
stability.  
However, since the measure would be applicable  only to the EU markets, its effectiveness 
may be somewhat reduced  since ratings might continue to be publishe d outside Europe and 
trading of sovereign debt instruments can continue on trading venues outside the EU. 
However, ratings which published outside the EU and which would fall outside the 
endorsement or equivalence regime for third co untries as provide for in the CRA regulation 
would not be allowed to be used for the purpose of regulatory capital. 
Option 4 -Introduce a requirement for CRAs to conduct the sovereign debt ratings 
process more frequently 
Under this option CRAs would be required to conduct a full review of sovereign processes 
ratings more frequently (every 6 months).101 This would force CRAs to follow up more 
regularly on the main political and economic de velopments in Member States and mitigate the 
risk that rating agencies react too late to  such developments with sudden upgrades on 
downgrades. This is turn would reduce the risk of over reactions from investors and of herd 
behaviour 
This provision would make sure that any new relevant policy measure introduced by a 
sovereign which can entail positive effects on s overeign's fundamentals are timely reflected in 
the related debt rating.  
This option would contribute to improving th e communication of rati ngs to investors by 
CRAs as they would be required to undertake a full rating assessment on a more regular basis. 
It should be noted that this would not necessa ry entail an increased number of rating changes 
and CRAs would continue to be allowed to revise ratings when it is fully justified on the basis 
of their methodology and analysis.  
For CRAs the provision would entail some add itional costs as they would need to conduct 
more frequently the full rating process.  
Option 5 - Extend powers of competent au thorities (ESMA) to scrutinise rating 
methodologies 
                                                 
101  Existing provisions only requires a credit ratin g agency t o  ' 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 an impact on a credit rating'.  (See art 8.f of CRA regulation n. 1060/2009). 
 
 33/193  Under this option, supervision on rating methodol ogies would be reinforced since any new 
rating methodology developed by rating agencies would require prior no tification to ESMA 
before its actual implementation. ESMA woul d be required to scrutinize the new rating 
methodology and check its compliance with exis ting requirements for rating methodologies as 
outlined in article 8.3 of the CRA Regulation. This option could apply for sovereign debt 
ratings but also for ratings of other asset classes. 
Only after a positive assessment by ESMA, rating agencies would be allowed to apply the 
new methodology. As a result, this option is expected to contribu te to substantially enhance 
transparency and quality of sovereign ratings since it would enforce the existing provision requiring CRAs to adopt rating methodologies which are 'rigorous, systematic, continuous 
and subject to validation base d on historical experience, in cluding back-testing' (see article 
8.3 of the CRA Regulation). It should be noted that in compliance with Article 23 of the CRA 
Regulation, this assessment by ESMA would be limited in sc ope and would not entail the 
interference with the conten t of rating methodologies. 
In terms of efficiency this new task would entail some (limited) additional costs for the 
ESMA to validate the methodologies and for CRAs  to provide the necessary documentation to 
the ESMA. 
Option 6 - Introduce a requirement for (EU) sovereigns to publish a standardised set of 
data on economic performance to enable  credit risk assessment by investors 
The benefit attached to this option would be making all relevant information on economic and 
financial performance of EU sovereigns freely ava ilable in a standardised form to interested 
stakeholders, including investors, through a centralised database.  
This would facilitate market participants to make their own assessment of creditworthiness of 
sovereigns, without excessively relying on extern al ratings.  
Furthermore, credit rating agencies would be facilitated in issuing unsolicited ratings which 
could improve the number of credit opinions  available to market participants.  
However, it should be noted that relevant information to assess cr editworthiness of EU 
sovereigns is already available to investors through distinct sources, including the European 
Statistical System (ESS) coordinated by EU ROSTAT. The ESS is already committed in 
making EU economic statistics and the Prin cipal European Economic Indicators (PEEI)
102 
increasingly complete, comparable and timely. Cons equently, a large amount  of statistics and 
indicators on public finances are made avai lable through EUROSTAT. There does not appear 
to exist any lack of data for the purpose of  making credit assessment for sovereigns.   
Therefore this measure would not considerably improve the quantity or timeliness of the 
information necessary for investors to make th eir own assessment. It would rather aim at 
improving its comparability and accessibility for investors and gene ral public. Taking also 
into consideration the existing work-streams wh ich should improve the reliability and quality 
                                                 
102  PEEIs represent a comprehensive set of infra-annual  macro economic statistics aiming to describe the 
economic and labour market situation as well as pr ice developments in the euro area and the European 
Union, which are of particularly high importance for economic and monetary policy. The 
communication of the Commission to the European Parliament and the Council on Eurozone statistics 
“Towards improved methodologies for Eurozone statistics and indicators” of November 2002 has 
defined the list of PEEIs and their timeliness targ ets. Since 2002, achieved progress and remaining 
challenges have been constantly monitored. Each year Eurostat, in cooper ation with the European 
Central Bank, drafts a Status Report on Information Requirements in the European monetary union 
(EMU) which is first submitted to the Economic and Financial Committee (EFC) and then to the 
Economic and Financial Affairs Council (ECOFIN).  See the annual EFC Status Report on information 
requirement in EMU available from: 
http://epp.eurostat.ec.europa.eu/portal/page/po rtal/euroindicators/peeis/efc_status_report .  
 
 34/193  of available data on sovereigns , the added value of the measur e is expected to be rather 
limited and therefore it would only have a limited  impact in terms of reducing reliance on 
ratings and mitigating risks of spill-over effects.   
Option 7 - Grant ESMA the po wer to restrict or ban temporarily sovereign debt ratings 
in situations defined by the Regulation 
In situations where the objectivity and quality of sovereign ratings can be impaired by 
upcoming market developments, like the case where all details of an international financial 
support programme (including those in the fram ework of the European Financial Stability 
Mechanism) to stabilize the economy of th e sovereign are still unknown, ESMA would be 
given the power to temporarily restrict or ban the issuance of  sovereign debt ratings while 
there is uncertainty with regard to timing, valu e, amount and conditions of the support.  Other 
cases might encompass events which can substantially impact on market confidence and 
trigger excessive market volatility. 
This would reduce the risk for concerned soverei gns to be subject to a premature and not fully 
justified downgrade with huge negative impact on their financial stability and further spill-
overs to its economy and to that of neighbouri ng countries. Building on the previous example, 
the ban would be possible for ESMA until the complete information on timing, amount and 
conditions of the support is available.  
However, it has to be observed that while, on one side, the measure might contribute to 
increasing the quality and accuracy of sovereign debt ratings thereby reducing the probability 
of unjustified downgrades, on the other side, as rati ng agencies operate at international level, a 
temporary ban could have limited effect. There ex ists a risk that rega rdless of a ban imposed 
on EU CRAs to issue certain s overeign debt ratings, ratings could still be issued by CRAs 
established outside the EU. However, in view of the third country regime, which provides for 
endorsement or equivalence of third country ratings, as outlin ed in Article 5 of the CRA 
Regulation this risk would be mitigated and li mited as these ratings could not be used for 
regulatory purpose. Ratings which fall outside the third county regime already today cannot 
be used for regulatory purpose. 
The measure in discussion could raise some concer ns with respect to its compatibility with the 
freedom to conduct a business of Credit Rating Agencies and of investors (protected under 
Article 16 of the Charter of Fundamental Ri ghts of the European Union). Subject to the 
principle of proportionality, the freedom to conduct a business may be limited, provided the 
limitations are necessary and genu inely meet objectives of gene ral interest recognised by the 
Union or the need to protect th e rights and freedoms recognised by the Charter (see Article 52 
of the Charter).  
Taking into account the relevance of the objec tive pursued through this measure, i.e. 
preserving financial stability in the EU, th e proposed measures would comply with the 
principle of proportionality mentioned above if th ey are limited to clearly defined, exceptional 
circumstances, are limited in time, and consti tute a measure of last resort. Conditions under 
which such restrictions and bans can be imposed  would have be drafted with sufficient clarity 
and precision to prevent any poten tial arbitrariness or abuse. It  has to be underlined that the 
expected impact of the measure on quality, reli ability and timeliness of sovereign ratings 
would depend more on its deterring and inhibiting effects rather than on its actual use. 
Therefore, this measure can also be seen as th e application of the prec autionary principle.  
Option 8 - Encourage an existing, independe nt EU structure or promote a brand new 
European Credit Rating Agency to issue sovereign debt ratings 
Under this option an existing i ndependent EU structure with ad equate resources and capacity 
or a brand new European Credit Rating Agency  would issue credit ratings for sovereign 
 
 35/193  issuers to provide market participants with a greater variety of opinions  on credit worthiness 
of issuers. Sovereigns would get an additional rating from an independent and reputable 
source with a strong signalling e ffect to financial markets.  
Two implementing modalities (sub-opti ons) are possible under this option: 
A - Encouraging the establishment of a bra nd new European Credit Rating Agency (this 
option is further analysed in section 6.3) which could offer the whole spectrum of rating 
services on all asset classe s including sovereign bonds. 
B - Encouraging an existing EU structure to ta ke over the specific task  of issuing sovereign 
ratings provided it has adequate skills and re sources and is already active in the areas of 
macro prudential supervision, macroeconomic surv eillance or in that of financial support to 
EU Member States. This sub-option is distin ct to the European Credit Rating Agency 
described in section 6.3 as the scope would be limited to sovereign ratings and ratings would 
be conducted by an existing EU structure.  
In order to limit the costs which the selected structure would incur to  be fully equipped to 
perform the new task and to draw on the expertise alrea dy available within the EU 
institutional framework there are 3 possible institutions which could fulfil the task: the 
European Central Bank (together with the Euro pean System of Central Banks (ESCB)); the 
European Commission (Directorate General fo r Economic and Financial Affairs), and the 
newly established European Financial Stabi lity Facility (EFSF), which will become the 
European Stability Mechanism as from 2013.  
The ECB 
In terms of effectiveness it would make sens e to give central banks the task of issuing 
sovereign ratings. Historicall y, the two main objectives of central banks relate to the 
maintenance of monetary and financial stabil ity. Both objectives are closely interlinked; 
monetary policy has significant implications for financial stability, while financial stability is 
an essential pillar for effectiv e monetary policy. Identifying vulne rabilities in the financial and 
non-financial sectors, including in sovereign debt markets, and potential shocks in these 
markets is therefore a vital part of the work of central banks.  
The ECB is at the heart of the newly estab lished European Systemic Risk Board and has 
already a wide-ranging macro-prude ntial expertise together with  adequate resources to pool 
all the necessary information, to carry out the right level of analytical work, including the 
development of methodology and management of a complex and wide set of indicators at EU 
and Member State level.  
Moreover, the ECB has already a system to i ndependently assess the creditworthiness of 
issues eligible for credit operations and for critically reviewing external assessments 
(Eurosystem credit assessment framework – ECAF)103 which in particular allows the 
                                                 
103  The Eurosystem credit assessment framework (ECA F) defines the procedures, rules and techniques 
which ensure that the Eurosystem requirement of high credit standards for all elig ible assets is met. In 
the assessment of the credit standa rd of eligible assets, the Euro system takes into account credit 
assessment information from credit assessment systems belonging to one of four sources, namely:  
 external credit assessment institutions (ECAIs), 
 NCBs’ in-house credit assessment systems (ICASs), 
 counterparties’ internal ratings-based (IRB) systems, or 
 third-party providers’ rating tools (RTs). 
Additionally, in the assessment of the credit standard the Eurosystem takes into account institutional 
criteria and features guaranteeing similar protecti on for the instrument holder such as guarantees. 
Available from: http://www.ecb.int/p aym/coll/risk/ecaf/html/index.en.html .  
 
 36/193  recognition internally to  the Eurosystem of the four in- house credit rating assessments from 
the respective EU National Central Banks104. 
Considering the high reputation an d solid experience in carrying out monetary policy in the 
UEM independently, its sovereign ratings would carry a strong signalling effect for investors 
and would be able to substantiall y influence markets developments. 
On the other hand, three major arguments can be presented against the a ttribution of the task 
to the ECB. First, there may be a conflict of in terest between the activity of issuing sovereign 
debt ratings and the implementation of its mone tary policy. In particular there might be 
concerns that the ECB for reasons of protectin g the Eurosystem against financial losses in 
connection to its credit operations (i.e. deprec iation of assets accepted as collateral) would 
issue more favourable sovereign rating policy than justified by underlying indicators and 
sovereign's fundamentals.  
Second, there would be a reputatio nal risk linked to the activity of issuing sovereign ratings. 
A perceived failure in assigning th e 'right' rating to a sovereign might prove detrimental to the 
reputation of the ECB/ESCB, ther eby jeopardising their credibility  as a monetary authority as 
well. 
Third, as the ECB is an independent institutio n with concrete tasks notably in terms of 
monetary policy set with the EU Treaty, in orde r to attribute a task of issuing sovereign 
ratings some institutional considerations woul d need to be addresse d – which might possibly 
require a modification of the EU Treaty. 
Having regard to the efficiency criterion, giving to the ECB the mandate of issuing sovereign 
debt rating would allow to fully benefit from th e available qualified resources to carry out the 
underlying analytical and statisti cal work. Therefore the costs li nked to implementation of this 
option would be limited. 
European Commission (Directorate General Ec onomic and Financial Affairs – DG ECFIN) 
DG ECFIN plays a key role in macro-economic surveillance105, including the design and 
implementation of large-scale macro-financial assistance programmes (often in cooperation 
with the IMF and the World Bank) to support Me mber States and part ner countries facing 
severe financial or balance of payments difficulties. 
In that respect it could be well placed to take over the duty of issuing sovereign ratings since 
it would be in a position to pr operly assess risks to the financ ial system and to economy of 
Member States.                                                 
 
104  Banque de France, Deutsche Bundesbank, Banc o de Espana and Oesterreichische Nationalbanks. 
105  See Art. 99, §3 and 4 of the EC Treaty:  "3. In order to ensure closer co-ordination of economic policies 
and sustained convergence of the economic performa nces of the Member States, the Council shall, on 
the basis of reports submitted by the Commission, monitor economic developments in each of the 
Member States and in the Community as well as th e consistency of economic policies with the broad 
guidelines referred to in paragraph 2, and regularly carry out an overall assessment. For the purpose of 
this multilateral surveillance, Member States sh all forward information to the Commission about 
important measures taken by them in the field of their economic policy and such other information as 
they deem necessary". 4. Where it is established, under the procedure referred to in paragraph 3, that the 
economic policies of a Member Stat e are not consistent with the broad guidelines referred to in 
paragraph 2 or that they risk jeopardising the proper functioning of economic and monetary union, the 
Council may, acting by a qualified majority on  a recommendation from the Commission, make the 
necessary recommendations to the Member State concerned. The Council may, acting by a qualified 
majority on a proposal from the Commission, decide to make its recommendations public. The 
President of the Council and the Commission shall repo rt to the European Parliament on the results of 
multilateral surveillance. The President of the Counc il may be invited to appear before the competent 
committee of the European Parliament if the Council has made its recommendations public”  
 
 37/193  However, in terms of effectiveness it could be argued that sovereign ratings issued by the 
Commission could lack sufficient credibility vis-a-vis  markets. Indeed investors might have 
concerns on the objectivity of ratings in relation to potential political pressures from National 
Authorities and in relation to possible conflict of  interests with the role of the Commission in 
support programmes to Member States (see above).  
As regards the cost efficiency this option would lead to quite substantial costs in relation to 
the need to build the necessa ry expertise to perform cr edit rating activities, including 
development of methodologies and poo ling of all relevant information.  
The European Financial Stability Facility(EFS F) / European Stability Mechanism (ESM)106 
Taking into account the mandate of the EFSF/ESM, i.e. to facilitate or  provide financing to 
Euro Member States in financial difficulties107, the ESFS/ESM could provide a possible 
alternative to the two previous options to identif y a European entity to be entrusted with the 
task of issuing sovereign ratings.  
However it can be argued that  the EFSF/ESM would face in pe rspective a serious lack of 
credibility vis-à-vis markets and investors. On one side investors might have doubts on its 
independence and on objectivity an d candidacy of its analysis because of its shareholders' 
structure (the Euro Area Member States). On the other side there mi ght be concerns with 
respect to the conflict of interest with both its lending and its borrowing operations since a  
downgrade of a Member country or of a borrowe r country could potentially impact negatively 
on the rating of the ESFE/EMS itself.108  
Finally, as the ESFE/EMS is an independent en tity, some institutional considerations would 
need to be addressed (notably amendments to the legal instruments providing for the creation 
of this mechanism) before such a task  could be attributed to this entity. 
Moreover in terms of cost effi ciency, taking into account the lim ited resources available to the 
EFSF109, this solution would lead to substantial co sts to provide for adequate expertise and 
technical infrastructure to perform the task.  
Option 9 - Prohibit sovereign debt ratings 
Under this option sovereign issu ers would remain unrated. As a result, investors, including 
credit institutions, willing to acquire sovere ign debt would be required to base their 
investment decision on their ow n exclusive risk assessment. Th is would contribute to the 
objective of reducing reliance on external credit ratings by investors. However, while large 
credit institutions could be expected to have  the capacity and processes in place to perform 
such an assessment, as highlighted by the res ponses to the public c onsultation, smaller credit 
                                                 
106  The European Financial Stability Facility (EFSF) was created by the euro area member states following 
the decisions taken May 9, 2010 within the framework of the Ecofin Council. As part of the overall 
rescue package of €750 billion, EFSF is able to issue bonds guaranteed by EAMS for up to € 440 
billion for on-lending to EAMS (Euro Area Member States) in difficulty, subject to conditions 
negotiated with the European Commission in liaison with the European Central Bank and International 
Monetary Fund and to be approved by the Euro group. EFSF is a Luxembourg-registered company 
owned by Euro Area Member States. On 28 - 29 October the European Council agreed on the need to set up a permanent crisis mechanism to safeguard th e financial stability of the euro area as a whole. 
Eurogroup Ministers agreed that this European Stability Mechanism (ESM) will be based on the 
European Financial Stability Facility capable of providing financial assistance packages to euro area 
Member States under strict conditionality functioning  according to the rules of the current EFSF. The 
ESM will become operational as of mid-2013 following the expiry of the existing EFSF. 
107  See article 3 of EFSF Articles of Incorporation. Available from: 
http://www.efsf.europa.eu/attachments/ efsf_articles_of_incorporation_en.pdf .  
108  It must be underlined that the EFSF Framewor k agreement provides for various credit enhancement 
mechanisms to exclude the situ ation referred in the text 
109  At the time of drafting the EFSF ha d a staff of around  12 officials. 
 
 38/193  institutions and smaller investors do not necessa ry have the skills and resources to carry out 
their own assessment for all sovereigns. This would put a disproportionate burden on them. 
Furthermore, the effective enforcement of su ch a measure could be effectively limited by 
unsolicited ratings carried out by CRAs licensed in jurisdictions outside the EU. Moreover 
CRAs would be confronted with the disappear ing of an important source of revenues. 
The permanent prohibition would heavily impact on the freedom to conduct a business 
(Article 16 of the Char ter of Fundamental Rights of the Eu ropean Union) of  both credit rating 
agencies and investors. Indee d, considering the general nature  of the prohibition, it raises 
serious concerns as to its compatibilit y with the principle of proportionality. 
The summary of the analysis of different optio ns to achieve specific objective 2 (mitigate 
risks of contagion effects linked to sovereign debt ratings) is pr esented in the table below. The 
analysis of the impact of these options on different stakeholder groups is given in Annex VIII. 
 
 Effectiveness Efficiency 
Option 1 (baseline) n.a. n.a. 
Option 2 
(Require CRAs to publish a full research 
report on sovereign debt ratings and allocation of staff) (++) transparency on sovereign ratings will 
be improves. 
(++) investors would get a better increasing understanding of ratings.  (++) detailed information on research 
report would be made available to investors 
free of charge.  (-) CRAs would face lower profits since they would not be allowed to market the underlying (detailed) information on 
sovereigns. 
Option 3 
(Require CRAs to publish sovereign ratings after closing of EU trading venues) (++) publication of ratings during sensitive 
times would be avoided and contagion effects of sovereign ratings reduced.  
(-) measure would be not effective in 
trading venues outside EU jurisdiction. (0) since the measure would only affect the 
timing of the publication of the rating it would not entail additional costs for CRAs). 
Option 4 
(Require CRAs to conduct the sovereign 
debt ratings process more frequently)  (++) risks of contagion and spill over 
effects would be reduced.  (+) CRAs would be confronted with the 
limited additional costs linked to doing the 
full rating process more frequently. 
Option 5  (Extend powers of competent authorities (ESMA) to scrutinise rating methodologies)  (++) transparency and quality of sovereign 
ratings enhanced.   (+) limited additional costs for competent 
authorities to scrutinise ratings.  (+) limited additional costs for this 
additional validation process for CRAs. 
Option 6 
(Introduce a requirement for (EU) sovereigns to publish a standardised set of data on economic performance to 
enable credit risk assessment)  (+) access to data on sovereigns and 
investors' own assessment would be facilitated.  (-) duplication of costs with on going 
initiatives of the ESS to enhance reliability and quality of information on sovereigns. 
Option 7 (Grant ESMA the power to restrict or ban temporarily sovereign debt ratings in exceptional situations)  (++)  risks of contagion effects of sovereign 
ratings would be reduced.  (+) accuracy and quality of sovereign ratings would be improved. 
(-) risks of  adverse market reactions 
enhanced. (0) no direct costs involved by the adoption 
of the measure.   
Option 8 (Encourage an existing independent EU structure or promote a brand-new 
European Credit Rating Agency to issue 
sovereign debt ratings ) (++) financial stability enhanced through 
the availability of a credible alternative to existing commercial ratings for sovereigns.   
 (+/0) additional costs for the establishment 
of a new EU  Agency (case of public funding) 
or 
 
(+)limited  additional costs for the existing EU structure  to build  the expertise/technical infrastructure necessary 
to perform rating activities  
 
Option 9 (Prohibit sovereign debt ratings)  (+) reliance on sovereign ratings would be 
reduced.  (-) effectiveness would be limited by the 
continuous issue of sovereign ratings 
outside the EU jurisdiction. (--) investors, particular ly small investment 
firms and small credit institutions would be confronted with the costs of setting up their 
own risk assessment capacity.   
(-) CRAs would loose an important source of revenues. 
 
 39/193  Based on the analysis above on the effectiven ess and efficiency of the various options 
presented, options 2, 3, 4, 5, and 7 as the pref erred ones. Indeed their joint implementation 
would provide an adequate response to the va rious issues (problem drivers) described in 
section 4.2 above. Indeed measures included in options 2, 3, 4 and 5 are expected to improve 
transparency of sovereign rating process and therefore enhance the quality, objectivity, and 
reliability of sovereign ratings. In terms of effectiveness they all are expected to reduce the 
negative spill-overs and 'cliff' ef fect of sovereign ratings (downgr ades). With respect to cost 
efficiency, the implementation of such options  would entail limited additional costs, 
particularly for CRAs which would have to face  a reduction in their sources of revenues and 
bear the costs of doing the full sovereign rating process more frequently and comply with the 
obligation of prior validation of their me thodology by the ESMA. Furthermore, publication 
after closure of European trading venues (optio n 3) would ensure that market overreactions 
and heard behaviour is reduced. In exceptiona l circumstances which could trigger market 
volatility or affect the reliability and complete ness of the rating process, for instance pending 
the disclosure of the terms and conditions of a financial support packag e granted to a Member 
State, ESMA would be empowered to temporaril y ban sovereign ratings as a measure of last 
resort, ensuring that risks of contagion effects of sovereign downgrades are mitigated.  
6.3. Policy options to improve credit rating market conditions 
Policy options 
1. No policy change 
2. Encourage the emergence of a network of small and medium size rating agencies 
3. Encourage the emergence of a new European rating agency 
4. Harmonise ratings scales to improve comparability of ratings between CRAs 
5. Establish a European Rating Index (EURIX) 
6. Require CRAs to issue joint ratings at the level of the rating committee 
7. Ban large CRAs from acqui ring small and medium-sized CRAs 
8. Introduce temporary market share ceilings for CRAs  
9. Require CRAs to disclose pricing of ratings and ensure that prices are not discriminatory and based on costs  
 
The full description of policy options is presen ted in Annex VII. Options 2, 3, 4, 5, 6, 7, 8 and 
9 are not mutually exclusive and can be combined.  
Option 1 - No policy change 
Under this option, existing oligopolistic market structure, with three main rating agencies 
dominating the market is expected to persist.  
The landscape of the rating industry would not be substantially modified by the outcomes of 
the ongoing registration process und er the CRA Regulation. At this  early stage, six small and 
medium rating agencies have been registered an d it is too early to determine weather one of 
these agencies has the potential a nd the ambition to turn itself into a full-blown rating agency 
covering a wide reach in terms of asset classes (including sovereign debt, corporate and structured finance products) and territory (s ee Annex IV). A preliminary assessment does not 
suggest that in the short term a true competitor,  comparable in size, reputation and territorial 
reach to the three rating agencies with  a dominant market share could emerge. 
 
 40/193  Recently, there have been signals on possible market-driven initiatives for the future 
establishment of a European  Rating Agency in the fo rm of private Foundation110 which could 
be able to inflate more competition in the market of credit rating services.  
However, it is still too early to make any form of evaluation of these in itiatives since they are 
merely at the stage of announcements and it is impossible to assess their concrete chances of success. 
Therefore for the time being it is likely that issuers and investors w ould continue to be 
confronted with the current st ructure of the market which implies a limited availability of 
ratings and limited opportunities to compare differe nt credit opinions fo r investors. Issuers 
would continue to have a limited choice as rega rds the service provider for the rating of their 
debt instruments: consequently issuers could be confronted with pot ential abuses on prices. 
This could affect small and medium enterprises for which the access to financial markets 
could become costly. Nevertheless, if any private initiative materialises and results in one or 
more new competitors who would gain ground in terms of client basis and credibility, this would be undoubtedly a positive development enhancing competition and choice for the 
market.  
Option 2 - Encourage the emergence of a ne twork of small and medium sized credit 
rating agencies 
Promoting through a EU-funded programme a netw ork of small and medi um rating agencies 
could facilitate this type of CRAs to enter the market. This network could facilitate the sharing of best practices and resources and eventu ally lead to the emerge nce of more sizeable 
market players which could compete in terms of  size, instruments rate d, geographic reach and 
reputation of the large CRAs. Entry into the mark et and survival of new competitors would be 
also encouraged. The consultation process showed  that the majority of stakeholders would 
welcome more choice and market players in the rating industry.  
Due to their size and limited scope of activities, small and medium sized credit rating 
agencies lack resources to create such a ne twork by market forces. However, the public 
consultation on this initiative outlined great interest of small and medium-sized CRAs in 
having an opportunity to share knowledge, enha nce capacities for growth and eventually, 
extend the scope of their activities, particularly  with a view of operating in a cross-border 
context. There was therefore support from a gr oup of small and medium-sized CRAS for the 
idea of a European Network of Small and Me dium-sized Rating Agencies. Furthermore, a 
network could contribute for small and medium-s ized rating agencies to obtain economies of 
scale through sharing of data and best practi ces, which is an important factor currently 
limiting market entry. The European Parliament, in  its own initiative report on rating agencies, 
supported the creation of such a network. Ho wever, some regulators and governments 
questioned the effectiveness of such a network.  
For investors, such a measure would lead to more  choice with respect to the ratings available 
for the same debt instrument or the same issu er. For issuers this opti on could over time result 
in an increased offer of rating services and eas ier (and less costly) access to capital markets.  
Moreover it can be argued that higher compe tition and market contestability would push 
incumbent CRAs and new entrants to compete bot h on the side of prices  and on that of the 
quality of the services provided. This would i nduce CRAs to increase their investments on the 
collection and processing of th e information and on the methodol ogical tools. Th is in turn 
                                                
 
110  Recently the Consultancy Company Roland Berger has announced its intention to develop a European 
rating agency. Available from: 
http://www.rolandberger.co m/media/press/releases/Initiative_to_establish_European_Rating_Agency.ht
ml.  
 
 41/193  would reinforce the discipline exerted by the 'r eputation mechanism' since CRAs would incur 
in higher reputational risks if they underinvested and did not keep pace with their competitors 
in carrying out their business properly111. 
It should be noted that any netw ork of small and medium-sized rating agencies would have to 
adhere to existing competition rules112 which apply to all companies in the EU. More details 
on the implementing modalities are provided in Annex IX. 
Option 3 - Encourage the emergence of a brand-new European credit rating agency 
Under this option, the setting-up of a new Europ ean rating agency would be promoted either 
via the establishment of a pub lic institution entirely financed through the Union budget or by 
providing direct funding to a European agen cy in the form of a private foundation.  
Some Member States as well as the Europ ean Parliament suggested that the idea of 
public/private structures should be further cons idered and analysed. At the same time, some 
Member States noted the problems of credibility a nd conflicts of interest that could be caused 
by direct funding arrangements and which woul d need to be addressed. Some national 
regulators and several privat e enterprises opposed the crea tion of a new European CRA. 
Such a new entity would provide the whole range of rating services and cover all the asset 
classes. In this respect the EU  structure issuing sovereign ra tings envisaged under option 8 of 
the previous section 6.2 and the European ratin g agency could co-exist and increase further 
the offer of services to issuers and investors. Eventually, this could lead to lower prices for 
investors in the rating market and could incr ease the information available to investors 
through a wider range of credit ratings. 
However, it would likely take at least 5 – 10 y ears for such new entity to become capable to 
compete with the established CRAs by offering i nvestors and issuers a real alternative for 
rating services, thereby enhancing competition within the market for such services.  
Details on the estimation of costs of th e new entity are provided in Annex XI. 
Public European credit rating agency 
In terms of effectiveness a European rating ag ency entirely public would raise concerns of 
distortion of competition as it would be less under market pressure to develop competitive 
products and to price them ade quately as its entir e costs could be c overed and thus the 
bankruptcy avoided. Furthermore, the establishm ent of such an agency could hamper new 
private market entrants that want to establis h themselves on the market and progress gradually 
towards a sizeable competitor and thus further promote market concentration. In addition, the 
public could fear a preferential treatment  or a more accommodating behaviour from 
supervisors. Moreover investors could be concer ned, despite existing rules provided for in the 
CRA Regulation113, about the conflict of in terest that this model w ould entail particularly in 
the area of sovereign ratings (see analysis under option 8 in section 6.2 above).  This could be 
partially addressed by an a ppropriate design of the governan ce to ensure the Agency's 
independence. On the other side the public nature of the entity could positively impact on its 
credibility provided it is backed  by a positive track record of rating activities. However, for 
                                                 
111  It is worth mentioning that according to some Authors increased  competition might result in lower 
overall quality of ratings, i.e. more issuer-friendly and less informative ratings. See B. Becker and T. 
Milbourn, 'Reputation and competition: evidence from the credit rating industry, 2009. 
112  Also this option would raise the same concerns of competition as option 3 as the EU-funded network 
would be competing on the market with private companies. Further inform ation exchange between 
competitors can - depending on the market charact eristics and the characteristic of the information 
exchange - be in contradiction with European Competition rules.  
113  As described in section 4.5. 
 
 42/193  the reasons mentioned above, it remains uncerta in if a purely public  agency would obtain 
sufficient market confidence among investors. 
As regards the profile of cost efficiency this  solution would be undoubted ly the least efficient 
and, taking into account the current EU budget cons traints, it would raise serious concerns as 
regards its feasibility and sustainability in the long term.  
Private credit rating Foundation 
Alternatively, a European rating agency in the form of private foundation would have a lower 
capacity to distort competition within the market  of rating services than an entity of public 
nature and being potentially more independent  from governments (for instance in issuing 
sovereign ratings) if it received only initial funding and then had to compete on the market 
and generate revenues from the sale of its ow n products. On the other side, this model might 
raise concerns as regards potenti al conflicts of interest since the new agency would have a 
financial interest in deve loping business with issuers114 which could lead to 'inflated ratings'. 
In order to facilitate its establishment, the European Rating Agency could be granted EU 
financing to cover part of the start-up costs in  the form of a Union loan, via a grant agreement 
of following a competitive procedure (open call for tenders), or coming from the European Investment Bank. In this context it is impor tant that any financia l support provided by 
Member States is in compliance with the provisions of Articles 107-109 TFEU on state aid. 
As regards the efficiency profile, this solu tion would imply a lower recourse to public 
resources even though, taking into account the budget constraints mentioned above, its 
feasibility should be carefully assessed tr ough an in-depth preparatory analysis.  
Option 4 - Harmonise ratings scales to improve comparability of ratings between CRAs 
This measure would facilitate investors in comp aring ratings from distinct agencies through a 
harmonised standard reference scale to be used  by registered and authorised rating agencies. 
This would enable investors to compare rati ngs from smaller market players with the 
dominant market players more easily. Furthe rmore, it would also contribute to the 
understanding of ratings by investors.  
As a result, market access for small rating agencies  would be facilitated to some extent which 
could increase competition. Furthermore, this option could improve transparency on ratings 
and their interpretation for stakeholders including rating agencies and issuers.  
The technical standard setting out harmonised rating scale would be developed by the ESMA. 
All CRAs would need to produce and publish tables showing the correspondence between 
their existing rating scales and the newly established rating scale. 
 
Option 5 - Establish a European Rating Index (EURIX) 
Under this option, rating agencies would have to communicate each newly issued rating to a 
central entity such as the ESMA, which could take care of the centralised publication of the 
rating and related information. This would be made freely available to  investors, possibly 
though the ESMA website. 
This measure would improve visibility for i nvestors of the availa ble ratings for debt 
instruments particularly for newly establishe d rating agencies. Theref ore it would help new 
market entrants to gain visibility among investors and increase their reputation over time. 
Investors would be helped in co mparing credit opinions and ma ke their own assessment. This 
would indirectly contribute to the objective of reducing relian ce on ratings. It should be noted 
                                                
 
114  In the case of the "issuer-pays" model. 
 
 43/193  that the creation of harmonise d standards on rating scales w ould be instrumental to the 
development of the EURIX. 
Option 6 - Require CRAs to issue joint rati ngs at the level of a rating committee 
Under this option, large CRAs woul d be required to issue ratings  jointly with a smaller CRA. 
Both credit rating agencies would have joint re sponsibility for the credit ratings issued. As 
small and medium-sized CRAs would be required to  participate in the ra ting process together 
with large CRAs, this option would improve reputation of small CRAs and promote the 
development of new market entrants  in the credit rating industry.  
Furthermore, the joint credit ra tings could improve quality of  ratings through complementary 
and combined expertise in the preparation of the jo int ratings as well as in the analysis of the 
findings and conclusions. 
However, as rating agencies would issue jointly  ratings, the number of views and opinions on 
credit risk would be limited. Therefore, this  option would risk limiting competition in the 
rating industry. Furthermore this option could ge nerate additional conflicts of interests and 
competition policy issues as small and large rating agencies would have to cooperate and exchange information.  
As this option would imply involvement of  only smaller CRAs at the level of rating 
committee this option could add up roughly 10%  to the costs of a credit rating. These 
additional costs would most likely make rati ngs more expensive and be transferred to 
issuers.
115 
Option 7 - Ban large CRAs from acqui ring small and medium-sized CRAs 
The growth of the three biggest CRAs over the la st decade can be partially explained by their 
acquisition of other firms (see Annex IV. Section 2). Under this option, a CRA  with a relevant 
market position would therefore not be allowed to acquire smaller rivals. The EU Merger 
Regulation116 which is only applicable to transactions with Uni on dimension and which reach 
the merger control thresholds appears insufficien t to tackle this issue. A temporary ban on 
acquisition and mergers could lim it the growth of large CRAs and let new market entrants 
enter the market and gradually develop their ma rket share. The ban should be temporary, but 
long enough – at least ten years - to enable smaller CRAs to build up their necessary reputation. 
Taking into account the current market structure, this measure, on its own, is likely to have a 
limited effect. However, this option could become  important if other measures were taken to 
promote the growth of small CRAs or entrance of new rating market players. Finally, mergers 
and acquisitions can be justified, in some cases , by the quest for increased efficiency as a 
result of the combination of res ources of the companies involved.  
Option 8 - Introduce temporary market share ceilings for CRAs  
Under this option large CRAs would need to  accommodate a maximum ceiling of market 
share, transferring business to smaller compet itors. As a result, smaller CRAs would be 
facilitated to acquire business and build reputa tion, enhancing the level of competition in the 
market. Therefore, this option could substan tially increase the number of sizable market 
players in the rating industry.                                                 
 
115  The approximate costs are calculated on the information on joint audits in France. 
116  Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between 
undertakings,  OJ L 24/1, 29.01.2004. Pursuant to Article 2(3) of the merger regulation only a 
concentration which would significantly impede effective competition, in the common market or in a 
substantial part of it, in particular as a result of  the creation or strengthening of a dominant position, 
shall be declared incompatible with the common market. 
 
 44/193  However, it is worth underlining that in the short-run this measure c ould result in a reduced 
offer of services for issuers and potential increase of prices together with lower availability 
(and quality) of ratings for investors that migh t cause further instability in the financial 
markets. Indeed, all along this initial phase, while small and medium-sized CRAs would need 
enough time and resources to build up adequate capacity and reputation, large CRAs would be 
required to start reducing market share. This might force small CRAs to replace incumbents in providing certain typologies of services when th ey are not as efficient as their competitors 
(lower economies of scale, lower economies of scope) or even are not able to provide such 
services. 
These negative effects could be mitigated by the introduction of a phase-in period (e.g. 
transition period 5 years) ensu ring that both the supply and the demand side would have 
enough time to adjust to new requirements.  
However such a measure would go beyond Articl e 102 of the TFEU which only prohibits the 
abuse of a dominant position and not a dominant pos ition as such.  It would also amount to an 
artificial engineering of market structures which might have evolve d naturally based on 
competition on the merits. 
Option 9 - Require CRAs to disclose pricing of ratings and ensure that prices are not 
discriminatory and based on costs  
Require CRAs to disclose policy on pricing of ratings 
This option would require CRAs to provide inve stors, issuers and competing CRAs with the 
information on the policy of ratings pricing, in cluding objective pricing criteria. CRAs would 
be required to extend existing disclosure s of the current transparency report
117 with the 
aggregate information on the actual fees charge d for different asset classes. This limited 
disclosure of pricing information would further facilitate potential customers to compare the prices they would have to pay for the servi ces rendered by different CRAs and in this way 
promote competition.  
Require CRAs to ensure that the fees they char ge for their services are not discriminatory 
This option would also  imply price regulation thereby a CRA would be required to ensure that 
the prices and fees they charge for their services  are not discriminatory and based on costs, i.e. 
different consumers are not char ged a different price for an identical service taking into 
account the actual costs. In this regard CRAs would have to provide ESMA with detailed 
information on fees. This option would also contri bute to addressing conflicts of interests due 
to the issuer's pays model as pricing for rating services would be more transparent for issuers 
and the fees would not based on any form of contingency. This measure would be 
indispensable to effectively tackle inherent conf licts of interest in the "issuer pays" model. 
Information on fees would also enable all mark et participants as well as ESMA to better 
assess the risks of possible hidden pricing pr actices which could be  conducted against the 
interests of some issuer s, investors or products. 
However such rules need to be carefully drafted to make sure that they do not facilitate 
collusive behaviour among CRAs. 
The summary of the analysis of different optio ns to achieve specific objective 3 (improve 
credit rating market conditions) is presented in the table below. The analysis of the impact of 
these options on different stakeholder groups is given in Annex VIII. 
                                                
 
117  Art 12 of Regulation 1060/2009 requires rating ag encies to publish an annu al transparency report. 
Annex I section E (III) outlines that the transparency report should include f inancial information on the 
revenue of the credit rating agency divided into fees from credit rating and non-credit- rating activities 
with a comprehensive description of each.  
 
 45/193   
 Effectiveness Efficiency 
Option 1 (baseline) n.a. n.a. 
Option 2 
 (Encourage the emergence of a network of small and medium size rating agencies) (++) facilitate market entry of small and 
medium rating agencies.  (++) create more choice for investors and issuers reducing reliance on ratings.  (+) costs to set up a network are 
estimated moderate and proportionate.   
Option 3 (Encourage the emergence of a new European rating agency) (+) creation of more choice to investors and 
issuers reducing reliance of ratings.  (--) substantial costs for EU budget 
(funding of start-up costs) and possible distortion of competition (Public agency.) 
Option 4  (Harmonise ratings scales to improve 
comparability of ratings between 
CRAs)  (+) increased transparency which would 
enable investors to make own assessment and 
compare distinct ratings. 
(+) small market entrants would be  facilitate in entering the  market. (+) limited costs for all CRAs to enable 
the mapping of new rating scales. 
 
 
Option 5 (Establish a European Rating Index 
(EURIX))  (+) increased possibilities to compare distinct 
ratings available in the market. 
(+) small market entrants would gain  better 
market access due increased visibility. (+) limited costs for ESMA to establish 
and manage and update  index on an 
ongoing basis. 
(+) limited  costs CRAs to communicate information to cen tralised entity. 
Option 6. 
(Require CRAs to issue joint ratings at 
the level of the rating committee) (+) it  would increase the visibility and build 
trust on quality of ratings by smaller CRAs. 
(-)  it is quite likely that there would be no 
change regarding concentration and choice in the market.  (-)additional costs for CRAs to comply 
with the provision. 
Option 7  (Ban large CRAs from acquiring small 
and medium-sized CRAs) 
 (0/+) the credit rating market would remain 
highly concentrated. Though development and 
growth of small CRAS would be facilitated. 
Furthermore, risks that successful new market entrants would be taken over by larger market players would be mitigated, which would contribute to more choice in the rating 
industry..  (0) costs are likely to appear in terms 
reduced economies of scale due to 
banned acquisitions. 
Option 8  
(Introduce temporary market share 
ceilings for CRAs) (+) effective in reducing market concentration. 
 (0 )significant costs are likely to appear 
in terms reduced economies of scale due 
to giving up their businesses to smaller 
CRAs; disruptions in the market cannot be excluded either. 
Option 9  (Require CRAs to disclose pricing of ratings and ensure that prices are not discriminatory and based on costs )  (+) Price transparency and regulation of 
prices would contribute to more intense competition.   (+) Limited costs for CRAs to comply 
with the provision. 
 
Based on the analysis above, option 2, 4, 5 and 9 ar e the preferred options in order to improve 
choice and enhance competition within the mark et of rating services. Under this package, 
small and medium size rating agencies would be  stimulated to exchange information which 
could facilitate new market entrants in the market. Furthermore, common standards for rating 
scales would facilitate comparison of ratings  among investors. Additionally, visibility of 
ratings by new market entrants would be impr oved through the establishment of a European 
Rating Index. In addition, improve d transparency on pricing policies and fees would enable to 
avoid potential conflicts of interest in the pr ovision of rating services and would facilitate 
competition in the rating market. Option 7, The ban for large CRAs from acquiring small and 
medium-sized CRAs would be necessary to ensu re effectiveness of other preferred options, 
including those addressing issues  on CRAs' independence. However, this ban on its own 
would not be effective to change the market structure and could be circumvented by CRAs. 
6.4. Policy options to ensure right of redress for investors 
 
Policy options 
1. No policy change 
2. Introduce civil liability of  CRAs into EU legislation 
 
 46/193  3. Ensure civil liability of CRAs towards us ers of credit ratings before national courts 
Option 1 – no policy change 
Without a policy change the curre nt situation would persist, i. e. investors in many Member 
States would face legal difficulties in claimi ng damages from CRAs, even if the latter 
infringed its obligations with gross neglig ence that resulted in faulty ratings.118 Investors' right 
of redress and, accordingly, the level of exposure of CRAs to civil liability claims would vary 
considerably from one Member State to anot her. This could incentiv ise CRAs to favour the 
application of laws of such Member States wh ere their exposure to potential civil liability 
claims is more limited.  
It could be argued that the fact that the CRA Regulation has empowered ESMA to impose 
sanctions on CRAs for having infringed th e CRA Regulation alread y provides sufficient 
incentives to CRAs to comply with the CRA  Regulation. However, the possibility of 
sanctioning CRAs is not a substitute  for an efficient right of re dress for investors and does not 
compensate investors for their losses. 
Accordingly, several respondents from vari ous stakeholder groups encompassing some 
governments, regulators a nd banking industry bodies supported th e possibility of civil liability 
claims against CRAs, but only for gross negligen ce or intent. Overall, there seemed to be 
general support (with the notable exception of the CRAs themselves, arguing that this would, 
for instance, increase reliance) for the notion th at it should be possible to pursue civil action, 
in the case of both solicited and unsolicited ratin gs, but that such action should be reserved for 
severe infringements. 
Option 2 – Introduce civil liabili ty of CRAs into EU legislation 
Under this option a new specific provision on whic h investors could directly base claims for 
damages against CRAs resulting from gross neg ligence or misconduct would be introduced in 
the CRA Regulation. This provision would dire ctly define the conditions under which CRAs 
can be held liable. The specificities of the ra ting activity would need to be taken into account. 
Ratings contain to a certain ex tent a prognosis for the future, and in some situations there 
could be a virtually unlimited number of invest ors who could claim damages from a CRA that 
infringed the CRA Regulation. This  might suggest that only cases  of gross negligence should 
trigger civil liability. The advantages of this op tion over option 1 include th at civil liability of 
CRAs to investors would be possible throughout the EU and under the same conditions. This 
would ensure an equal right of redress for investors against CRAs. By granting access to 
justice in these cases, this option would positiv ely impact on the right to an effective remedy 
and to a fair trial as guaranteed by Articl e 47 of the Charter of Fundamental Rights.  
As CRAs would be equally exposed to civil li ability, there would be no incentive for forum 
shopping. The fact that civil liability of CR As would be possible (under the conditions 
defined in the CRA Regulation) would provide additional strong incentives for CRAs to avoid 
misconduct and comply with the CRA Regulation.  
The disadvantage of this option is  that, depending on the level of detail of EU rules, it could 
increase the complexity of civil law systems of the Member States. Civil law systems in 
general cover all types of activ ities, and are often based on principles which horizontally 
apply to all claims (e.g. the appropriate standard  of fault, causality link). Regulating civil 
liability of CRAs on the EU level while most ot her areas stayed at the national level would 
increase the complexity of the civil law system s and could make it more  difficult to apply in 
                                                 
118   See table in Annex VI, section 2.4 describing on what legal basis and to what extent investors can claim 
damages against CRAs having infringed the CRA Regulation. 
 
 47/193  practice. In any case, liability claims would need to be broug ht before national courts, under 
national procedural rules. In addition this option may go beyond what is necessary to ensure 
that users of ratings have a su fficient right of redress.   
Option 3 – Ensure civil liability of CRAs towa rds users of credit ratings before national 
courts 
Under this option, a provision in the CRA Regulat ion would ensure civ il liability of CRAs 
towards investors before national courts. This  provision would set th e principle and some 
conditions under which civil liab ility of CRAs should be possible. For instance, it could 
stipulate that CRAs infringing requirements  of the CRA Regulation by gross negligence 
should be held liable and that it should not be permitted to exclude civil liability. As in the case of option 2, this option has the advantage that it would en sure that investors in all 
Member States have a sufficient right of redress against CRAs before national courts.
119 By 
granting access to justice in these cases, this option would positively impact on the right to an effective remedy and to a fair trial as guarant eed by Article 47 of the Charter of Fundamental 
Rights. 
Furthermore, the possibility of civil liab ility of CRAs would create additional strong 
incentives for CRAs to comply with th e requirements of the CRA Regulation. 
In comparison with option 2 this has the advantag e of taking into accoun t the specificities of 
national civil law orders. In fact, option 3 requi res the supplementary a pplication of national 
rules. This option would thus be in accordance with the principl e of subsidiarity. On the other 
hand option 2 may be more effective in ensuring a uniform right of redress for all European 
investors as there would be only one legal basis fo r claims throughout the EU. 
A summary of the analysis of the different options  to ensure a right of redress for investors is 
presented in the table below. 
 Effectiveness Efficiency 
Option 1 (baseline) n.a. n.a. 
Option 2 
(Introduce civil 
liability of CRAs into 
EU legislation) (++) objective to ensure right of redress fully met.  
(++) uniform provision in EC legislation excludes 
forum shopping.  (+) uniform provision in CRA Regulation ensures 
harmonised approach.  
(-) may go beyond what is necessary and  increase 
complexity within the national civil law systems. 
Option 3 
(Ensure civil liability 
of CRAs towards users 
of credit ratings before national courts)  (++) objective to ensure right of redress fully met.  
 
(+) risk of forum shopping reduced. 
 (+) respect specificity of national civil law orders. 
Based on the analysis above option 3 would be  the preferred option. Both option 2 and 
option 3 provide clear advantages compared to the status quo in achie ving the operational and 
specific objective. In particular, both would ensure that investor s profit from an appropriate 
                                                 
119  An efficient right of redress under this option (and  also option 2) presupposes that the applicable law 
under private international law rules (Rome II Regulation) would be the law of a Member State. Under 
Art. 4 of Rome II the applicable law is the law of  the country where the damage occurs, which could be 
in case of financial instrument pur chases either the place of purchase, the place where the securities are 
deposited or where the account is located. Following these criteria purchases by EU investors on EU 
markets will in most cases lead to the application of the law of a Member State which will ensure an 
efficient right of redress under this option. It should also be considered in this context that other 
important jurisdictions have recently strengthened the civil liability of credit rating agencies. For 
instance in the US , the Dodd-Frank Wall Street Re form and Consumer Protection Act, Subtitle C, Sec 
931 ff, stipulates that CRAs shoul d be accountable in the same way as accounting firms or securities 
analysts.  
 
 48/193  right of redress against CRAs, reduce the risk of forum shopping and provide strong 
incentives for CRAs to comply with their lega l obligations and to i ssue good quality ratings. 
While option 2 would have the benefit of creating a completely harmonised basis for 
investors' claims against CRAs, option 3 may ach ieve the objectives in a more efficient way 
by relying more on national rules which is preferab le in view of the principle of subsidiarity. 
Both, option 2 and 3 would impact positively on the right to an effective remedy and to a fair 
trial as guaranteed in Article 47 of the Charter of Fundamental Rights. 
6.5. Policy options to reinforce independence of  credit rating agencies and improve 
credit rating methodologies and processes 
Policy options 
1. No policy change 
2. Require investors to pay for  ratings ("investor-pays model") 
3. Require trading venues to set up and ensure the adm inistration of the "Trading venues pay" model 
4. Require CRA selection to be undertaken by an independent board 
5. Introduce rotation rules for the CRAs engaged by an issuer to rate its own products and to rate the issuer itself  
6. Introduce specific requirements on CRAs' independence and objectivity in relati on to their shareholders 
7. Strengthen rules on disclosure of rating methodologies 
8. Require CRAs to inform issuers sufficient ly in advance of the publication of a rating 
The policy options presented above are not necessarily mutually exclusive, hence 
combinations of two or more options are also analysed where appropriate. 
As explained in the problem definition, the issuer  pays model's conflicts of interest are highly 
sensitive to all market particip ants and should theref ore be carefully asse ssed. In this context 
it is important to consider the steps taken in  the US under the Section 939 F(b) of the Dodd-
Frank Act of July 2010, requiring the SEC to  carry out a study of CRA compensation and 
remuneration models within two years of that date.120 
Option 1 – No policy change 
Even if the CRA Regulation neither imposes nor favours a specific re muneration model, the 
issuer pays model would without  a policy change, possibly, con tinue being the most dominant 
in the market and conflicts of interest related to this model would pers ist. Since CRAs have a 
financial interest in generating business from ra ted firms, they may tend to give issuers that 
                                                 
120  Specifically, the Dodd-Frank Act requires that: "T he Commission (SEC) shall carry out a study of 1) 
the credit rating process for structured  finance products and the conflicts of interest associated with the 
issuer-pay and the subscriber-pay models; 2) the feasibility of establishing a system in which a public or private utility or a self-regulatory organization assigns nationally recognized statistical rating 
organizations to determine the credit ratings of stru ctured finance products, in cluding (a) an assessment 
of potential mechanisms for deter-mining fees for the nationally recognized statistical rating organizations; (b) appropriate methods for paying fees to the nationally recognized statistical rating 
organizations; (c) the extent to which the creation of such a system would be viewed as the creation of 
moral hazard by the Federal Government; and (d) an y constitutional or other issues concerning the 
establishment of such a system; 3) the range of metr ics that could be used to determine the accuracy of 
credit ratings; and 4) alternative means for compensating nationally recognized statistical rating 
organizations that would create in centives for accurate credit ratings". 
 
 49/193  account for a large proportion of their income higher ratings than justified121, even if the CRA 
Regulation partially addresses this issue by di sclosure rules and pro cedural requirements.122  
Moreover, without a policy change , conflicts of interest rela ted to a CRA's shareholders 
structure may potentially occur as the curren t CRA Regulation does not  explicitly include 
controlling shareholders in  the provisions that proh ibit specific rating actions.123 
Without a policy change investors would not always be well informed and be able to 
understand the underlying assumptions a nd limits of rating methodologies.   
Finally, without a policy change, it would still be possible for CRAs to notify issuers outside 
working hours of an imminent rating action, wh ich does not allow the issuers to check the 
accuracy of the underlying assumptions.   
Option 2 – Require investors to pay fo r ratings ("investor pays model")  
The advantage of this option would be that conf licts of interest related to the issuer-pays 
model would be avoided. Since in general investors should have an interest in accurate ratings, 
an investor-pays model would potentia lly enhance the quality of ratings. 
On the other side, there are also potential disa dvantages related to the investor-pays model. 
First, investors may have their own interests124, so ratings paid by investors would not be free 
of potential conflicts of interest.  
Furthermore, investors are like ly to ask for "compensation"  for increased rating costs by 
requiring higher returns on investments, so the lik ely outcome of this model is an increased 
cost of funding for issuers. Moreover, in cont radiction to FSB principl es, investors' reliance 
on ratings could further increase.  
Finally, an obligatory investor-pays model could make it difficult for smaller issuers of less 
liquid issuances to find a CRA w illing to rate them and, conse quently, to raise funds at the 
capital markets. CRAs may refuse to rate such issuances due to the uncertainty whether there 
will be enough investors willing to pay for th em. Also many respondents to the consultation 
opposed an obligatory investor-pays model, pointi ng to conflicts of interest that are related 
also to this model.  
Option 3 – Require trading venues to set up and ensure the administration of the 
"Trading venues pay" model 
The advantage of this option would be that conf licts of interest related to the issuer-pays 
model and the investor pays model would be av oided as it would be the trading venue (and 
not the issuer or investor) which would sele ct and pay the rating agency. Trading venues do 
not have an own interest in the rating and are impartial. This  model would therefore remove 
the incentives for a CRA to issue favourable ratings  in hope of repeated rating services for the 
same issuer. 
                                                 
121  See above Section 4.5.1. and Annex VI, 2.5. 
122  For instance, credit rating agencies have to undertake all necessary steps to ensure that their ratings are 
not affected by any existing or potential conflict of  interest (Art. 6 (1) of the CRA Regulation in 
conjunction with Annex I, Section B 1). They have to disclose to the public the names of the rated entities from which they receive more than 5 % of their annual income (Art 6 (2) in conjunction with 
Annex I Section B 2). Rating analysts may not be i nvolved in any negotiation regarding fees with a 
rated entity and their remuneration shall not depend on the remuneration received from the rated entity 
(Art. 7 (2), (5) of the CRA Regulation). 
123  Art. 6 in connection with Section B 1.-3 of the CRA Regulation.  It would for instance not be explicitly 
prohibited that a CRA issues a credit rating on an instrument in which the CRA's controlling shareholder has a direct ownership interest.  
124  See Section 4.5 and Annex VI, 2.5. 
 
 50/193  However, the trading venues-pay model has severa l disadvantages. First, the effectiveness of 
this model can be questioned as it would only cover securities that are traded on trading 
venues, but not those which are traded over-t he-counter. Currently, a large proportion of 
securities are not trad ed on trading venues.125 In order to avoid the trading venues-pay model 
to apply, issuers may even decide  to delist from trading venues. 
Secondly, it would be difficult to find criteria that trading venues c ould use in order to 
attribute rating mandates to credit rating agencies. Where CRAs are allocated to issuers on a 
pure random basis, CRAs would wi n business, even if they we re not responding to the needs 
of investors. If a trading venue would have discretion in  selecting a CRA they could 
potentially face civil liability claims for havi ng selected an inappropriate CRA. Finally, this 
model would require trading venues to substa ntially restructure thei r business, and hire 
experts which would be able to select appropriate CRAs. It is not sure whether trading venues 
currently have sufficient capacity and experience  to administer such a model. Trading venues 
would probably pass those costs onto their cl ients which could make public listing more 
expensive. Making public listing more expensive would go agai nst the strategic objective to 
facilitate access to capital markets, particularly  for smaller and medium  enterprises (SMEs). 
Last but not least, trading venue s would be subject to civil liability claims for the choice of a 
given CRA. 
Option 4 – Require CRA selection to be undertaken by an independent board 
Under this option an independent "Credit Ratin g Agencies Board" comprising supervisors, 
issuer representatives, subscribers/investors and CRAs would be empowered to select a CRA 
for an issuer.126 The issuer would remain free not to be rated at all, or to mandate an 
additional CRA apart from the one selected by the board.    
The advantage of this option would be that conflic ts of interest related to the issuer-pays and 
investor-pays models would be avoided as it would be an independent board (and not the 
issuer or investor) which woul d select the rating agency. Due to its balanced composition the 
board could be expected to be impartial when selecting a CRA. 
However, the effective functioning of the rating ma rket requires that securities issuers are free 
to choose their rating provider. If ratings are centrally allo cated, incentives for CRAs to 
maximize their operational performance and to compete on the basis of price and service 
quality could significantly be reduced. Similar c oncerns were raised by some respondents to 
the public consultation.                                                   
 
125  In Europe, the ratio of listed to unlisted compan ies is 1:3.  Data from Property Funds Research, 
Bloomberg and Macquarie Research, cited in Compatible not competing, 19 November 2010. Available from: http://www.ipe.com/realestate/compatible-not-competing_37991.php?categoryid=1056
. 
126  In the US, there is currently a debate whether conf licts of interest due to the issuer pays model should 
be addressed by creating a ratings oversight board to select CRAs for rating structured finance instruments:  The "Franken Amendment" calls on the Securities and Exchange Commission to create a 
ratings oversight board, with investor representativ es in the majority. The board could choose a rating 
agency to conduct the initial evaluation of each new set of asset-backed bonds or other structured-
finance products. Assignments would be based on objective measures of rating accuracy over time. 
Securities issuers would not be allowed to play a ro le in the assignment process. There would be two 
objective measures to evaluate the accuracy of ratin g agencies: (1) one standard of comparison is long-
term yield: if two securities have the same risk profile, they ought to produce similar rates of return over 
time; (2) another simple gauge is the frequency with which investment-grade bonds default or lose 
significant value. Under the Franken Amendment, simple, transparent measures of this kind would be used to reward the most accurate rating agencies with additional assignment s, while those with the 
poorest records could, in extreme cases, be suspen ded or removed from the pool. See Key Questions 
and Answers, The rating agencies and the Franken Amendment, Demos, June 2010. Available from: 
http://www.demos.org/publication.cfm?cu rrentpublicationID=F68A14B1-3FF4-6C82-
51CF8955309A97FD .  
 
 51/193  Moreover, there would be similar concerns as  the ones related to the trading venues-pays 
model (option 3). It would be difficult to find th e right criteria for attributing rating mandates 
to individual credit rating agencies. The selec ting board would be exposed to civil liability 
claims. In addition, the establishment and the ad ministration of such a board would be costly 
and require taxpayers' money.  
Option 5 - Introduce rotation  rules for the CRAs engaged by an issuer to rate its own 
products and to rate the issuer itself and introduce mandatory separation between them 
The system involving the external  rotation of credit rating agenci es would preven t conflicts of 
interest arising from "issuer pays" model and long business relations w ith rated companies, 
but would also eliminate "lock-in" effect where by an issuer has difficulties to switch a rating 
agency.   As issuers would be legally required to change cred it rating agencies, this action 
would not raise concern of inve stors regarding the creditworthin ess of the issuer. This would 
also help CRAs to better resist any pressure from issuers to issue more favourable ratings by 
reducing independence threats that result from  long business relationship between a CRA and 
an issuer.  Secondly, one could also increase  the independence of CRAs by ensuring, where 
necessary, that a different CRA rate s an issuer and its products.  
In addition to reinforcing CRA's independenc e, mandatory rotation of CRAs would also 
create more opportunities for an is suer to solicit ratings from different CRAs and would offer 
CRAs the opportunity to rate more different issu ers and instruments, potentially gaining more 
experience in different areas a nd should give an opportunity fo r smaller CRAs to compete by 
producing a track record of quality ratings. 
The disadvantages would include a small additional burden on issu ers to administer the more 
frequent change of CRA, and making informati on available to different parties. For CRAs 
there may be some additional cost associated w ith the initial analysis of an issuer or its 
products in order to issue a rating. 
The introduction of external  rotation would require revi ewing current CRA Regulation 
requirements on internal rotation for CRAs analysts. 
Option 6 - Introduce specific requirements on CRAs' independence and objectivity in 
relation to their shareholders 
A CRA would be prohibited from issuing ratings  of any person or of financial instruments 
issued by a person that owns shar es of that CRA or directly or  indirectly controls that CRA. 
Also, shareholders would be prohibited to accrue potentially controlling stakes, individually 
or in voting blocs in more than one CRA. In vi ew of the potential infl uence that these persons 
might have on the management of a CRA, thes e requirements would remove the potential 
conflict of interest that a CRA could otherwise have when issuing ratings of these persons.  
Moreover, any person that directly or indirectly controls a CRA would be prohibited to invest 
in products and entities ra ted by the CRA and to provide adviso ry services to the entity which 
or whose products were rated. Th is requirement would reduce a ri sk that a CRA is influenced 
by these persons – individually or jointly – with respect to ratings of financial instruments / 
issuers that these persons have interest in.  
One disadvantage of this option is possible co sts for tracking important shareholdings. The 
CRAs should be aware of their main shareholders  whom they also have to report to ESMA 
during the registration process.127 A minimum threshold of participation holding in the 
shareholder's equity of a CRA could be determined  to limit the scope of this option to material 
shareholdings.                                                  
 
127  See Annex II Nr. 5 of the CRA Regulation. 
 
 52/193  Option 7 - Strengthen rules on di sclosure of rating methodologies 
Extend disclosure requirements on methodologi es and underlying assumpti ons of structured 
finance ratings to ratings of all asset classes  
This extension would harmonise requirements between different asset classes and would 
make ratings clearer to users of ratings. This  would also provide fo r greater stakeholder 
engagement and would eventually reduce uncerta inty in the market regarding the meaning 
and the quality of a credit rating. It would al so reduce overreliance on credit ratings if 
investors are in a position to better understand  and evaluate a rating – and form their own 
opinion. 
Enhance the requirement to disclose material changes in methodologies by additionally 
requiring the publication of clear reasoning and justi fication for the changes 
This would require CRAs to disclose material  changes to their methodologies by publishing 
detailed justifications and reasoning alongsid e the changes, disseminating this information 
especially to all rated entities that would be affected by the changes, as soon as these are 
known.  A requirement to attach such explanations  and justifications to  any further updates on 
ratings could also be introduced. This would have the advantage of increasing investors' 
understanding of the methodologi es, enhancing dialogue of CRA s with stakeholders and 
could potentially also reduce market disr uption that rating changes may cause.  
Enhance disclosure requirement regarding erro rs in methodologies or their application by 
requiring immediate disclosure directly to the affected parties including investors, issuers and 
competent authorities 
If a CRA discovers an error in a methodology or its application the CRA would be required to 
disclose this directly to the affected partie s including investors, issu ers and ESMA. Firstly, 
this would provide incentives to CRA to avoid such errors in the first place. Secondly, this 
requirement would benefit the market part icipants by informing them of errors.  
Option 8 – Require CRAs to inform issuers su fficiently in advance of  the publication of 
a rating 
Option 8 has the advantage over option 1 that it ma y help to reduce the risk of factual errors 
before publication of ratings. This option woul d extend the current pr e notification period 
provided for in Annex I D (3) of the CRA Regul ation ("12 hours-rule") . The advantage would 
be that issuers (including sovereigns) are info rmed sufficiently in advance of the publication 
of a rating publication in or der to draw the CRA's atten tion on any factual errors. A 
notification 12 hours before the publication of a rating, but outside normal working hours, for 
instance over night, would not be sufficient. Option 8 is favoured by some Member States. 
Participants who responded to the public cons ultation had many different views on the time 
span between informing the issuer and inform ing the public to be covered under such an 
option. However, there was a significant pe rception that 12 working hours would be 
preferable than a provision of 12 hours without explici tly specifying them as "working hours".   
The disadvantage of this option is the potential for negative impacts on market stability due to 
the greater risk of market abuse / insider dea ling before the publication of a rating. However, 
such risk could be mitigated, by limiting the timeframe to 12 working hours and not 3 working days as suggested in the public consultation a nd through introducing some 
safeguards in the forthcoming review of the Market Abuse Directive review. Furthermore, 
requiring CRAs to inform issuers about rating changes in advance may open room for pressure from the rated entities on the CRAs. 
The summary of the analysis of different options to achieve objective 5 (reinforce 
independence of credit rating agencies and improve ratings quality) is presented in the table 
 
 53/193  below. The analysis of the impact of these opt ions on different stakeholder groups is given in 
Annex VIII. 
 Effectiveness Efficiency 
Option 1 (baseline) n.a. n.a. 
Option 2 
Require investors to pay for ratings 
("investor-pays model") (+/-) could help to reduce the issuer-pays 
conflicts, but may replace these with others 
or possibly increase investors' reliance on 
ratings. (-) funding could become more difficult for 
some types of issuers. 
(+) issuer pays conflicts would be avoided 
for a section of the market.  
Option 3 (Require trading venues to set up and 
ensure the administration of the 
"Trading venues pay" model) (+) removes issuer-pays conflict. 
(-)does not target non listed financial 
instruments. 
 (--) cost and difficulty for venues to set up 
and administer such a model. 
 
Option 4 (Require CRA selection to be undertaken 
by an independent board) (+) the issuer-pays model conflict would be 
eliminated. 
(--) there could be significantly reduced incentives to compete on quality of ratings 
depending on specific arrangements of 
model.   (--) potential entrants  could face further 
difficulties establishing themselves in the 
market.  (--) cost of devel oping the independent 
body. 
Option 5 
(Introduce rotation rules for the CRAs engaged by an issuer  
 (++) reduces incentive for CRAs to inflate 
ratings in return for repetitive business. (-) potential downward effect on rating 
quality as CRAs incentives to meet highest 
quality standards may decrease. (++) reduces conflicts due to issuer pays model. (++) reduces lock in effects. (++)effectively  reduces conflicts through 
relatively simple measures.  
(-) increased costs for issuers/rating 
agencies.   
Option 6  (Introduce specific requirements on CRAs independence and objectivity in relation to their shareholders)  (++) from the perspective of ownership and 
control of CRAs,, ensures independence of CRAs and integrity of the market.  (+) some additional costs supervision 
justified by the achievement of this objective.  
Option 7 
(Strengthen rules on disclosure of rating 
methodologies)  (++) ensures that market properly 
understand and be in a position to 
scrutinise methodologies for all asset classes. (+) in addition it should also reduce 
overreliance on external ratings. (+) extends existing provisions to cover 
further asset classes.   
 (-) increased costs for CRAs. 
Option 8 (Require CRAs to inform issuers sufficiently in advance of the publication of a rating) 
  (+) increase quality of ratings by making 
factual mistakes less probable. (-) on the other hand, the requirement to notify issuers about a rating decision in 
advance opens room for insider 
dealing/market manipulation. (++)enhance existing provision of CRA 
Regulation and  makes the rating process more transparent without causing further costs. 
 
Based on the above analysis, the options 5 – 8 sc ore better than other options and are assessed 
as efficient and effective. The options requiring  significant interventions in and alterations of 
the market (for example, 3 and 4) have pot entially prohibitive costs. While they might 
eliminate some conflicts, they could also enge nder others. Options 5 – 8 are complementary. 
Option 7 goes some way to mitigating the concer n that option 5 could in some circumstances 
cause a risk that the quality of ratings coul d fall: by ensuring transparency, the rating 
methodologies would be subject to more market scrutiny and encourage CRAs to justify and 
correctly monitor their ratings. However, the e ffectiveness of these measures, in particular 
mandatory rotation of CRAs, can only be ensure d if the market conditions are conducive to 
the growth of small CRAs and the entran ce of new players in the rating market. 
  
 
 54/193  7. OVERALL IMPACT OF THE PACKAGE  
7.1. Cumulative impacts and synergies 
This section presents the cumulative impact s from the implementation of the package of 
preferred policy options. The package of prefer red policy options has been developed in a 
way to ensure the achievement of the overall objective to " contribute to reducing the risks to 
financial stability and restoring investor and other market participants' confidence in 
financial markets and ratings quality ".  
The preferred options are expected to reduce ov erreliance on external ratings by reducing the 
importance of external ratings in financial serv ices legislation. This is expected to reduce 
reliance on external rati ngs by credit institutions128, insurance undertakings129, investment 
funds and the asset management sector.130 In addition, the preferred policy measure to 
introduce a requirement for issuers to improve disclosure regarding the underlying asset pools 
of structured finance products is expected to facilitate investors to make their own credit risk 
assessment, rather than leaving them to rely solely on external ratings. 
Furthermore, the preferred options would improve transparency and quality of sovereign debt 
ratings through verification of underlying info rmation with a sovereign. A first measure 
would require CRAs to verify the accuracy of in formation with sovereigns to ensure that 
potential errors of sovereign ratings are a voided. Moreover, transparency and quality of 
sovereign ratings would be e nhanced through the publication of the fu ll research report 
accompanying the rating. The publication of sove reign ratings after closure of European 
trading venues would ensure that new rating info rmation can reach all market participants and 
thus would limit major market disturbances. A dditionally, to mitigate the risk of contagion 
effects of sovereign downgrades ESMA, in speci fic situations determined by the regulation, 
would be allowed to temporar ily ban sovereign ratings. This measure should be temporary, 
exceptional and subject to very strict conditions. 
The preferred policy measures are also expe cted to improve choice and optimize rating 
industry structure. Small and medium size rating agencies would be stimulated to exchange 
information which could facilitate new market entrants entering the rating industry and offer a 
wide range of services. In addition, comparison of  ratings from distinct rating agencies could 
be facilitated by promoting co mmon standards for rating s cales. Furthermore, improved 
transparency on pricing policies and fees would not only facilitate competition in the rating 
market, but would also enable ESMA to effec tively monitor potential conflicts of interest 
resulting from the "issuer pays" model. Fina lly, mandatory rotation of CRAs would not only 
substantially reduce the familiarity threat to  CRA independence resulting from long business 
relationship between a CRA and an issuer, but woul d also have a signific ant positive effect on 
improving choice in rating industry by providi ng more business opportunities for smaller 
CRAs.. 
In terms of investor protection, the preferred options would ensure that investors have an 
appropriate right of redress ag ainst CRAs before national cour ts. This would also provide 
strong incentives for CRAs to comp ly with legal obligations and ensure high quality ratings.  
Independence of ratings would be improved by introducing a requirement for issuers to 
change CRA periodically. Risks of conflicts of  interest would be further reduced by the 
requirement that a CRA should not be able to ra te an issuer and his products simultaneously. 
                                                 
128  Through an amendment of the Capital Requirements Directive. 
129  Through implementing measures of the insurance regulation II. 
130  Ensured through technical standards and implem enting measures subject to extensive scrutiny by 
ESMA and in cooperation with national competent authorities. 
 
 55/193  Furthermore, independence would be improved by enhancing the ownership structure of 
CRAs. In addition, transparency and quality of  ratings would be improved by strengthening 
the rules on disclosure of rating methodologies , by introducing a process for the development 
and approval of rating methodol ogies, including the requirement for CRAs to communicate 
and justify the reasons for modifications to their rating methodologies. Finally, quality of 
ratings would be enhanced by requiring CRAs to in form issuers sufficiently in advance of the 
publication of a rating. 
7.2. Proportionality of the package 
In order to, on the one hand, re duce reliance on rati ngs and, on the other hand, increase their 
quality it is necessary to improve transparency  and choice for investors and to increase the 
independence of credit rating agencies. 
To achieve the objective of reducing reliance on  ratings, the preferred options would ensure 
that financial institutions are required to enha nce internal risk management and promote the 
use of internal rating models, which would re quire improved disclosu re by rating agencies 
and issuers. To this end the requirement for issuers to impr ove disclosure on structured 
finance products, the most complex financial in struments, on an ongoing ba sis is necessary to 
enable internal risk management. The requireme nt for the publication of the full research 
report on sovereign ratings also contributes to internal risk management, which is 
proportionate particularly in view of the importa nt impact of sovereig n ratings on financial 
markets. Disclosure for corporate asset classes remains unchanged. 
 
However, financial institutions of smaller size or with non-complex  exposure or private 
investors would continue to require and use extern al ratings. This requires availability of a 
wide choice of ratings based on high quality  rating methodologies performed by independent 
rating agencies.   To improve the choice in rating industry the package proposes to encourage small and medium-sized rating agencies to grow in size and scope by creating a network. These smaller 
agencies would benefit from improved visibi lity and comparability  through the European 
Rating Index which would be easily accessible fo r all interested stakeholders. To ensure 
comparability of available ratings through the EURIX would require harmonised rating scales 
based on a technical standard determined by ES MA. To ask rating agencies to provide such 
rating scales is therefore a proportionate measure.  
 
Additionally, the quality of ratings and the quality of rating methodologies would be 
improved by a number of measures within the package. Improved disclosure of rating 
methodologies would improve the understanding of a ll stakeholders of rating methodologies. 
For sovereign debt ratings, issuers would be requ ired to inform issuers sufficiently in advance 
of underlying information used to rate the pr oduct which is a precautionary measure to ensure 
rating quality for sovereigns. Additionally, the requirement to scrutinize rating methodologies 
of sovereign ratings would be a proportionate ad ditional measure to ensure quality of ratings 
for this asset class which can have important imp lications for the stabilit y of financial markets. 
Furthermore, high quality rating methodologies for sovereigns would contribute to limiting 
the use of the proposed power, for ESMA, to te mporarily ban sovereign ratings. Consequently, 
it is proposed to limit this latter power to tem porary and exceptional that would be subject to 
very strict conditions.  Concerning the proportionality of the introduction of  a rotation requirement it is important to 
point out that rotation of rati ng agencies would only apply for "solicited ratings", which are 
 
 56/193  paid by the issuer. Furthermore, if this requ irement were to be introduced, it would be 
proportionate and consistent to remove the rules on in ternal rotation of staff for solicited 
ratings. For (unpaid) unsolicited ratings, the exis ting requirement to internally rotate staff 
would need to be maintained to ensure  independence for this type of ratings. 
 Independence would be further reinforced by a prohibition on CRAs rati ng the products of 
firms which are themselves controlling share holders of the CRA. The latter entails an 
important risk as controlling shareholders could influence rating decisions or exploit 
preferential information on ratings . This could damage the interest s of regular investors. This 
measure is considered proportionate as the numbe r of controlling shareholders of a CRA is 
limited. Furthermore, the impact would depend on the activity of the shareholders concerned. Independence will also be re inforced by improved disclosure  on prices. To avoid possible 
collusion in addition to pricing methodologies it is proposed to to disclose aggregate 
information on fees to the gene ral public. This would enable CRAs clients to better compare 
prices between CRAs and select CRAs also on the basis of prices. Fu rthermore, it would be 
required for CRAs to provide detailed inform ation to ESMA on individual fees. This 
information would enable ESMA to enforce th e practical application of non-discriminatory 
fees by CRAs. Moreover, pricing on basis of the actual costs would reduce conflicts of 
interest due to the "issuer pays model" and thus strenghten independence of rating agencies. 
 
7.3. Impact on different stakeholders groups 
i) Investors
 confidence in financial markets is expected to improve as a risk of "cliff" 
effects on financial institutions would be mitigated. Furthermore, investors would 
benefit from enhanced transparency whic h would increase their capacities to 
determine their own credit assessment without relying solely on external credit ratings. Furthermore, investors woul d benefit form better understanding of 
sovereign ratings, improved choice in the rating market and improved independence of rating agencies. Finall y, investors would benefit from the 
improved possibilities of civil liability in case of infringements of the CRA 
regulation.    
ii) Financial institutions
 would gain comfort that both enhanced credit risk 
management systems and external cred it ratings would mitigate exposures, but 
would need to adapt their systems a nd processes to ensure compliance. 
Furthermore, they would benefit from  enhanced transparency of rating 
methodologies. 
iii) Corporate and structured finance issuers would benefit from increased 
independence of CRAs ensuring that their debt instruments are rated with high 
quality methodologies and would benefit fr om improved understanding of ratings 
by investors. However, issuers would need to change rating agency periodically to 
ensure compliance. Issuers of structured finance produc ts would need to enhance 
transparency to investors on underlying asset pool.  
iv) Sovereign issuers  would benefit from improve d communication between CRAs 
and sovereigns avoiding eventual errors  in underlying info rmation which would 
contribute to high quality s overeign ratings. Furthermore,  sovereigns would benefit 
from reduced risks of market disruption in case of sovereig n downgrades due to 
better understanding of soverei gn risks among investors.  
v) CRAs: would need to comply with a range of  policy measures. First of all they 
would need to comply with increased tran sparency and of sovereign debt ratings. 
 
 57/193  In addition, CRAs would be subject to more harmonised civil liability rules. 
Moreover, CRAs independence would be enhanced through additional 
requirements on CRAs' ownership a nd remuneration. Finally, increased 
transparency of rating methodologies w ould mean enhanced communication with 
investors, issuers and supervisors which w ould eventually increas ed ratings quality.  
- Small and medium-sized rating agencies would benefit from enhanced market 
conditions and would find it easier to establish themselves on the market, 
particularly due to the requirement fo r issuers to change rating agencies 
periodically. Furthermore, they woul d benefit from the exchange of 
information when participating in th e network of small and medium sized 
agencies and from increased visibi lity through common standards on rating 
scales. Over time this could contribute to having more competitors in the rating 
market providing and a wider range of  services. Small and medium-sized 
rating agencies would benefit from in creased visibility through a EURIX.  
- Large CRAs  are likely to face more competition in the market due to a 
requirement for issuers to change peri odically their rating agency. They would 
also face more competition due to increas ed transparency and the ban on price 
discrimination.  
vi) Supervisors (ESMA) would benefit from more increase supervisory powers to 
scrutinize rating methodologies and to tempor arily ban sovereign ratings in case of 
specific situations. However, ESMA would  need to adapt their supervisory 
processes to ensure that all new rules are applied. 
7.4. Assessment of administrative burden and compliance costs  
The table below provides for administrative burde ns and other compliance costs for individual 
preferred options that aim to re duce the overreliance on external cr edit ratings, to mitigate the 
risks of contagion effects of sovereign debt ratings, to prom ote competition in the credit-
rating market, to ensure the right of redress for investors and to enhance independence of 
CRAs. It should be noted that administrative burdens are those compliance costs that result 
from meeting legal obligations to provide information to public  authorities or to private 
parties. 
 
 58/193  Policy Areas Preferred Options One-Off One-Off recurring
Low High
MLN € MLN € MLN € MLN € MLN €
OVERRELIANCE Reduce reliance on external ratings by enhancing 
internal risk management and promoting the use of 
internal rating models for regulatory purposes0,00 substantial substantial 0,00 0,00
Improve disclosure requirements for issuers of 
structured finance products on an ongoing basis 1,70 1,92 1,92 1,70 1,92
SOVEREIGN Require CRAs to publish a full research report on 
sovereign debt ratings and allocation of staff0,00 5,21 5,21 0,00 0,01
Require CRAs to publish sovereign ratings after 
closing of EU trading venues0,00 0,00 0,00 0,00 0,00
Require CRAs to conduct the sovereign debt ratings 
process more frequently0,00 3,12 3,12 0,00 0,00
Extend powers of competent authorities (ESMA) to 
scrutinize rating methodologies0,00 0,15 0,15 0,00 0,00
Grant ESMA the power to restrict or ban temporarily 
sovereign debt ratings in exceptional situations 0,00 0,00 0,00 0,00 0,00
COMPETITION Encourage the emergence of a network of small and 
medium size rating agencies0,00 0,90 1,95 0,00 0,00
Harmonise ratings scales to improve comparability of 
ratings between CRAs1,08 0,00 0,00 0,00 0,63
Establish a European Rating Index (EURIX) 0,30 0,45 0,45 0,00 0,38
Require CRAs to disclose pricing of ratings and 
ensure that prices are not discriminatory and based on 
costs 0,00 0,03 0,03 0,00 0,03
CIVIL LIABILITY Ensure civil liability of CRAs towards users of credit 
ratings in civil law of Member States0,00 substantial substantial 0,00 0,00
INDEPENDENCE Introduce rotation rules for the CRAs engaged by an 
issuer to rate its own products and to rate the issuer 
itself and in introduce mandatory separation between 
them0,00 0,01 0,01 0,00 0,01
Introduce additional and specific requirements on 
CRAs' independence and objectivity in relation to their 
shareholders0,00 0,01 0,01 0,00 0,00
Strengthen rules on disclosure of rating methodologies0,00 0,00 0,00 0,00 0,00
Require CRAs to inform issuers sufficiently in advance 
of the publication of a rating0,00 0,00 0,00 0,00 0,00
TOTAL : 3,1 11,8 12,8 1,7 3,0AVERAGE COMPLIANCE 
COSTS
recurringof which: 
ADMIN BURDEN
 
The full explanation of the methodology, assumpti ons and calculation of the administrative 
burden and compliance costs can be found in annex XII. 
There would be additional costs for financial firms resulting from the requirements to enhance 
internal risk management and the use of inte rnal rating models for regulatory purposes. These 
costs would be substantial for relevant financial sectors as a whole, but proportional with 
respect to individual financial firms. There woul d also be additional costs to issuers due to 
enhanced disclosure requirements, the total of which could amount to EUR 1.7 million one-
off cost and EUR 1.92 million annually.  
A set of options to mitigate risks of contagion e ffect linked to sovereign ratings, would lead to 
some additional compliance costs to CRAs, which could amount to EUR 3.27 million 
annually to the industry.  
Measures to improve competition would not significantly increase the costs for CRAs (the 
annual compliance cost of the rating industry is expected to be around 1.38 Million). The 
costs would only relate to promoting the emerge nce of a network of small and medium sized 
CRAs (see Annex X) that could range annua lly between €0.9 to 1.95 million, for which the 
Commission would explore possibili ties for EU funding/instrument. 
 
 59/193  The policy option related to civil liability of CRAs towards investors is expected to cause 
compliance costs due to need to insure their civil liability or, in the absence of the insurability, 
to create a financial buffer to cover potential claims from investors.  
Finally, the preferred options de aling with CRA independence ar e not expected to entail any 
significant costs. 
7.5. Impact on EU budget  
Only the policy measure to introduce a networ k of small and medium rating agencies is 
expected to affect the EU B udget. However, this policy m easure would rely on existing 
programmes. Therefore, these policy measures w ould not have an impact on the EU budget.   
All other preferred policy measures, including additional powers granted to ESMA have 
already been covered by the existing EU budget.  
7.6. Impact on fundamental rights 
An assessment was made of the policy options  to ensure compliance with fundamental 
rights.131  Most of the options considered in this  impact assessment have no relevant impacts 
on fundamental rights. By ensuring a better regu lation and reliability of  the service provided 
by the CRAs to businesses and individuals, the measures generally impact positively on the 
right to consumer protection and the freedom to conduct business.  
As far as the Credit Rating Agencies' freedom to conduct a business (Article 16 Charter of 
Fundamental Rights of the European Union) is concerned, the preferred option would lead to 
more effective and harmonised regimes for provis ion of financial risk management and CRAs 
activities with the objective of improving fi nancial stability and compliance with CRA 
Regulation rules, in line with the principl e of proportionality. In particular, as regards 
sovereign debt ratings, the preferred option - pr oviding for powers to temporarily restrict or 
ban sovereign debt ratings in  clearly defined exceptional circumstances, thus avoiding 
arbitrariness,-appears as a less intrusive means compared to a blanket and general prohibition 
of issuing sovereign debt ratings . One could argue that this optio n restricts, to some extent, 
the freedom of expression or information (Art icle 11 Charter of Fundamental Rights of the 
European Union) of credit rating agencies. Howeve r, limitations to this right are possible, in 
accordance with Article 10(2) of the Convention for the Protection of Human Rights and 
Fundamental Freedoms as referred to by Article 52( 3) of the Charter. Article 10(2) of that 
Convention provides that the exercise of the fr eedom of expression carries with it duties and 
responsibilities and may be subject to rest rictions prescribed by law necessary for, inter alia , 
the prevention of disorder. Indeed, the objec tives of general interest pursued by the 
prohibition to issue sovereign rati ngs or review of existing ones  are covered by the concept of 
prevention of disorder referred to in  Article 10(2) of that Convention.  By ensuring a right of 
redress and access to justice to businesses and individuals having suffered loss due to actions that may give rise to civil liability by CRA s, the preferred option impacts positively on the 
right to an effective remedy and to a fair trial in line with Article 47 of the Charter of Fundamental Rights. 
As regards data protection (Ar ticle 8 of the Charter and Dire ctive 95/46/EC on the processing 
of personal data) the proposal w ould ensure that if personal da ta are processe d in any way 
such processing would be carried out in lin e with the Charter a nd Directive 95/46/EC. 
                                                
 
131  Based on (COM (2010) 573), Strategy for the ef fective implementation of th e Charter of Fundamental 
Rights by the European Union, October 2010, particularly the check list. 
 
 60/193  7.7. Social impact  
The framework proposed is expected to reduce risk  to financial stability. As far as the options 
considered in this initiative would mitigate the frequency or the duration of future financial 
crises and their impact on the real economy, they  would also reduce the social costs of these 
crises, mainly through a lower level of unemployment.  
7.8. Environmental impact  
The proposal would not have any direct or  indirect impacts on the environment. 
7.9. Impact on SMEs  
The proposals would affect two types of SMEs: CRAs that are SMEs and SMEs wishing to be 
rated. The proposal takes into account the size of firms. For example, as the planned 
obligation for financial institutions to develop in ternal models to assess credit risk would not 
apply to SME financial institutions without ma terial, complex credit risk exposures. Those 
however that did have material, complex expos ures would need to reduce their reliance on 
external ratings. However, the problem of di stinguishing complex and material exposures 
from immaterial exposures remains to be resolved. 
In the case of CRAs that are also SMEs, a netw ork of smaller CRAs would help them develop 
by promoting best practice and experience. Howe ver, due to existing economies of scale and 
reputation in the rating sector, the effectivene ss of a CRAs network to stimulate competition 
with large CRAs may be limited. Development of  SME CRAs could also be stimulated if 
issuers were required to rotate between CRAs, as more rating opportuni ties would be created 
for smaller CRAs. 
The proposals regarding civil liability of CRAs towards investors affect SME CRAs equally 
with larger CRAs. Both SME and large CRAs w ould be subject to civil liability. The large 
CRAs would indeed be more exposed to civil liab ility claims due to the size of the rated firms 
and larger value of the rated debt instruments,  their wide range of ra tings provided and their 
market presence and reputation. SME CRAs, on the other hand, generally rate smaller firms 
and debt instruments of smaller value. They  also usually have a much smaller market 
presence in terms of territo rial aspects, asset classes and reputation among investors. 
Therefore they are likely to be less affected by civil liability claims. Furthermore, it should be 
stressed that civil liability would be impos ed upon large and SME CRAs only in case of gross 
negligence or intent on their part. SME CRAs can therefore avoid liability by taking 
precautionary measures. Lastly, SME CRAs can also  insure their liability with proportionately 
lower costs since their ratings are, as stre ssed above, generally related to smaller money 
values. 
Finally, the proposals in this impact assessment would not affect the competitiveness of SMEs 
in general as it would contri bute and help SMEs to make  sustainable decisions for 
investments while relying less on ratings by making their own due diligence assessments and 
evaluations of the ratings issued.  
7.10. Coherence with other proposals 
This proposal is in strong relatio n with other policy initiatives in  the EU. A detail ed list of the 
main legislative initiatives and analysis of th e coherence with the legislative initiative CRA3 
is presented in the Annex XIII.   
The Commission services are coordi nating their different exercises to make sure that they are 
based on compatible data and models.  
 
 61/193  7.11. Choice of legal instrument 
The current initiative encompasses a wide ra nge of measures. They can be divided in 
five categories. 
Measures requiring amendments to the current CRA Regulation 
A first group of proposed measures strengthen and build on provisions in the current CRA 
Regulation. 
Measure Relevant 
section 
Requirement to publish full research reports on sovere ign debt ratings and disclose the allocation of staff  section 6.2, 
option 2 
Requirement to publish sovereign ratings  after closing of EU trading venues  section 6.2, 
option 3 
Requirement to conduct the sovereign debt rating process more frequently  section 6.2, 
option 4 
Enhanced disclosure requirement s for rating methodologies  section 6.5, 
option 7 
Extending the powers of ESMA to scrutinize rating me thodologies and temporarily ban sovereign debt ratings section 6.2, 
option 7 
Requirement to disclose pricing of rati ngs and prohibit price discrimination  section 6.3, 
option 9 
Requirement to regularly rotate the CRA  section 6.5, 
option 5 
Provisions to mitigate conflic ts of interests related to the shareholder structure  section 6.5, 
option 6 
Requirement for a CRA to inform an issuer sufficiently in advance of a rating change  section 6.5, 
option 8 
Implementation of those measures would requir e amendments to the current CRA Regulation. 
They could not be achieved by non binding measures (e.g. ESMA  guidelines) as those rules 
need to be enforceable by ESMA in order to be  effective. More specif ically, one group of the 
proposed amendments to the CRA Regulation complement or extend the application of 
provisions included in the current CRA Regulation. This refers to all requirements related to 
transparency and enhanced disclosure (publica tion of a full research report, publication of 
ratings outside trading hours, requirement s related disclosure of methodologies, 
communication with the issuer in advance of a rating change), the rating process (frequency 
of the rating process), preven tion of conflicts of  interest and cor porate governance 
requirements (rotation of CRAs, shareholder stru cture). Consequently, an amendment in form 
of a Regulation is necessary.132 
Enhancing ESMA's powers to scru tinize in more detail or te mporarily ban sovereign debt 
would also require a change to  the current CRA Regulation. Enforcement measures can only 
be based on a binding legal act acco rding to the rule of law. 
The proposed requirement to disclose pricing and prohibit price discrimination would also 
require an amendment to the CRA Regulation. A recommendation through an ESMA 
guideline would not be sufficient as in this cas e it would not be certain that all CRAs comply 
                                                 
132  This applies to the requirement to publish full re search reports on sovereign debt ratings and disclose 
the allocation of staff which will complement Article s 10, 11, Annex I section D I 2 and section E III 3 
of the CRA Regulation; - the requirements to publish sovereign ratings after closing of EU trading 
venues which builds on Article 10 (1) of the CRA Regulation; -the requirement to conduct the sovereign debt rating process more frequently which enhances Article 8 (5) of the current CRA 
Regulation; - enhanced disclosure requirements for rating methodologies which specifies Article 10, 
Annex I D 2 (b) of the CRA Regulation; -the requirement to regularly rotate the CRA which builds on Article 7 (4) of the CRA Regulation; -provisions to mitigate conflicts of interests related to the 
shareholder structure which concretize Article 6 (2), Annex I Section B, 3,4 of the CRA Regulation; -
the requirement to inform an issuer sufficiently in advance of a rating change which enhances Article  
10, Annex I Section D I  3 of the CRA Regulation. 
 
 62/193  with the rule which would jeopardize the effect iveness of the measure and cause an unlevel 
playing field.  
Measures requiring amendments to the curr ent CRA Regulation coupled by technical 
standards 
Three measures would require a change of th e CRA Regulation including an empowerment of 
ESMA to prepare draft techni cal standards. These are: 
- requirements for CRAs to use a harmoni sed rating scale and to report rating 
information to the European Rating I ndex (section 6.3, option 4 and option 5); 
- specifying the content and format of peri odic reporting on fees charged by credit 
rating agencies (section 6.3, option 9);   
- disclosure requirements for issuers of st ructured finance instruments (section 6.1, 
option 6). 
These proposed measures could not be achieved by non binding measures (e.g. ESMA 
guidelines) as they need to be enforceable by ESMA in order to be effective. A harmonised 
rating scale makes only sense if it is strictly applied by all CRAs. Therefore, a simple 
recommendation would not be sufficient. Simila rly, disclosure requirement with regard to 
structured finance products need to be app lied by all issuers in order to be effective. 
Otherwise the objective to allow investors to assess and compare different instruments could 
not be met. 
Details of the proposed measures (the detaile d calibration of the harmonised rating scale, 
details of the information to be disclosed by issuers) could be determined by regulatory 
technical standards (to be drafted by ESMA) as they are technical and do not imply policy 
choices which would be determined by amendments to the CRA Regulation. 
 
Measures requiring 
amendments to the 
current CRA 
Regulation   Field Legal  instrument Preliminary 
timeline 
• Policy measures to 
mitigate the risks of "cliff" and 
contagion effects linked to 
sovereign debt ratings 
• Policy measures to 
improve credit rating market 
conditions (except, a policy 
option to support  the small 
and medium sized CRAs 
network) 
• Policy measures to ensure 
right to redress for investors 
• Policy measures to 
reinforce independence of 
credit rating agencies    Credit Rating Agencies Amendments of  CRA 
Regulation (CRA III) Proposal to be adopted 
Q4 2011  
Measures requiring amendments  to sectoral legislation 
The proposed measures to reduce reliance on cr edit ratings, require changes to sectoral 
financial legislation. The amendments regulate to  what extent financial firms may or may not 
use external ratings, that financ ial firms have to carry out th eir own credit risk management 
and which alternatives to ra tings should be used. Requirements on financial firms are in 
general regulated in the respective sectoral fi nancial legislations. However, a comprehensive 
 
 63/193  provision could be included in  the CRA Regulation preventi ng financial firms from over-
relying on credit ratings.  
  
In addition, a sectoral approach should be chosen  as any alternatives to  external ratings have 
to be specific to the sectoral context where ex ternal ratings are being used. This sectoral 
approach is also followed by the US SEC.133 
More specifically, it would be necessary to  implement the measures against overreliance  in 
sectoral legislation for credit in stitutions and investment firms (where relevant modifications 
have been included in the  proposal for amendments to the Capital Requirements Directive (CRD  IV) of 20 July 2011), for insurance and re insurance undertakings and in the investment 
management sector. 
Measures against 
overreliance Field Legal  instrument Preliminary 
timeline 
Credit institutions and 
investment firms CRD IV-Banking 
Directive/Regulation Proposal adopted on 20 
July 2011 
Insurance and reinsurance 
undertakings Solvency II framework 
Directive (Omnibus II) 
Implementing measures Currently negotiated in 
Council/Parliament 
Summer 2012 
Alternative investment fund 
managers AIFM Directive Implementing 
measures (tbd) Summer 2012 • Strengthening own internal 
risk management of financial 
firms 
• Requiring firms with 
material credit risk exposure 
to develop internal models 
(applies to credit institutions, 
investment firms and 
insurance and reinsurance 
undertakings) 
• Regular reporting by ESAs  
on  efforts by firms and 
supervisors to reduce risk of 
overreliance Investment managers Technical standards of 
UCITS Directive (tbd) Summer 2012  (to be 
confirmed by ESMA 
which has the right of 
initiative in this regard 
In the remaining areas of financial regulation where ratings are referred to134 changes to 
sectoral legislation should be  proposed where these references  have the potential to trigger 
undue reliance on ratings. Any changes would be subject to a separate impact assessment. 
Measures building on an existing European Union funding program  
In order to enhance competition on the market for rating services and lower entry barriers for 
small players it is proposed to support the establishment of a network among small/medium 
CRAS to share best practices and develop cap acity (section 6.3, option 3). Such a network 
would require Union funding and thus would need an adequate legal basis in a Union legal act 
(usually decision or regulation). Taking into consideration, on the one  hand, constraints in 
Union financing and, on the other hand, that fu nds could possibly become available by using 
existing Union programmes, this network could be supported making rec ourse to one of the 
two instruments under which the actions of the existing CIP (competitiveness and Innovation 
Framework Programme) will cont inue as from 2014 onwards135, i.e.: 
- the common strategic framework for rese arch and innovation f unding, called 'Horizon 
2020"; 
- the new Competitiveness and SME programme for the continuation of the non-
innovative actions of the CIP mentioned above. 
                                                 
133  US SEC Report on the Review of Reliance on Credit Ratings, July 2011. 
134  See complete list of references to external ra tings in EU financial Regulation in Annex IV 2.1. 
135  See the multiannual financial framework 2014-2020 "A budget for Europe 2020" COM (2011) 500 final 
of 29.6.2011. 
 
 64/193  The identification of the programme which woul d fit the best the f unding of the proposed 
network will be done at a late r stage when all the details of the two instruments mentioned 
will be known.   
 
Measures on an 
existing EU funding 
program  Field Legal  instrument Preliminary 
timeline 
• Enhance competition on 
the market for rating services Establishment of a network 
among small/medium CRAs CIP – independent 
initiative/program Programme could be 
adopted in course of 
2012  
Measures requiring changes to the CRA Regula tion and implementation in national legal 
orders 
In order to ensure civil liabili ty of credit rating agencies vis- à-vis investors non-binding rules 
would not be effective. This could result in a situation where investors in some Member 
States would not be enabled to e ngage in civil liability claims against a CRA that has violated 
the CRA Regulation thereby causing damage to the investor. Therefore, only binding 
legislative instruments would be appropria te. The proposed amendment of the CRA 
Regulation136  would ensure civil liability of CRAs vi s-à-vis investors exist and is effective 
according to the national civil la w orders (section 6.4. option 3). 
 
Measures to ensure 
right of redress for 
investors Field Legal  instrument Preliminary 
timeline 
• Ensure civil liability of 
CRAs towards users of credit 
ratings in civil law of Member 
States Credit Rating Agencies Amendments of  CRA 
Regulation (CRA III) Proposal to be adopted 
Q4 2011 
7.12. Impact on third countries 
The proposed policy measures against overreliance shall implement in th e EU legal order the 
FSB's principles to reduce th e reliance on ratings, as requested by the FSB in October 2010. 
Following the FSB principles, other jurisdictions and international standard setters, including the US and the Basel Committee on Banking Supe rvision (BCBS), are also taking measures 
against overreliance. Compliance with the FSB principles and coordination by international 
standard setting bodies should ensure internat ional consistency of these measures.    
Also most of the other areas that the propos ed measures would strengthen are currently 
reviewed and enforced by third country regulat ors, including the US. For instance, the US 
SEC is currently investigating ways to reduce conflicts of interests due to the issuer-pays 
model. Measures to improve disclosure of structured finance instruments, to increase 
competition in the rating market and to strengthe n civil liability of CRAs have already been 
taken in the US.                                                  
 
136  It was assessed that the CRA Regulation would be more appropriate legal instrument versus Directive. 
It is neither legally necessary nor practical and propor tionate to propose an extra directive for the single 
provision that we have in mind on civil liability. Ac cording to the settled case-law of the ECJ (Eridania, 
judgement of 27.9.1979 – case 230/78) the fact that a regulation is directly ap plicable does not prevent 
the provisions of that regulation from requiring Member States to take implementing measures. For 
instance, Art 36 of the first CRA Regulation (2009)  required Member States Member to "…lay down 
the rules on penalties applicable to infringements of the provisions of this Regulation and … to take all 
measures necessary to ensure that they are implemented". 
 
 65/193  If following this IA the EU regulatory regime on CRAs was enforced, this would have to be 
considered in subsequent equivalent assessments  according to Article 5 (6) and also by ESMA 
when deciding on whether a third country regulatory  regime can be considered as stringent as 
the EU regulatory framework according to Article  4 (3) of the CRA Regulation. Ratings from 
third country CRAs can only be endorsed if the third country CRA complies with 
requirements of the third country regulatory regime being as stringent as the EU CRA 
Regulation. Given the proportionality of the proposed measures and the fact that third 
countries are also enforcing the relevant areas , we do not assume that the proposed measures 
would make the access of third country CRA s to the EU much more difficult.  
On the other hand, third country CRAs would also  benefit of access to more information due 
to increased disclosure, especially for struct ured finance issues, wh ich would allow CRAs to 
compete with solicited ratings by issuing their own ratings. 
For third country investors there would be the added benefit of being able to use ratings 
issued by CRAs subject to enhanced transparency  and procedural requirements.  Establishing 
liability of CRAs towards investors would also allow third country investors to benefit from 
this added investor protection if enacted. Su ccessful adoption of measures to increase 
competition could also see a greater choice in ratings for investors. Finally, third country 
investors would benefit from increased disclosu re regarding structured  finance instruments, 
allowing them to further improve th eir own credit risk assessments. 
For issuers in third countries, there may be the possibility of soliciting ratings by a greater 
number of CRAs subject to a high level of over sight.  Both issuers and investors stand to 
benefit from increased independence and tr ansparency of CRAs and the resulting 
improvement in the quality of ratings. 
Market participants in general should benef it from a reduced risk of negative impacts of 
sudden ratings corrections, flawed ratings and in appropriate sovereign ra tings and potentially 
negative market consequences. 
8. MONITORING AND EVALUATION  
When the recommended policy options are put in to practice, the Commission will monitor 
how Member States apply the proposed polic ies. When necessary, the Commission will 
pursue the procedure set out in Article 226 of the Treaty in case any Member State fails to 
respect its duties concerning the implemen tation and application of Union Law.  
In order to assess the effectiveness of the proposed policies, the Co mmission will propose to 
set up the following system of monitoring to facilitate an evaluation three years after the 
transposition date (pos sibly in the form of a report to the Council and the Parliament).  
As part of the monitoring exercise, ESMA wo uld receive quarterly reports from national 
competent authorities on the various policy areas. The evaluation would be built on this information. The main indicators and sources of  information that could be the following: 
• Regarding the measures designed to increase the number of unsolicited ratings issued: 
The number or proportion of solicited and unsolic ited rating issued for various asset 
classes . 
• To monitor the 'stabilisation' of sovereign ratings: The frequency of review and 
issuance of ratings, particula rly sovereign debt ratings.  
• To assess the achievement of better tran sparency and use of rating methodologies: 
Frequency and types of changes to methodol ogies, and how often these were rejected 
or challenged.  
 
 66/193  • To assess the effectiveness of increasing new market entry: The number of new 
entrants and changes to the market structure.   This could include market share of 
existing players in terms of both revenue a nd number of outstanding ratings in various 
classes. 
• As regards reliance on ratings, a report on the use of the standardised and internal 
ratings based approaches  could investigate impact of the use ratings for regulatory 
purposes by firms.  
In other areas, such as liability of CRAs, it may be difficult to assess the impact of proposals 
three years after transposition, as case law developments are likely to take more time. 
 
 
 67/193  ANNEX I. OVERVIEW OF EXISTING CRA  REGULATION AND POSSIBLE NEW INITIATIVES ON 
CRA S (PREFERRED OPTIONS ) 
 
 
CRA I + CRA 
II reference CRA I (Regulation 1060/2009) 
and CRA II (Regulation 
513/2011) New initiatives (in 
addition to CRA 
Regulation)  Instrument 
where new 
policy will be 
included 
REGISTRATION – SUPERVISION – ENFORCEMENT POWERS 
ESMA is in charge of registering and supervising cred it rating agencies in the EU from 1 July 2011. ESMA 
has to ensure that the CRA Regulation is correctly a pplied by CRAs. If a CRA does not comply with the  
CRA Regulation, ESMA has to take supervisory measures and impose a fine on the CRA. 
  
Art. 14-
17 of 
CRA 
Regulatio
n137 
 Art. 21-
23d  
 
 
Art. 24, 
36a,  
 
Art. 19 
 
Art. 40, 
40a Registration and supervision: CRAs 
must apply to register with ESMA, 
which will decide on each application.  
Supervision: ESMA will supervise 
the CRAs in order to ensure 
compliance with the requirements of 
the CRA Regulation.  ESMA's 
supervisory powers include 
information requests and on-site 
inspections. ESMA can delegate 
specific supervisory tasks to 
competent authorities of the Member 
States.  
Sanctions: ESMA can take 
supervisory measures (up to the 
withdrawal of the registration) against 
a CRA infringing the CRA Regulation 
and can also impose fines.   
Fees  are levied from CRAs to pay for 
the supervision. 
Transitional regime  
-According to the CRA Regulation 
ESMA is in charge of supervising all 
registered CRAs from 1 July 2011.  
- From 1 July 2011 any new 
applications from CRAs are to be 
decided by ESMA  
- Applications from existing CRAs 
(those that have been operating in the 
Union before 7 June 2010) had to be 
submitted by  7 September 2010; their 
examination will be finalised by 
colleges composed of national 
competent authorities. ESMA is 
involved in the registration process 
but the final decision is taken by   
                                                 
137  Regulation 1060/2009 on credit rating agencies as amended by Regulation 513/2011. 
 
 68/193  CRA I + CRA 
II reference CRA I (Regulation 1060/2009) 
and CRA II (Regulation 
513/2011) New initiatives (in 
addition to CRA 
Regulation)  Instrument 
where new 
policy will be 
included 
national competent authorities.  
 
CORPORATE GOVERNANCE  
A CRA should maintain arrangements for sound co rporate governance which shall ensure that the 
CRA issues ratings that are independent, objective and of good quality. 
 Annex I.A.9  Rating policy review function:  An 
internal function to review the 
methodologies, models and significant 
changes to methodologies and 
models.  This function should be 
independent of the business lines and 
report to the independent members of 
the board.    
 Annex I.A.5-6  Compliance function:  A permanent 
and effective compliance function 
operating independently of the 
business lines is required. It reports 
regularly to senior management and 
the independent members of the 
board.    
 Annex I.A.2  Independent members of the 
administrative or supervisory 
board:  At least 1/3 but not less than 2 
independent members required. They 
have the specific task of monitoring 
the development of the rating policy 
and methodologies, effectiveness of 
the rating internal quality systems, 
effectiveness of procedures dealing 
with conflicts of interest, compliance 
and governance processes.    
CONFLICTS OF INTERST 
Conflicts of interest have to be identified and eith er eliminated or properly managed and disclosed. 
Conflicts of interests arise for instance from remuneration models used by CRAs, from the provision 
of advisory or ancillary se rvices and from CRAs, its staff or important sharehol ders having an own 
interest in the rated instruments. 
 Art. 6, Annex 
I B 1 General policy:  CRAs to ensure that 
conflicts of interest will not affect 
ratings.  Actual or potential conflicts 
of interest to be (i) identified and 
either (ii.1) eliminated or (ii.2) 
properly managed and disclosed.   
 Annex 
I.B.3  Prohibited conflicts of interest:  
Ratings not to be issued and existing, 
potentially compromised ratings to be 
immediately flagged as such.    
 
 69/193  CRA I + CRA 
II reference CRA I (Regulation 1060/2009) 
and CRA II (Regulation 
513/2011) New initiatives (in 
addition to CRA 
Regulation)  Instrument 
where new 
policy will be 
included 
 Annex 
I.B.4  Prohibition of provision of 
consulting/advisory services: It is 
prohibited to provide 
consulting/advisory services to the 
rated entity or its related third party.    
 Annex 
I.B.4  Provision of ancillary services: Only 
specific ancillary services may be 
provided (market forecasts, estimates 
of economic trends, pricing analysis 
and other general data analysis as well 
as related distribution services). CRA 
to ensure that ancillary service does 
not present a conflict of interest with 
the rating activity and to disclose in 
the final ratings report any ancillary 
services provided to the rated entity.    
 Art. 7(5)  Compensation and performance 
evaluation of analysts: 
Compensation and performance 
evaluation of analysts not to be 
contingent on the amount of revenue 
generated.    
 Art. 7(2)  Rating staff engagement in fee 
negotiations: Prohibited.    
 Annex I.C.1, 
3, 4, 6.  Rules on conduct of the staff 
engaged in the rating process:  
Prohibition for the rating analysts and 
person approving the ratings to 
engage in any transactions in 
instruments related to the rated entity. 
Prohibition to accept money, gifts or 
favours from anyone the CRA does 
business with. Handling of 
confidential information (incl. 
unpublished ratings). Look-back 
reviews of ratings after an analyst has 
left to work for the rated entity.    
 Annex I.C.2 Rules excluding employees from the 
rating process: Prohibition for the 
rating analysts and persons approving 
ratings to be engaged in rating an 
entity triggered by conflicts of interest 
arising from owning financial 
instruments, recent employment, 
business or other relationship.   
 Art. 7(4), 
Annex I.C.8  Rotation of rating staff  is 
mandatory. Lead analysts to rotate 
every four years, ratings analysts 
every five years, and persons   
 
 70/193  CRA I + CRA 
II reference CRA I (Regulation 1060/2009) 
and CRA II (Regulation 
513/2011) New initiatives (in 
addition to CRA 
Regulation)  Instrument 
where new 
policy will be 
included 
approving ratings every seven years. 
   Rotation of CRAs: An issuer's 
own credit worthiness could not 
be rated by the same CRA for 
more than 3 consecutive years.   
Another CRA would take over 
thereafter and the outgoing CRA 
and the issuer would make 
available all information 
accessed in the rating process. 
A CRA would not be able to 
rate more than 5 consecutive 
issues  of any asset class by the 
same issuer, or if fewer than 5 
issues are made, it would not be 
able to rate the issues of one 
issuer over a period exceeding 3 
years.   
 CRA III – Q4 
2011 
   Introduce additional 
requirements on CRAs' 
independence and objectivity 
in relation to their 
shareholders . ESMA would be 
required to ensure that: (1) 
shareholders could not either 
individually or in voting blocs 
accrue potentially controlling 
stakes in more than one CRA (2) 
CRAs could not issue ratings for 
any firm that has a significant 
shareholding of that CRA, even 
indirectly (3) a firm that has a 
significant shareholding in a 
CRA would not be allowed to 
invest in products rated by this 
CRA. CRA III – 
Q4 2011 
ENSURE THE QUALITY OF RATING S AND OF RATING METHODOLOGIES 
CRAs are required to monitor ratings in order to keep them up to date. The information used by CRAs 
to produce ratings has to be of sufficient quality, w here this is not the case CRAs have to refrain from 
issuing ratings. Finally, rating methodologies have to  comply with certain qualitative requirements. 
Supervision by ESMA will be strengthened in this respect.  
 Art. 8(5)  Monitoring activity: Monitoring of 
ratings required on an on-going basis 
(as well as at least an annual review).   
 Art. 8(6)  Impact of methodology changes on 
existing ratings: When a 
methodology, model or key rating   
 
 71/193  CRA I + CRA 
II reference CRA I (Regulation 1060/2009) 
and CRA II (Regulation 
513/2011) New initiatives (in 
addition to CRA 
Regulation)  Instrument 
where new 
policy will be 
included 
assumption is changed, a CRA shall: 
(a) immediately, using the same 
means of communication as used for the distribution of the affected credit 
ratings, disclose the likely scope of 
credit ratings to be affected; 
(b) review the affected credit 
ratings as soon as possible and no 
later than six months after the 
change, in the meantime placing 
those ratings under observation; and 
(c) re-rate all credit ratings that 
have been based on those 
methodologies, models or key rating assumptions if, following the review, 
the overall combined effect of the 
changes affects those credit ratings.  
 Annex 
I.D.I.4 Quality of data used: A CRA shall 
state clearly and prominently when 
disclosing any credit rating whether 
it considers satisfactory the quality of 
information available on the rated 
entity and to what extent it has 
verified information provided to it by 
the rated entity or its related third 
party.   
 Annex 
I.D.I.4  Limits to rating activity: CRAs 
shall refrain from issuing a rating or 
withdraw an existing rating when (i) 
lack of robust data, (ii) complexity of 
the structure of a new instrument or 
(iii) quality of information is not 
satisfactory or raises serious 
questions as to whether a credible 
rating can be produced.    
 Annex 
I.D.II.2  For structured finance 
instruments , a CRA is expected to 
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 instruments.    
 Art. 8(3) 
CRA 
Regulatio
n A credit rating agency shall use 
rating methodologies  that are 
rigorous, systematic, continuous and 
subject to validation based on 
historical experien ce, including back-  
 
 72/193  CRA I + CRA 
II reference CRA I (Regulation 1060/2009) 
and CRA II (Regulation 
513/2011) New initiatives (in 
addition to CRA 
Regulation)  Instrument 
where new 
policy will be 
included 
testing.  
   Requiring registered CRAs to 
notify in advance  any change 
of rating methodologies . Only 
after a positive assessment by 
ESMA the CRA may proceed 
with the new methodology.  CRA III – Q4 
2011  
   ESMA shall be empowered to 
restrict for a limited period the 
issuance of ratings  where a 
sovereign requests financial 
support by the EFSF. CRA III – Q4 
2011  
 Art. 23(1)  Principle of non interference: 
Prohibition for ESMA or any other 
public authority to interfere with the 
content of credit ratings or 
methodologies.    
TRANSPARENCY – DISCLOSURES 
The CRA Regulation sets various disclosure and transparency requirements in order to allow investors 
and issuers to properly understand rating actions and supervisors to assess the rating activity. Rules 
on the timing of rating publications shall ensure that all market participants are informed at the same 
time. 
 Art. 10(1)  Disclosure of credit ratings:  Any 
credit rating should be disclosed on 
a non-selective basis and in a 
timely manner  (also applicable to 
credit ratings distributed by 
subscription)    
   Require CRAs  to publish 
sovereign debt ratings only 
after the close of business of 
European trading venues  
ensuring that all market 
participants can obtain a full 
understanding of any change of a 
rating. CRA III – Q4 
2011  
 Art.8(1), 
Annex I.E.I.5 
 
Annex I 
D I 2 b  Disclosure of methodologies, 
models and key assumptions in 
use: CRA required to disclose on an 
on-going basis the methodologies, 
and descriptions of models and key 
rating assumptions such as 
mathematical or correlation 
assumptions used in its credit rating 
activities as well as their material 
changes.  
Also the CRA has to indicate the   
 
 73/193  CRA I + CRA 
II reference CRA I (Regulation 1060/2009) 
and CRA II (Regulation 
513/2011) New initiatives (in 
addition to CRA 
Regulation)  Instrument 
where new 
policy will be 
included 
principle methodology that was used 
in determining a specific rating.  
 Annex I 
D II 1-4  Disclosure obligations in relation 
to credit ratings of structured 
finance instruments : 1. provide in 
the credit rating all information about 
loss and cash-flow analysis; 2. level 
of assessment it has performed 
concerning the due diligence 
processes carried; 3. accompany the 
disclosure of methodologies, models 
and key rating assumptions with 
guidance which explains assumptions 
and uncertainties of the models used; 
4. disclose, on an ongoing basis, 
information about all structured 
finance products submitted to it for 
their initial review or for preliminary 
rating.   
   Extend the requirement to 
disclose methodologies and 
underlying assumptions behind 
ratings from structured finance 
products to all asset classes.  
Require the publication of clear 
reasoning and justification for 
changes of rating 
methodologies . 
Disclose errors in 
methodologies or their 
application  by requiring 
immediate disclosure directly to 
the affected parties including 
investors, issuers and competent 
authorities. CRA III – Q4 
2011  
 Art. 10(3)  Differentiation of structured 
finance ratings: When a CRA issues 
credit ratings for structured finance 
instruments, it shall ensure that rating 
categories that are attributed to 
structured finance instruments are 
clearly differentiated using an 
additional symbol which 
distinguishes them from rating 
categories used for any other entities, 
financial instruments or financial 
obligations.    
 Annex I 
D (3)  The credit rating agency shall 
inform the rated entity at least 12 
hours  before publication of the credit CRAs to inform issuers and 
specifically sovereigns  for 
which they are in the process of CRA III – Q4 
2011  
 
 74/193  CRA I + CRA 
II reference CRA I (Regulation 1060/2009) 
and CRA II (Regulation 
513/2011) New initiatives (in 
addition to CRA 
Regulation)  Instrument 
where new 
policy will be 
included 
rating and of the principal grounds 
on which the rating is based in order 
to give the entity an opportunity to 
draw attention of the credit rating 
agency to any factual errors.  issuing a rating sufficiently in 
advance ( 12 working hours ) of 
the publication of the rating, of 
the principle grounds on which 
the rating is based.  
 Annex 
I.E.III.(3)  
 A credit rating agency shall make 
available annually statistics on the 
allocation of its staff  to new credit 
ratings, credit rating reviews, 
methodology or model appraisal and 
senior management.  In addition, require CRAs to 
publish information on the 
allocation of staff  to ratings of 
different asset classes . CRA III – Q4 
2011 
 Art. 
11(2), 
Annex 
I.E.II.1  Historical performance data : CRAs 
to make available every six months 
in a central repository established by 
ESMA information on its historical 
performance data including the 
ratings transition frequency and 
information about credit ratings 
issued in the past and on their 
changes. .    
   CRAs would be required to 
publicly disclose the actual 
prices and the pricing 
methodology  of their ratings 
services. CRAs will also have to 
ensure that the prices and fees 
they charge for their services are 
(a) not discriminatory, i.e. fully 
based on the costs; (b) not based 
on any form of contingency. CRA III – 
Q4 2011  
   Harmonised rating scale to be 
set by ESMA, including a 
common definition on sovereign 
default. CRA III – Q4 
2011  
   Disclosure requirements for 
issuers of structured finance 
products  will be on an ongoing 
basis, enabling the disclosure of 
the main elements of underlying 
asset pools for structured finance 
products necessary for investors 
to make their own credit 
assessment and thus not rely on 
external ratings. Issuers will 
disclose this information by 
means of a website. CRA III – Q4 
2011  
OVERRELIANCE ISSUES OUTSIDE CRA REGULATION  
 Enhanced internal  risk management Credit institutions, investment 
firms, insurance and reinsurance CRD IV – July 
2011; Solvency II 
 
 75/193  CRA I + CRA 
II reference CRA I (Regulation 1060/2009) 
and CRA II (Regulation 
513/2011) New initiatives (in 
addition to CRA 
Regulation)  Instrument 
where new 
policy will be 
included 
undertakings, asset managers and 
investment funds' investment 
decisions must not rely solely 
and mechanistically on ratings 
but always form their own 
internal credit opinion on every 
exposure.  – Q1 2012; 
UCITS and 
AIFMD – Q2 -
2012 
 Internal ratings based approaches to calculate 
capital requirements Institutions with a material 
number of exposures in a given 
asset class will need to develop 
internal models.  CRD IV – July 
2011; Solvency 
II – Q1 2012  
 Verify external ratings internally Even if institutions do not use 
internal ratings they will be 
required to compare their 
internal credit opinion with the 
capital requirement resulting 
from an external rating.  CRD IV – July 
2011; Solvency 
II – Q1 2012  
SOVEREIGN DEBT RATING I SSUES OUTSIDE CRA REGULATION  
 ECB and ESM  Encourage the ECB or ESM  to 
establish independent credit 
assessments, particularly for 
European sovereigns and 
systemic credit institutions.  EFSF 
Regulation 
 
COMPETITION ISSUES OUTSIDE CRA REGULATION  
 A network of European small and medium size 
rating agencies A network of European small 
and medium size rating agencies 
would be promoted under a 
European Programme. This 
could consist of the future 
Competitiveness and SME 
programme to be established (as 
successor  of the CIP 
programme) by the Enterprise 
and Industry Directorate 
General or by the "Horizon 
2020" programme for 
innovation related actions 
managed by DG Research; in 
both cases, the financing would 
be possible as of 2014 at the 
earliest. This network would 
enable participating small and 
medium rating agencies to share 
data, best practice on rating 
methodologies and resources.  The common 
strategic 
framework for 
research and 
innovation 
funding 
(Horizon 2020) 
or 
the new 
Competitiveness 
and SME 
programme for 
the continuation 
of the non-
innovative 
actions of the 
CIP 
 
 
 
 76/193  Annex II. Stakeholder Consultation 
1 – Summary of Responses to the Public Cons ultation Paper on ne w initiatives of CRAs 
The purpose of this annex is to summarise the responses to the Public Consultation on Credit 
Rating Agencies launched by the European Commission services on 5 November 2010 and 
closed on 7 January 2011. The consultation attr acted approximately 100 responses from a 
range of respondents including Member States ' competent authorities, academics, firms, 
citizens, registered and non-registered a ssociations in addition to CRAs themselves. 
 
The non-confidential responses to the consul tation are published on the EU Commission's 
website: http://ec.europa.eu/internal_market/consultations/2010/cra_en.htm . 
 
The chart below shows the distribution of th e approximately 100 respondents among different 
categories: 
 
 
Respondents to the public consultation on CRA3 - 2011
Academics
4%Associations  
/Non Registered 
Organisations
9%
Associations / 
Registered 
Organisations
42%Citizens
8%CRA s
9%Firms
6%Governments
12%Other
2%Regulators
8%
 
 
1. OVERRELIANCE ON EXTERNAL CREDIT RATINGS 
 1.1 Reference to external ratings in regulatory capital frameworks for credit institutions, investment firms, insurance and reinsurance undertakings 
 
Many responses echoed concerns about overrelian ce on ratings, and alt hough there is support 
for reducing references to ratings in legislati on gradually, so as to avoid a shock, even from 
some CRAs as well as some regulators. Respon dents including regulators noted that part of 
the challenge will lie in finding suitable measur es to replace them.  Using market measures 
instead of ratings was seen as inappropriately pro-cyclic al and volatile by many including 
industry groups and governments, but at the sa me time they could be taken into account 
 
 77/193  alongside other measures and or good quality ra tings according to national regulators, 
governments, banks and industry groups. Res pondents including banks also felt that good 
quality ratings were helpful and should continue to be used, but that it was important to 
incentivise the development of internal ratings abilities for firms with sufficient resources.  
There was concern from respondents such as investor groups and governments about firms 
investing in instruments whose credit risk was difficult to assess independently, although 
several respondents, especially  industry representatives felt that this was sufficiently 
addressed in CRD II. However respondents noted that risk is necessary in the financial 
markets and that external ratings alongside intern al ratings models could continue to be used 
so long as they were of reliable quality.  There was opposition to the idea of requiring 
multiple ratings from most sectors of res pondents, including banks, governments, industry 
associations. 
 
Many responses drew the attention to ongoing wo rk in Basel (in part icular on the capital 
framework for securitisations) and suggested  waiting for the outcome of this work.  
 
1.2 Use of external ratings for in ternal risk management purposes 
 There was widespread support for a requirement for firms to conduct their own due diligence 
without relying exclusively on ratings from respondents in se veral categories, including 
industry associations, government s and regulators and rating ag encies. However, there was a 
small amount of concern regarding smaller firm s’ abilities to perform such analysis. It was 
mentioned that current sectoral legislation al ready contains such requirements which have 
recently been strengthened. A range of diffe rent stakeholders, among them governments, 
industry associations and regul ators, offered support for incr eased transparency including 
disclosure of firms’ reliance on external ratings. There was also strong support for all 
information used by CRAs for rating structured fi nance instruments to be made available to 
everyone while some expressed concern about the costs of such a measure, confidentiality 
issues and international consistency.  While  there were mixed views on whether or not 
sovereign debt ratings were based on publically available information – some felt that private 
meetings were also involved, or that even if  based on public information, CRAs added value, 
not all respondents thought this meant that all firms would have the cap acity to analyse this 
information similarly. 
 
1.3 Use of external ratings in the mandates and investment policies of investment managers 
 
There was considerable support for avoiding mechan istic use of ratings, with some regulators, 
governments and several industry associations supporting a 'flexibility clause', while other 
respondents from the same groups did not support such a clause. However, industry 
associations, several governments and regulator s CRAs were mostly cautious regarding the 
introduction of specific legisla tion to mandate flexibility and proportions of portfolios 
dependent on ratings, with support for market-led  approaches and for investment managers to 
rely on their judgment. There was again cau tion from some governments, CRAs and industry 
groups against relying on market data to measure credit risk, t hough few proposals for 
alternatives to external ratings.  On the ot her hand, some of the same stakeholder groups 
proposed that cautiously, and for the right a ssets only, market measures could be used. 
 
 
 2. SOVEREIGN DEBT RATINGS 
 
 
 78/193  2.1 Enhance transparency and monitori ng of sovereign debt ratings 
 
There was a general consensus that sovereig n issuers should not r eceive fundamentally 
different treatment to corporate issuers. Ther e were calls from some governments and industry 
stakeholders for increased transparency regard ing methodologies and p ublication of the full 
research reports underlying ratings , although a small number in this group opposed this idea.  
Some governments wished to propose a maximum period of time for the review of sovereign 
ratings. On the other hand, many respondents, ac ross all stakeholder groups, including some 
rating agencies, was that sovereigns should not be  treated significantly differently from other 
issuers, albeit a few stating that CRAs should be more alert to cha nges in all cases. The 3 
days’ notice measure, while supported by some Me mber States and regulators, caused to some 
others Member States and regulat ors concern, in particular becau se of risks of market abuse 
and conflict of interest issues. 
 
2.2 Enhanced requirements on the methodology and the process of rating sovereign debt 
 
In terms of ratings methodologies, there was strong support from various kinds of respondents for an improved transparency, and further calls to treat sovereign issuers in a similar way to 
corporate issuers. There was some support including from some regulators for postponing 
publication until close of business, but on the other hand, many respondents, including other regulators and Member States' considered this  less effective when tr ading continues around 
the globe. Fewer respondents approached the is sue of Member States not paying for ratings, 
with no real discernible trends of groups in favour or against: some felt that this would not 
reduce conflicts of interest, while others s upported the measures and asked for a common 
European approach.   3. ENHANCING COMPETITION IN THE CREDIT RATING INDUSTRY 
 
Overall, there was general concern about the l ack of competition in the credit rating industry, 
but caution against interventions in this co mmercial market, with importance placed on 
maintaining a level playing field. On the other hand there were some propositions for 
increasing competition, such as driving de mand by requiring more ratings by a greater 
number of agencies, encouraging specialists, but there was similarly some representation 
against specific legislation in this area.  
 
3.1 European Central Bank or National Central Banks   There was opposition among a wide range of stak eholders for the ECB or National Central 
Banks to establish ratings. The ECB itself a ppears to oppose to the idea to publicly issue 
ratings for reasons of independence. Governme nts and regulators, while some were supportive 
to this idea; others were sceptical of public  sector involvement in the ratings sphere. 
 
3.2 New National Entrants  
 A limited number of stakeholders responded in this area. Some governm ents, finance industry 
groups said that if such an option would be pursued, operati onal independence would be a 
key factor. On the other hands, some other go vernments, finance industry groups and CRAs 
were against state intervention to stimulate new entrants. 
 3.3 Public/Private structures  
 
 
 79/193  Some Member States proposed the idea of Public/p rivate structures to be further considered 
and analysed. At the same time, some of th ese respondents further noted the problems of 
credibility and conflicts  of interest that could be cause d by direct funding arrangements and 
which would need to be addressed. Some nati onal regulators and several private enterprises 
opposed the creation of a new European CRA.  
 
3.4 European Network of Small and Medium-sized Credit Rating Agencies 
 There was some support from a group of Small and Medium-sized CRAS for the idea of a 
European Network of Small and Medium-sized Rating Agencies. However, some regulators, and governments felt this would not be effective.   
 
4. CIVIL LIABILITY OF CREDIT RATING AGENCIES 
 
Several respondents from various stakeholde r groups encompassing some governments, 
regulators and banking industry bodies supported the possibility of civil liability claims 
against CRAs, but only for gross negligence or intent.  Several respondents including 
respondents from all stakeholder groups expre ssed concerns about respecting existing legal 
systems, and the difficulty in establishing and disruption that cause d by simply applying a 
common standard across all of them. Taking re sponses as a whole to this section, there 
seemed to be general support (with the notable exception of the CRAs themselves, arguing 
that this would, for inst ance, increase reliance) for the no tion that it should be possible to 
pursue civil action, in the case of  both solicited and unsolicited ra tings, but that this should be 
reserved for severe cases only, not simply where investors suffer loss. Other measures 
proposed included increased regulatory scrutin y and punishment of offenders.  There was 
very little support for introducing the concept of an ‘incorrect’ rating. . 
 
5. POTENTIAL CONFLICTS OF INTERES T DUE TO THE “ISSUER-PAYS” MODEL 
 
Respondents agreed that the “issuer-pays” model inherently contains c onflicts of interest, 
although respondents of all kinds also stated that it should be possible to manage and 
minimise these conflicts, and in additi on, other models were  also conflicted. 
 
5.1. “Subscriber/Investor-Pays” model  
 
Some financial firms and their industry bodies felt that increasing the cost of investment 
risked reducing demand for securities.  Furt her respondents including competent authorities 
and governments noted that this model c ould reduce the independence of CRAs.   
 
5.2. “Payment-upon-results” model   
Some national authorities, government and trad e bodies of financial firms were opposed to 
this idea and expressed scepticism as to the feasibility of implementing such a system.  One 
trade body and one national authority were con cerned that this model could lead to the 
erroneous notion of "right" or "wrong" ratings. 
 
5.3. “Trading venues Pay” model  
 
There was some support from the academic sphere for this model. However, among market 
participants, public auth orities and interested third partie s, this model was not a favoured 
 
 80/193  option, especially in view of the large numbe r of unlisted securities which would not be 
covered.  5.4. Government as Hiring Agent model   
Governments responding to this question felt that this model had negative implications for 
conflicts of interest.  There were also conc erns about cost and how the model could be 
operated. 
 
5.5. Public Utility model  
 
The trade bodies and public authorities responding to this option were concerned at the expense of such an option, and some of thes e had concerns about increasing overreliance and 
regarding conflicts of interest , particularly rating of s overeign debt during a crisis. 
General outcome 
 
Overall, throughout the responses to the cons ultation, there were occasional calls for the 
Commission to wait for the full effect of CRA I and CRA II to become known, and some 
respondents called for the work  of the G20 and Basel to be taken into account.  
 
 
 81/193  2 – Roundtable on Credit Rating Agencies  
 
6 July 2011, Berlaymont Building, Rue de la Loi 200 – 1049 Brussels  
Summary of points rais ed in the roundtable 
 
The purpose of the roundtable was to gather vi ews from various shareholders in order to 
shape future policy in the field of credit rati ng agencies (hereafter referred to as CRAs) 
complementing existing EU regulation. The roundtable was chaired by Deputy Director 
General of the Directorate General for Intern al Market and Servic es, Mrs Nadia Calviño. 
Conclusions were drawn by Maria Velentza, Head of Unit of "Financial Stability" of the same 
Directorate General.  It was attended by approximately 60 participants, representing all 
relevant stakeholder groups (European institu tions and agencies, Member States, rating 
agencies, issuers, including va rious industry federations and re presentatives of the financial 
services industry, academia etc).  
We have not attributed particular statements  to individuals present, but have tried to 
represent the views expressed by various stak eholder groups.  The following is only 
intended as a summary of the discussion that occurred on this day, and does not try to 
represent the official lines taken by partic ular industry representatives, bodies or 
Member States. 
 
Overreliance on CRAs 
Issues debated: 
• What alternative measures of credit risk could be used instead of external credit 
ratings?  Does the answer di ffer across asset classes: cor porate, financial, sovereign, 
structured finance?   
• Should alternative measures of credit risk , including internal models and enhanced 
risk management, be used in isolation or  in combination with external ratings? 
• How do you assess transparency and data availa bility in structured finance? Is there 
enough transparency to allow financial firms to assess the credit ri sks of structured 
finance instruments themselves? 
In this section of the discussion, participants  were unanimous on the importance of reducing 
overreliance on ratings, particularly mechanistic reliance.  Although there was consensus that 
action should be taken, some participants cautio ned against overreacting in the wake of the 
crisis.  
A number of participants said that market pl ayers including investors did not perform enough 
of their own due diligence and risk analysis  or did not have su fficient understanding of 
ratings,.   
In order to facilitate improved due diligence and credit risk assessment, many proposed 
greater transparency and access to information.  However, some warned that simply providing 
more information would not lead to greater understanding and less overr eliance, stressing the 
need to incentivise market participants' ow n due diligence, including in the area of product 
innovation.  
Some participants raised  the issue of intellectual property in relation to tr ansparency, though 
not all agreed this was an issue. 
 
 82/193  A large number of participants said that referenc es to ratings in legislation were important in 
driving overreliance and that th ey should be removed, though some called for this to be done 
gradually. However, the general consensus wa s that removing references to ratings in 
legislation is just one step and is not an immediate cure. 
Some cautioned that a move to internal ratings c ould take time in order to first ensure quality 
or because such ratings would also be subject to  conflicts and quality is sues.  Some of these 
participants mentioned that in particular some SMEs do not currently have the capacity to 
perform their own ratings and pro cess large amounts of information. 
Participants acknowledged the difficulty in finding suitable alternat ives to ratings in 
legislation. A few participants drew a link betw een overreliance and competition. In addition, 
the presence of ratings in private contracts, pa rticularly in the asset management sector was 
raised, although this falls outside of the remit of EU legislation. 
A number of participants raised the importan ce of supervision and enforcement to ensure 
appropriate use of and to pr event overreliance on ratings. 
 
Sovereign debt ratings 
Issues debated: 
• Do you agree that the specificities of s overeign debt ratings justify enhanced 
requirements for sovereign debt ratings compared  to other rating classes? If this is the 
case, what kind of requirements would you suggest? 
• How can the transparency and monitoring of  sovereign debt ra tings be improved? 
• How can investors' understanding of sovere ign debt rating actions be enhanced? 
Many participants expressed serious concerns with some sovereign ratings issued by large 
CRAs. Some referred to concrete examples of  recent European downgrades that they found 
inexplicable since some CRAs appeared to fail  to take account or assess in a consistent 
manner all relevant information, such as support initiatives and other fa ctors, when issuing 
ratings. Others did not understand why majo r rating changes were made when no new 
information was available.  Participants said that some ratings issued by CRAs were 'not 
logical', 'questionable' 'disruptive' and 'not credible'.   
Some participants countered that some inaccurate statements were made, and that ratings are 
imperfect due to their forward-looking natu re, adding further that  methodologies were 
publicly available. 
There was no consensus as to whether soverei gn ratings should be s ubject to a specific 
regulation. Some participants felt that sovere ign rating should be distinguished from other 
rating classes, whereas others felt that  it should not be treated differently. 
Some said it was important to take into account spillover eff ects and that in general, more 
understanding of sovereign ratings was needed. 
One participant said that not onl y references to ratings in legi slation, but risk weightings for 
sovereign debt had encouraged a cycle of ir responsible borrowing, but also irresponsible 
lending. A few participants consid ered possible to set up a Eur opean body to rate sovereign 
debt, though others were agains t, stressing the importance of ma intaining a level playing field. 
There were several calls for increased transparency. There was general consensus on 
publication of full reports and explanation and justification behind sove reign rating changes, 
and also detail on the staff involved and time devoted to the rating.  
 
 83/193  There was opposition to the possible measure incl uded in the consultation to requests 3 days' 
notice to be given for sovereign rating changes,  mainly because of market abuse risks.  
However, some called for notice to be given w ith sufficient working hours to respond, rather 
than the current 12 hour requirement. 
Some said it was important to increase competition to increase the number of opinions in the 
market. One participant suggested  distinguish between issuer pa ys and investor pays models 
when drafting rules, as an advanced notice rule would not be suitable fo r an investor solicited 
rating. 
 
Enhancing competition in the CRA industry 
Issues debated: 
• How can new players be encouraged to enter the credit ra ting agency sector? 
• What are your views about cr eating a network of CRAs? Do  you consider that such a 
network could help increase competiti on in the credit rating agency sector? 
• What are your views about  creating a new independent European Credit Rating 
Agency? 
Many participants expressed concern at the olig opolistic structure of the credit rating market, 
despite the existence of strong regional or special ist players, and stressed the need to increase 
competition and to encourage more players in th e market. One cited a past example of large 
corporations downgraded by some rating agencies, whereas other agencies maintained investment grade ratings, allo wing the corporations to con tinue to raise funding and to 
continue to be profitable today. Some noted the importance of lo cal knowledge in this respect. 
A few participants said that more players w ould not necessarily improve competition or that 
more competition could be stimulated within the current structure. One participant thought 
that more competition could worsen the quality of ratings, though this was contested by other participants. 
A representative of the European Parliament e xplained the proposals regarding the creation of 
a publicly supported new European rating agency in the form of a foundation for which the 
European Parliament requested the Commi ssion to conduct an in-depth assessment. 
The majority of participants were against a Eu ropean rating agency as a public initiative, 
regardless of how it was funded. Some cited the long timeframe of around 10 years it might 
take for such an institution to gain credibilit y, while others thought it never would due to the 
questions about its independence and absence of c onflicts of interest.  Some felt that one new, 
large player would not increase competition. Othe rs felt it was not appropriate to give public 
support to one specific agency or project over the rest, as this would distort competition. 
A number of participants called for regulation to reduce and not increase barriers to entry. 
One participant noted that despite privat e ownership, CRAs have an important public 
responsibility and should base their actions on the public good. One proposed stimulating 
more competition by promoting comparability of the performance of ratings issued by CRAs. 
 
Conflicts of interest in the issuer pays model 
Issues debated: 
• What are your views about the model currently  discussed in the US (selection of the 
CRA by an independent board)? 
 
 84/193  • What are your views with respect to a re gular rotation between CRAs in order to 
mitigate conflicts of interests due to the issuer-pays model? 
Some participants noted that no model is free of conflicts of interest.  One proposed the 
creation of a private not for pr ofit investor-pays m odel foundation, suggesting that by having 
several stakeholders with different intere sts, conflicts could be minimised. Several 
participants called for more focus on c onflicts in the registration process. 
Some participants called for greater transparency to counter conflicts. 
A few participants drew comparisons to the audit industry, with some  advocating mandatory 
rotation. However others cautioned against this. A few participants cautio ned against conflicts 
created by the shareholding structure of the la rgest CRAs, and the similarity between their 
shareholders. 
One said that the issuer pays model had allo wed issuers to bribe for favourable ratings, but 
this statement was strongly rejected by others. 
 
Civil liability of CRAs 
Issues debated: 
• Do you think that credit rating agencies sh ould be held liable if they infringe 
negligently or intentionally the CRA Regulation, thereby caus ing damage to investors? 
• Do you see benefit in intr oducing a civil liab ility regime for CRAs in the CRA 
Regulation or should national legal or ders provide for such a regime? 
Some supported more stringent liability for CRAs, a few drawing parallels to the audit 
industry. A standard of gross negligence or intent was suggested. The opinion was also 
expressed that it would be easier to pursue lia bility claims agains t CRAs by moving to an 
investor-pays based model. 
There were calls in various parts of the di scussion by participants for CRAs to take 
responsibility for their actions, es pecially in view of the seri ous potential consequences. Some 
noted that CRAs can be sued, and that they sometimes are. 
 
 85/193  ANNEX III. INTERNATIONAL CONTEXT   
 
This annex contains information regarding international legislation and policy initiatives in 
the field of CRAs. 
1 – Overview 
At the international level, th e International Moneta ry Fund released (O ctober, 2010) a global 
financial stability report with a spec ific focus on sovereign debt ratings.138 The Financial 
Stability Board (FSB) has endor sed (October, 2010) principles139 to reduce authorities’ and 
financial institutions’ reliance on CRA ratings and the G20 already approved the FSB's principles on reducing relian ce on external credit ratings.
140 
The FSB principles cover five types of financ ial market activity: prudential supervision of 
banks; policies of investment managers and in stitutional investors; central bank operations; 
private sector margin requirement s; and disclosure re quirements for issuers of securities. The 
goal of the principles is to reduce the "cliff"  effects from CRA ratings that can amplify 
procyclicality and cause systemic disruption. Th e principles call on authorities to do this 
through:  
• Removing or replacing references to CRA ra tings in laws and regulations, wherever 
possible, with suitable alternative standards of creditworthiness assessment;  
 
• Expecting that banks, market participants and institutional investors make their own 
credit assessments, and not rely sole ly or mechanistically on CRA ratings.  
 The FSB has asked standard setters and regulators to consider next steps that could be taken 
to translate the principles into policy approa ches tailored to specifi c financial sectors and 
market participants.   The Basel Committee on banking supervision is currently working on specific policy actions 
to reduce reliance on ratings in the regulator y framework. The Toronto G20 statement on 26-
27 June 2010
141 called on the FSB to reduce the re liance on credit rating agency (CRA) 
ratings, and on the Basel Committee to address adverse incentives arising from the use of CRA ratings in the regulatory capital framework. In response to this request, the Committee established a working group (the  Ratings and Securitisation wo rking group) to review the 
Basel framework’s reliance on ratings and ma de several recommendations to the Basel 
Committee, most of which were ultimately included in the Basel III rules text.
142  
                                                 
138  International Monetary Fund, World Economic and Financial Surveys Global Financial Stability Report, 
October 2010. Available from: http://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/text.pdf .  
139  FSB, principles for reducing reliance on CRA ratings, adopted on 27 October 2010. Available from: 
http://www.financialstabilityboard.org/publications/r_101027.pdf .  
140  G20 Seoul Summit leaders' Declaration,  11-12 November 2010. Available from: 
http://www.g20.org/Documents2010/ 11/seoulsummit_declaration.pdf .  
141  G20, Toronto G20 summit declaration, 26-27 June 2010. Available from:  
http://www.g20 .org/Documents/g2 0_declaration_en.pdf .  
142  These included, for example, proposals to remove or  reduce certain cliff effects related to ratings from 
the internal-ratings based (IRB) approach and standardised approach (SA). In particular, the RS group 
is now working on addressing adverse incentives an d cliff effects arising from  the use of CRA ratings 
through: (i) the recalibration of the risk weights fo r securitisation exposures under the ratings-based 
approach, including to reduce ‘cliff effects’; (ii) th e review of the hierarchy of approaches in the 
Securitisation framework with  the aim of reducing the predominant role played by external ratings; and, 
 
 86/193   
In parallel, the USA has also introduced more ri gorous requirements on credit rating agencies. 
The adopted Dodd-Frank Wall Street Re form and Consumer Protection Act143 which 
strengthens provisions on accountab ility and transparency of credit rating agencies to rate 
structured finance instruments144, including rules on corporat e governance, presentation of 
ratings, methodologies. In addition, Section 939 A of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act requires federal agencies to review how  existing regulations rely on 
credit ratings and remove such references from their rules as appropriate. The Securities and 
Exchange Commission145 (SEC) is currently exploring ways  to reduce regulatory reliance on 
external credit ratings and replace them with a lternative criteria. For instance, SEC proposed 
amendments to its rules that  would remove credit ratings as one of the conditions for 
companies seeking to use short-form registration when registering securities for public sale. 
One of the criteria that allowed US issuers to  use this registration fo r their public offerings 
was that the securities to be offered had to  be rated investment grade by at least one 
NRSRO.146 
2 – Summary of FSB Report on overrel iance to external credit ratings 
On 14th of October 2010, FSB ha s released a report to G20 Fi nance Ministers and Governors 
on reducing reliance on CRA ratings.147  
The principles have been developed by the FSB, in consultation with international standard 
setters: 
I. Reducing reliance on CRA ratings in  standards, laws and regulations 
Standard setters and authorities should assess re ferences to credit rating agency (CRA) ratings 
in standards, laws and regulations and, wherev er possible, remove them or replace them by 
suitable alternative standards of creditworthiness. 
II. Reducing market reliance on CRA ratings Banks, market participants and institutional in vestors should be expected to make their own 
credit assessments, and not rely sole ly or mechanistically on CRA ratings. 
III.1. Central bank operations 
Central banks should reach their own credit judg ements on the financial instruments that they 
will accept in market operations, both as colla teral and as outright purchases. Central bank 
policies should avoid mechanistic approaches that could lead to unnecessarily abrupt and 
large changes in the eligibility of financial in struments and the level of haircuts that may 
exacerbate "cliff" effects. 
III.2. Prudential supe rvision of banks 
Banks must not mechanistically  rely on CRA ratings for asse ssing the creditworthiness of 
assets. This implies that banks should have the capability to conduct their own assessment of 
                                                                                                                                                        
 
(iii) the enhancement of internal assessment and du e diligence requirements. Final proposals on these 
topics are expected to be completed in time for the September 2011 meeting of the Basel Committee. 
143  Dodd-Frank Wall Street Reform and Consumer Protection Act, 29 June, 2010.  
144  Ibid, Sec. 932. 
145  SEC Initiatives under New Regulatory Reform Law.  
146  SEC Proposes First in Series of Rule Amendments  to Remove References to Credit Ratings, 9 February 
2011. Available from: http://www.sec.gov/rules/proposed/2011/33-9186.pdf .  
147  FSB Report on Principles for Reducing Reliance on CRA Ratings, 27/10/2010. Available from: 
http://www.financialstabilityboard.org/publications/r_101027.pdf .  
 
 87/193  the creditworthiness of, as well as other risks relating to, the financial instruments they are 
exposed to and should satisfy s upervisors of that capability. 
III.2.a. Larger, more sophisticated  banks within each jurisdiction should be expected to assess 
the credit risk of everything they hold (eith er outright or as collateral), whether it is 
for investment or for trading purposes. 
III.2.b. Smaller, less sophisticated banks may not have the resources to conduct internal credit 
assessments for all their investments, but still should not mechanistically rely on CRA ratings 
and should publicly disclose their credit assessment approach. 
III.3. Internal limits and investment policie s of investment managers and institutional 
investors 
III.3.a. Investment managers shou ld conduct risk analysis commen surate with the complexity 
and other characteristics of the investment and the materiality of their exposure, or refrain 
from such investments. They should publicly  disclose information about their risk 
management approach, including th eir credit assessment processes. 
III.3.b. Senior management and boards of institu tional investors have a responsibility to 
ensure that internal assessments of credit and ot her risks associated with their investments are 
being made, and that the investment managers they use have the skills to understand the 
instruments that they are inves ting in and exposures they face, and do not mechan istically rely 
on CRA ratings. Senior management, boards a nd trustees should ensu re adequate public 
disclosure of how CRA ratings are used in risk assessment processes. 
III.3.c Regulatory regimes should incentivise investment managers  and institutional investors 
to avoid mechanistic use of CRA ratings. 
III.4. Private sector margin agreements 
Market participants and central counterparti es should not use changes in CRA ratings of 
counterparties or of collateral asse ts as automatic triggers for large, discrete collateral calls in 
margin agreements on derivatives an d securities financing transactions. 
III.4.a. Supervisors should review  the margining policies of mark et participants and central 
counterparties to guard agains t undue reliance on CRA ratings. 
III.5. Disclosures by issuers of securities Issuers of securities should disclose comprehe nsive, timely information that will enable 
investors to make their own independent inve stment judgements and credit risk assessments 
of those securities. In the case of publicly-traded securities, this  should be a public disclosure. 
III.5.a. Standard setters and aut horities should review whether any references to CRA ratings 
in standards, laws and regul ations relating to disclosure  requirements are providing 
unintended incentives for investors to rely ex cessively on CRA ratings and, if appropriate, 
remove or amend these requirements. 
Next steps 
Standard setters and regulators should incentiv ise a transition to a reduced reliance on CRA 
ratings over a reasonable timeframe extending in to the medium term. It should take into 
account the need for market part icipants to build up their own risk management capabilities to 
replace reliance on CRA ratings. The m ilestones should be clearly visible. 
3 – Basel Committee on Banking Supervision 
Basel Committee on Banking Supervision 
 
 88/193  The Basel Committee on Banking S upervision is an institutio n created by the central bank 
Governors of the Group of Ten nations. It was cr eated in 1974 and meets regularly four times 
a year. 
The Committee's members come from Argentina, Australia, Belgium, Brazil, Canada, China, 
France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, 
Mexico, the Netherlands, Russia, Saudi Arab ia, Singapore, South Af rica, Spain, Sweden, 
Switzerland, Turkey, the United Kingdom and the United States. The Committee usually 
meets at the Bank for International Settlement s (BIS) in Basel, Switzerland, where its 12 
member permanent Secretariat is located. Th e Committee is often referred to as the BIS 
Committee after its meeting location. However, the BIS and the Basel Committee remain two distinct entities.
148 
The Basel Committee formulates broad s upervisory standards and guidelines and 
recommends statements of best practice in ba nking supervision (see bank regulation or Basel 
II Accord, for example) in the expectation that member authorities and other nations' 
authorities will take st eps to implement them through their own national systems, whether in 
statutory form or otherwise. 
The purpose of the committee is to encourag e convergence toward common approaches and 
standards. Dieter Kerwer reports  that "the BCBS is not a classi cal multilateral organization. It 
has no founding treaty, and it does not  issue binding regulation. Rath er, its main function is to 
act as an informal forum to find policy solutions and to promulgate standards."149 
At present the IMF is collaborating with the Committee to improve bank regulation. 
The Basel committee along with its sister orga nizations, the Internat ional Organization of 
Securities Commissions and International Associ ation of Insurance Supervisors together make 
up the Joint Forum of international financial regulators. 
Basel II 
Basel II is an international initiative that requi res financial services companies to have a more 
risk sensitive framework for the assessment of regulatory capital.  
The Basel Capital Accord sets international capital adequacy standards. In 1988, the Basel 
Committee on Banking Supervision established a method of relating capital assets, using a 
simple system of risk weights a nd a minimum capital ratio of 8%. 
The planned implementation date for Basel II is December 2006 with pa rallel running from 
January 2006. Banks, academics and politicians, particularly in the USA are demanding 
changes to the draft rules, which they believe are too complex, overly prescriptive and costly. 
These changes may in turn cause delays to  the implementation of the final Accord. 
Basel II is based on the concept of 3 Pillars: 1. Minimum capital requirements 2. Supervisory Committee 
3. Market Discipline    
                                                
 
148  Marrison, Chris (2002). The Fundamentals of Risk Measurement. New York, New York: McGraw Hill. 
pp. 340–342. 
149  Kerwer, Dieter (October 2005). "Rules that many use: standards and global regulation". Governance 18 
(4): 611–632. 
 
 89/193  
 
 
Basel II not only affects traditional finance co mpanies, but they also influence other areas 
such as the cost of project fina nce for Infrastructure Projects. 
Basel III 
The Toronto G20 statement on 26-27 June 2010 called on the FSB to reduce the reliance on 
credit rating agency (CRA) ratings, and on the Ba sel Committee to address adverse incentives 
arising from the use of CRA ratings in the regulatory capital framework. 
In response to this request, the Committee established a working gr oup (the Ratings and 
Securitisation working group) to  review the Basel framework’ s reliance on ratings and made 
several recommendations to the Basel Committee, most of which were ultimately included in 
the Basel III rules text. 
Basel III work on ratings and securitisation is planned to be finalised by the end of 2011. 
4 – IOSCO disclosure principles for public offerings and listings of asset-backed 
securities 
In April 2010, the Inte rnational Organisation of Securities Commi ssions (IOSCO) published 
its Final Report on Disclosure Principles for P ublic Offerings and Listings of Asset-Backed 
Securities. 150  IOSCO had previously decided that  its previously published disclosure 
requirements did not fully capture all the in formation needed by ABS investors.  The 
principles are designed to be taken into account  by securities regulators in the scope of their 
disclosure requirement regimes. The principles  were developed within the remit of IOSCO's 
work following its 2008 Final Re port on the Subprime Crisis. 151 Poor disclosure and poor 
investor understanding and oversight of underlying assets in ABS were significant 
                                                 
150  The full report can be viewed at: http://www.iosco.org/library/ pubdocs/pdf/I OSCOPD318.pdf  and a 
summary of the main points at: http://www.iosco.org/news/pdf/IOSCONEWS180.pdf . 
151  The full report can be viewed at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD273.pdf .  
 
 90/193  contributing factors to the Crisis.  The main areas of disclosure proposed by IOSCO for ABS 
are as follows: 
1. Parties Responsible for the Document;  
2. Identity of Parties Involved In the Transaction;  3. Functions and Responsibilities of Signifi cant Parties Involved In  the Securitization 
Transaction;  
4. Static Pool Information;  
5. Pool Assets;  
6. Significant Obligors of Pool Assets;  7. Description of the Asset Backed Securities;  8. Structure of the Transaction;  9. Credit Enhancement and Other Support, Excl uding Certain Derivati ve Instruments;  
10. Certain Derivative  Instruments;  
11. Risk Factors;  12. Markets;  13. Information about the Public Offering;  14. Taxation;  
15. Legal Proceedings;  
16. Reports;  17. Affiliations and Certain Relation ships and Related Transactions;  
18. Interests of Experts and Counsel; and  19. Additional Information.  
The guidance does not cover ABS where the a sset pool is actively managed by the issuer. 
In the EU, the Prospectus Directive contains  an Annex regarding the issuance of ABS. 
5 – Comparison of the existing regulato ry frameworks for CRAs in EU and US 
Registration, supervision, enforcement power 
Requirement EU US 
Mandatory 
registration This is required. Activity of 
unregistered CRAs and use of their ratings for regulatory purposes is 
prohibited. (Art. 4(1), 14).  Not at this stage. However, the ratings 
of a non-registered CRA cannot be used for regulatory purposes. The 
scope of use of credit ratings for 
regulatory purposes is much broader than in the EU therefore there is a big incentive to acquire NRSRO status. 
A proposal to amend the registration 
requirements is included in the Wall 
Street Reform and Consumer 
protection act of 2009. 
 
 91/193  Legal / physical 
presence 
requirement As a rule, CRAs need to be legal 
persons established in the EU.  There is 
a specific regime for certified CRAs, 
which may be exempt from the requirement of physical presence.  Endorsement of ratings produced by overseas CRAs is possible. (Art. 4, 5, 14(1)). No. CRAs to promptly furnish the 
SEC with legible, complete, and 
current copies, and, if specifically 
requested, English translations of records.  
Supervision by a 
public authority As of March 2010 competent authorities 
of the Member States with CESR co-
ordination. (Art. 22). 
ESMA now supervises CRAs: they 
must register with ESMA which has supervisory powers including information requests, access to 
personnel and inspection powers and 
the CRAs must pay fees in respect of this supervision. The SEC has statutory authority to 
oversee CRAs (NRSROs) as of 2007.  
Supervisory 
authority 
empowered to 
impose sanctions Yes. (Art. 36). Yes. 
Organisational, corporate requirements 
Requirement EU US 
Rating policy review function There is a requirement for an internal 
function to review the methodologies, models and significant changes to methodologies and models.  This 
function should be independent of the 
business lines and report to the independent members of the board. (Annex I.A.9). Not envisaged.  
Bill of Restoring American Financial 
Stability Act proposed by Senate in March 2010 proposes that SEC would 
be directed to issue rules under which 
registered CRAs have to adopt procedures for the development and oversight of rating methodologies. 
Under Dodd-Frank, NRSROs are 
required to establish and maintain 
internal controls over methodologies, and produce a report on this.  
Compliance 
function A permanent and effective compliance 
function operating independently of the business lines is required. This function must report regularly to senior 
management and the independent 
members of the board. (Annex I.A.5-6). A registered CRA should designate a 
compliance officer.  
Independent 
members of the administrative or 
supervisory board  At least 1/3 but not less than 2 
independent members required. They have the specific task of monitoring the development of the rating policy and Not envisaged, but a designated 
compliance officer is responsible for specific monitoring tasks that the EU Regulation attributes to independent 
 
 92/193  methodologies, effectiveness of the 
rating internal quality systems, 
effectiveness of procedures dealing with 
conflicts of interest, compliance and governance processes. (Annex I.A.2). members. 
 
Wall Street Reform Act of 2009 
proposes to introduce requirements for independent directors with specific monitoring tasks. 
Conflicts of interest 
Requirement EU US 
General policy CRAs are to ensure that conflicts of interest will not affect ratings.  Actual or potential conflicts of interest to be 
(i) identified and either (ii.1) 
eliminated or (ii.2) properly managed and in any case disclosed. 
 
Some conflicts of interest are 
prohibited by law.  
(Annex I.B.1). Conflicts of interest to be  
(i) identified and either (ii.1) 
eliminated or (ii.2) properly managed 
and disclosed. 
 Some conflicts of interest prohibited 
by law.  
 
Prohibited conflicts 
of interest  
 Ratings not to be issued and existing, 
potentially compromised ratings are to be immediately flagged as such when:  
1) CRA, an analyst or person 
approving ratings has direct or indirect 
ownership in the rated entity 
(collective investment schemes excluded); 
2) the rated entity is linked by control 
to CRA; 
3) an analyst or person approving 
ratings is a member of supervisory or management board of the rated entity; 
4) an analyst, or person approving the 
ratings has had a relationship with the rated entity, that may produce 
conflicts of interest.  
 (Annex I.B.3) A CRA is prohibited from having the 
following conflicts of interest, where it issues or maintains a rating: 
1) CRA receives 10% or more of its 
net revenue from one entity;  
2) analyst or person approving ratings 
has securities or any other direct ownership in the rated entity (sovereign issuers excluded); 
3) analyst or person approving ratings 
is an officer or director of the rated 
entity; 
4) CRA associated with the rated 
entity; 
5) CRA has provided 
recommendations on the legal 
structure, assets, liabilities or 
activities of the issuer of the securities; 
6) analyst or person approving the 
rating or person developing 
methodologies for determining ratings 
has negotiated fees with the rated entity; 
 
 93/193  7) analyst or person approving the 
rating receives gifts valued at above 
25$ in total.  
 In addition specific unfair coercive or 
abusive practices are prohibited (e.g. conditioning the issuance of rating on the purchase of another service by the CRA). 
Provision of 
consulting/advisory 
services   It is prohibited to provide consulting 
or advisory services to the rated entity 
or its related third party.  
(Annex I.B.4). Not prohibited but conflict of interest 
has to be disclosed and properly 
managed.  
'Wall Street reform act proposes to 
include advisory services among prohibited activities. 
Provision of 
ancillary services   Only specific ancillary services may 
be provided (market forecasts, estimates of economic trends, pricing 
analysis and other general data 
analysis as well as related distribution services). The CRA is to ensure that ancillary services do not present a conflict of interest with the rating 
activity and to disclose in the final 
rating any ancillary services provided to the rated entity. (Annex I.B.4). Provision of ancillary services to the 
rated entities is qualified as a potential conflict of interest.  CRAs are 
required to disclose in form NRSRO 
the types of ancillary services they provide.  The SEC may verify if potential or actual conflicts of interest in this area are properly addressed.  
 
Rating staff 
Requirement EU US 
Compensation and 
performance evaluation of analysts Compensation and performance 
evaluation of analysts is not to be contingent on the amount of revenue generated. (Art. 7(5)). Not envisaged but covered by general 
provision to disclose and manage conflicts of interest. 
Rating staff engagement in fee 
negotiations Prohibited. (Art. 7(2)). Prohibited (included among 
prohibited conflicts of interest). 
Rules on conduct 
of the staff 
engaged in the rating process 
 - It is prohibited for the rating 
analysts and person approving the 
ratings to engage in any transactions in instruments related to the rated entity; 
- It is prohibited to accept money, 
gifts or favours from anyone the CRA 
does business with; 
 - Handling confidential information The following are not allowed as a 
prohibited conflict of interest:  
2) analyst or person approving ratings 
has securities or any other direct ownership in the rated entity (sovereign issuers excluded); 
7) analyst or person approving the 
rating receives gifts valued at above 25$ in total; 
 
 94/193  (incl. unpublished ratings); 
 
- Look-back reviews of ratings when 
an analyst has left the CRA to work for an entity it rates. 
(Annex I.C.1, 3, 4, 6)  
- CRAs expected to establish and 
enforce written policies and 
procedures to prevent the misuse of material non-public information;   
- Look back reviews envisaged under 
the Wall Street Reform act in case an employee of rated entity was 
employed by CRA and participated in 
rating activity for that entity, and there are disclosure requirements. 
Rules excluding employees from the rating process  Rating analysts and persons 
approving ratings are prohibited from being engaged in rating an entity where there are conflicts of interest 
arising from owning financial 
instruments, recent employment, business or other relationships.  
(Annex I.C.2) The following are not allowed as a 
prohibited conflict of interest:  
2) analyst or person approving ratings 
has securities or any other direct 
ownership in the rated entity 
(sovereign issuers excluded); 
3) analyst or person approving ratings 
is an officer or director of the rated entity; 
7) analyst or person approving the 
rating receives gifts valued at above 25$ in total. 
Rotation Rotation of rating staff is mandatory: 
- lead rating analyst – not to provide 
services to a client for more than 4 years; 
- other rating analysts – not to provide 
services to a client for more than 5 years; 
- persons approving the ratings – not 
to provide services to a client for more than 7 years. 
(Art. 7(4), Annex I.C.7). Not envisaged. 
 However, there is a general rule to 
prevent, disclose and or manage 
conflicts of interest. The procedure 
for managing conflicts of interest may include rotation mechanism. 
 The Wall Street Reform Act proposes 
to direct SEC to undertake a study on 
a possible mandatory rotation 
mechanism. 
Quality of ratings 
Requirement EU US 
CRAs' 
independence in determining their 
methodologies and 
the content of their Ensured. Public authorities are not to 
interfere in the methodologies and content of ratings. (Art. 23(1)). Ensured. SEC and state authorities 
prohibited from regulating the substance of credit ratings or the procedures and methodologies for developing them. 
 
 95/193  ratings  
NRSROs will be required to ensure 
that methodologies used for ratings 
are approved by the Board (Section 15(E)(r)(1).   
Monitoring activity:  Monitoring of ratings required on an on-going basis (as well as at least an annual review). (Art. 8(5)). CRAs are required to disclose 
procedures for monitoring, reviewing and updating the ratings including how frequently ratings are reviewed. 
 
NRSRO Boards required under Dodd-
Frank to ensure that the internal control system, including with respect to policies and procedures for determining credit ratings. (Section 
15(E)(t)(3).  
Impact of 
methodology 
changes on existing 
ratings  When a methodology, model or key 
rating assumption is changed, a CRA 
is expected to: 
(a) immediately, using the same 
means of communication as used for the distribution of the affected credit 
ratings, disclose the likely scope of 
credit ratings to be affected; 
(b) review the affected credit 
ratings as soon as possible and no later than six months after the change, 
in the meantime placing those ratings 
under observation; and 
(c) re-rate all credit ratings that 
have been based on those methodologies, models or key rating assumptions if, following the review, 
the overall combined effect of the 
changes affects those credit ratings. 
(Art. 8(6)). CRAs are required to disclose if 
changes made to models and criteria 
for determining initial ratings are applied retroactively to existing ratings. 
 
New legislation (Wall Street Act, 
Restoring the Financial Stability act) contains proposal that material changes to methodology have to be applied in a consistent manner (CESR 
advice paragraph 627). 
 NRSROs will be required to apply 
such changes to all relevant ratings within a reasonable time determined by the SEC (Section 15E(r)(2)(A) and 
(B).  In line with this requirement, 
NRSROs will have to immediately disclose the likely scope of ratings affected by such changes to methodology by the same means as 
the ratings were distributed, including 
disclosure of errors that have been discovered. 
Quality of data used  A CRA is expected state clearly and prominently when disclosing any credit rating whether it considers satisfactory the quality of information available on the rated entity and to CRAs required to give a description 
of the public and non-public sources of information used in determining credit ratings, including information and analysis provided by third-party 
 
 96/193  what extent it has verified information 
provided to it by the rated entity or its 
related third party.  
For structured finance instruments, a 
CRA is expected to 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 instruments.  
(Annex I.D.I.4, I.D.II.2). vendors; whether and, if so, how 
information about verification 
performed on assets underlying or 
referenced by a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction is relied on in determining 
credit ratings.  
 Wall Street Reform Act proposes to 
introduce requirement to disclose on a rating by rating basis information on 
the reliability, accuracy and quality of 
the data relied on in the determination of the rating (CESR advice para 650).  Under Dodd-Frank, NRSROs will be required to assess the quality of the 
information relied on, and publish this 
information alongside any ratings issued (Section 15E(s). 
NRSROs will also be obliged to 
consider information from sources other than issuers and underwriters 
where this is credible (Section 
15(E)(v). 
 In addition, the SEC is required to 
adopt rules including requiring CRAs 
to publish a statement including the 
extent to which essential data was available (which may be especially relevant in unsolicited ratings) and limits on historical data. 
Limits to rating 
activity CRAs shall refrain from issuing a 
rating or withdraw an existing rating when there is a (i) lack of robust data; 
(ii) complexity of a structure of a new 
instrument; (iii) unsatisfactory quality of information or that serious questions as to whether a credible rating can be produced. (Annex 
I.D.I.4). Not envisaged. (653). 
  
Transparency and disclosures 
Requirement EU US 
Disclosure of rating 
actions If ratings are intended for distribution 
channels or for the public, any rating  A CRA is required to disclose credit 
ratings on the internet or through 
 
 97/193  decision should be disclosed on a 
non-selective basis and in a timely 
manner. (also applicable to the 
subscriber-pays model) 
(Art. 10(1)). other accessible means in order to 
meet the statutory definition of "credit 
rating agency" (736 ff). 
Disclosure of full 
ratings history Not envisaged.   From June 2010 CRAs must publicly 
disclose on their website the rating history information for all ratings determined by the CRA after June 
2007 ("100% requirement") (795 ff). 
Differentiation of 
structured finance 
ratings  When a CRA issues credit ratings for 
structured finance instruments, it shall 
ensure that rating categories that are attributed to structured finance instruments are clearly differentiated using an additional symbol which distinguishes them from rating 
categories used for any other entities, 
financial instruments or financial obligations. (Art. 10(3)). Currently there is no differentiation 
required.  This proposal has been 
deferred in Nov 2009. Now the SEC is investigating alternative measures to differentiate SF from other ratings, e.g. enhanced disclosure of information (see CESR advice 854 
ff). 
Dodd-Frank provisions capture most 
structured finance ratings through a 
definition of 'asset backed securities', with required actions including use of 
symbols to differentiate structured 
finance ratings from others (Section 15E(s)(1)(B)), disclosure of assumptions and warnings on volatility of ratings (Section 
15E(s)(3). 
Disclosure of 
methodologies, 
models and key assumptions in use CRAs are required to disclose on an 
on-going basis the methodologies, 
and descriptions of  models and key 
rating assumptions such as mathematical or correlation assumptions used in its credit rating activities as well as their material 
changes. (Art. 8(1), Annex I.E.I.5). 
 CRA must also indicate the principle 
methodology that was used in determining a specific rating (Annex I 
D I 2 b). A general description is required of 
the procedures and methodologies 
used by the CRA to determine credit ratings, including unsolicited credit ratings within the classes of credit ratings for which the CRA is registered. The description must be 
sufficiently detailed to provide users 
of credit ratings with an understanding of the processes employed by the CRA in determining credit ratings, including in particular 
descriptions of  (…) the quantitative 
and qualitative models and metrics used to determine credit ratings, including whether and, if so, how assessments of the quality of originators of assets underlying or 
referenced by a security or money 
market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction factor into the 
 
 98/193  determination of credit ratings; the 
methodologies by which credit ratings 
of other credit rating agencies are 
treated to determine credit ratings for securities or money market instruments issued by an asset pool or as part of any asset-backed or mortgaged-backed securities 
transaction.  
Further disclosure requirements on a 
rating by rating basis proposed in Wall Street Reform act (e.g. disclosure on the sensitivity of ratings 
to assumptions made by CRA, (733)). 
Historical 
performance data 
(default and transition studies)   
 CRAs are to make available in a 
central repository established by 
CESR historical performance data including the ratings transition frequency and information about credit ratings issued in the past and on 
their changes. Data on the historical 
default rates of its rating categories to be provided every six months. A credit rating agency shall provide information to that repository on a standard form as provided for by 
CESR. CESR shall make that 
information accessible to the public and shall publish summary information on the main developments observed on an annual 
basis. (Art. 11(2), Annex I.E.II.1). Envisaged as disclosure on website. 
(1, 3, 10 year horizon required for 
each rating category). Methods used for calculation to be publicly explained. (790). 
 
Proposed amendments under Wall 
Street Reform act will direct SEC to require each CRA to disclose information on the historical performance of each rating (799 ff). 
Standards on 
presentation of 
rating reports  Envisaged. (Annex I.D.I). Envisaged. 
Record keeping obligations 
Requirement EU US 
Internal records 
retention period Internal records must be kept for at 
least 5 years (Annex I.A.8). Internal records must be kept for 3 
years. 
Other issues 
Requirement EU US 
Notching practice 
(discriminatory 
treatment of ratings issued by other 
CRAs in situations 
where they could be used in the CRA's CRAs are prohibited to refuse to issue 
a rating of an entity or a financial 
instrument because a portion of the 
entity or the financial instrument had been previously rated by another CRA. All instances of downgrades of underlying assets or structured The following is prohibited as 
anticompetitive behaviour: Issuing or 
threatening to issue a lower credit 
rating, lowering or threatening to lower an existing credit rating, refusing to issue a credit rating, or withdrawing or threatening to 
 
 99/193  rating process)  finance instruments shall be recorded 
and justified. (Art. 8(4)). withdraw a credit rating, with respect 
to securities or money market 
instruments issued by an asset pool or 
as part of any asset-backed or mortgage-backed securities transaction, unless all or a portion of the assets within such pool or part of such transaction also are rated by the 
CRA, where such practice is engaged 
in by the CRA for an anticompetitive purpose. 
Shopping for ratings  CRAs are to disclose publicly information about structured finance instruments for which preliminary ratings where requested. (Annex 
I.D.II.4). Under agreement between the New 
York Attorney General and the CRAs of 2008, the latter would charge fees even if the client did not request a 
rating after a "test rating". Under U.S. 
Treasury proposal, an issuer will be required to disclose all of the preliminary ratings it had received from different credit rating agencies. 
6 – Regulatory Changes in the US vs. EU new initiatives on credit rating agencies 
The Dodd-Frank Wall Street Reform and C onsumer Protection Act (Dodd) devotes a 
subsection to the improvement of Nationally Recognised Statistical Rating Organisations 
(NRSRO) regulation. The act will require ch anges in the way the SEC regulates NRSRO 
internal control and procedures, conflicts of interest, rating methodologies and their 
transparency and performance, rating analyst training, rating symbols and disclosure when 
issuing ratings of ABS. 
Many aspects of the reform are not decided in th e regulation itself, but rule-making details are 
delegated to the Security and Exchange Comm ission (SEC). On 18 May the SEC published a 
consultation paper on the proposed implementing rules for a 2 months consultation period. 
The final SEC rules are expected to enter into force by end of 2011. 
A new Office of Credit Ratings is being estab lished at the SEC which will register them and 
can fine or de-register them. It will also carry  out annual examinations of NRSROs and write 
reports about the results, as well as conduct st udies on NRSROs regardin g their independence, 
possible conflicts of interest and the standardising of ratings terminology.  
 
US legislation vs. EU new initiatives on CRAs  
 
Problem 
area US legislation EU new initiatives 
 
1. Reducing overreliance 
on external 
ratings 
 Removing many of the statutory / mandatory 
requirements for ratings (from Federal Deposit Insurance Act, Investment Company Act, 
Security Exchange Act, et al.) or replace them 
with alternative “ standards of credit worthiness” as defined by the appropriate regulator.  
• Alternative standards of creditworthiness: •  Internal risk credit management 
will be enhanced 
Credit institutions, investment firms, 
insurance and reinsurance undertakings, 
asset managers and investment funds' investment decisions must not rely solely 
and mechanistically on ratings but 
                                                 
152  Report on Review of Reliance on Credit Ratings, July 2011, SEC staff. 
 
 100/193  Problem 
area US legislation EU new initiatives 
on the national level, US federal banking agencies 
issued an advance notice of proposed rulemaking (ANPR) regarding alternatives to the use of credit 
ratings in regulatory capital guidelines in August 
2010, in response to section 939A of the Dodd-Frank Act. The Act requires federal agencies to 
assess regulations and subs titute references to or 
requirements for credit ratings with alternative standards of creditworthin ess, that are uniform 
where feasible. The federal agencies (including 
SEC) also conducted a roundtable to promote the exchange of ideas on the development of 
alternative creditworthiness standards in 
November 2010. 
• Investment managers and institutional 
investors: in March 2011, the SEC proposed rules 
that would no longer require a CRA rating for the 
determination of which securities are permissible 
investments for a money market fund, and instead would rely on the determination by the fund’s 
board that the security presents minimal credit 
risks. 
• Residential and commercial mortgage 
backed securities in functional regulation: US 
state insurance regulators no longer use CRA ratings for residential and commercial mortgage 
backed securities in functional regulation. Rather, 
independent third parties have been engaged by the National Association of Insurance 
Commissioners to model potential losses on 
regulated insurance companies’ RMBS and CMBS portfolios. 
Further measures to reduce reliance have been 
highlighter in the Report on Review of Reliance 
on Ratings
152: 
• Permission to register primary offerings 
of non-convertible securitie s by eligible issuers in 
forms forms S-3 and F-3 under the Securities Act: 
reference to NRSRO is pr oposed to be replaced 
by the criterion that "the issuer has issued at least 
$1 billion of non-convertible securities". 
Equivalent changes or just deletions of references were made in forms S-4 and F-4; F-9; Rule 134, 
138, 139 and 168; schedule 14A. 
• Changes in rules and forms under 
Investment Company Act of 1940. References to 
credit ratings assigned by a single NRSRO in the 
presentation of portfolio holdings in the shareholder reports (forms N-1a, N-2 nd N-3) are 
proposed to be replaced by funds that choose to 
use credit quality categorizations. 
• Changes in rules and forms under always form their own internal credit 
opinion on every exposure. (instruments: CRD IV – July 2011; Solvency II – Q1 
2012; UCITS and AIFMD – Q2 -2012)  
• Internal ratings based 
approaches will be used to calculate 
capital requirements 
Institutions with a material number of 
exposures in a given asset class will need 
to develop internal models. (instruments: 
CRD IV – July 2011; Solvency II – Q1 
2012) 
• External ratings will be verified 
internally 
Even if institutions do not use internal 
ratings they will be required to compare 
their internal credit opinion with the 
capital requirement resulting from an external rating. (instruments: CRD IV – 
July 2011; Solvency II – Q1 2012) 
 
 
 101/193  Problem 
area US legislation EU new initiatives 
Exchange Act. In the prescription of minimum 
net capital requirements for broker-dealers (Rule 
15c3-1, referred to as the "Net Capital Rule"), all 
references to credit ratings are substituted by a 
standard of credit-wort hiness: a broker-dealer 
take a 15% haircut on its proprietary positions in 
certain securities, unless the broker-dealer 
establishes, maintains and enforces written policies and procedures, which lead to 
determination that the investment has only a 
"minimal amount of credit risk".  
It is also proposed in the Appendix to the Net 
Capital Rule to delete references to NRSRO 
ratings in the term "major market foreign currency".  
In Appendixes E, G and F, which deal with 
alternative approaches to computing net capital, SEC proposed to replace references to NRSRO 
ratings by risk weight (20%, 50%, etc.) Also, an 
OTC derivatives dealer would be required to 
request SEC approval to determine credit ratings 
using internal ratings rather than ratings by NRSROs. 
Regarding integrity of the securities trading 
market, rules 101 and 102 of Regulation M are proposed to be changed. References to credit 
ratings in these rules are replaced with new 
standards relating to the trading characteristics of covered securities. Specifically, the Commission 
proposed to except nonconvertible debt securities, 
nonconvertible preferred securities, and asset-backed securities from Rules 101 and 102 if they: 
(1) are liquid relative to the market for that asset 
class; (2) trade in relation to general market interest rates and yield spreads; and (3) are 
relatively fungible with securities of similar 
characteristics and interest rate yield spreads. The proposal would require a determination to be 
made using reasonable factors of evaluation and 
the determination must be subsequently verified 
by an independent third party. 
Further removal of references to NRSROs were 
made in rules 15c3-3 and rule 10b-10. 
• Further considerations are made by SEC 
on the following rules: form S-3 under Securities Act, Rule 3a-7 under Investment Company Act 
and Rule 206(3)-3T under the Advisers Act 
 
2. Sovereign debt ratings No specific action. However, rules on 
methodologies and process of issuing ratings to be strengthened (independent of rating class). E.g. 
CRA will be required to p ublish the reasons for a 
methodology change and have to inform investors ECB or ESM 
The ECB or ESM will be encouraged to 
establish independent credit assessments, 
particularly for European sovereigns and 
 
 102/193  Problem 
area US legislation EU new initiatives 
about any significant errors in rating 
methodologies. systemic credit institutions. (Instruments: 
EFSF Regulation) 
 3. Enhancing 
competition 
 A modification to rule 17g-5 of the Securities 
Exchange Act of 1934 expressly addresses 
competition where an issuer or arranger pays for a 
rating for structured finance product.  The aims to increase ratings issued for structured finance 
products and to increase unsolicited ratings.  The 
rule will require the issuer , sponsor or underwriter 
of structured finance products to maintain a 
constantly updated website of information 
relevant to the rating or monitoring of the rating.  This website will be accessible to other NRSROs 
not hired to issue the rating, so that they can issue 
unsolicited ratings.  Other NRSROs accessing the information will be obliged to issue and maintain 
ratings for 10% of the products for which they 
access information. A network of European small and 
medium size rating agencies 
A network of European small and 
medium size rating agencies would be 
promoted under a European Programme. 
This could consist of the future 
Competitiveness and SME programme to 
be established (as successor  of the CIP 
programme) by the Enterprise and 
Industry Directorate General or by the 
"Horizon 2020" programme for 
innovation related actions managed by 
DG Research; in both cases, the 
financing would be possible as of 2014 
at the earliest. This network would 
enable participating small and medium 
rating agencies to share data, best 
practice on rating methodologies and 
resources. 
 
4. Civil 
liability 
 Increasing liability of NRSROs if they recklessly 
or knowingly failed to conduct a reasonable 
investigation into the facts used by its 
methodology or verify them if obtain from other parties. The right of redress will be ensured to 
investors (Instrument: CRA3) 
 5. Conflicts of interest 
 Provisions are included to reduce conflicts of 
interests among employees of NRSROs. The SEC is tasked with conducting a study on the 
appropriate methods of paying fees to NRSROs 
and the resulting conflicts of interest by mid-2012, and on that basis, deciding on a rule of how 
to select a NRSRO for an initial rating of 
structured finance product. 
Concerning the "issuer-pays" model, the SEC is 
exploring the option of creating a Credit Ratings 
Board to designate credit rating agencies to rate structured finance instruments. Rotation of CRAs. 
An issuer's own credit worthiness could 
not be rated by the same CRA for more 
than 3 consecutive years.  Another CRA 
would take over thereafter and the 
outgoing CRA and the issuer would 
make available all information accessed 
in the rating process. (CRA3) 
A CRA would not be able to rate more 
than 5 consecutive issues of any asset 
class by the same issuer, or if fewer than 
5 issues are made, it would not be able to 
rate the issues of one issuer over a period 
exceeding 3 years.   
Additional requirements will be 
introduced on CRAs' independence and 
objectivity in relation to their 
shareholders. ESMA would be required 
to ensure that: (1) shareholders could not 
either individually or in voting blocs 
accrue potentially controlling stakes in 
more than one CRA, (2) that CRAs 
could not issue ratings for any firm that 
holds shares in that CRA, even indirectly 
(3) any person that directly or indirectly 
controls a CRA would not be allowed to 
invest in products and entities rated by 
the CRA and to provide advisory 
 
 103/193  Problem 
area US legislation EU new initiatives 
services to the entity which or whose 
products were rated. 
 
 104/193  ANNEX IV. OVERVIEW OF CRA  MARKET  
1 – CRAs in the EU  
Pursuant to Regulation 1060/2009, all CRAs operati ng in Europe will have  to register with 
ESMA. Therefore, while there are eight CRAs th at have currently completed the registration 
process, there were 23 applications made  between 7 June 2010 and 7 September 2010, in 
respect of 45 legal entities, so the number of registered CRAs is expected to rise as the 
applications are processed.153 
List of registered or certified CRAs  
 
                                                 
153  CESR Annual report according to article 21 of Regulation (EC) 1060/2009 on Credit Rating Agencies, 
CESR/10-1424, 6 December 2010.  
 
 105/193  
 
Source: List of Credit Rating Agencies regist ered in accordance with Regulation 1060/2009, 
accessible at http://www.esma.europa.eu/popup2.php?id=8035 . Last update: 31.10.2011 
CRAs that currently provide sovereign debt ratings154 
Standard & Poor’s with subsidia ries in: FR, DE, IT, ES, SE, UK 
Moody’s with subsidiaries in : CY, CZ, FR, DE, IT, ES, UK 
Fitch with subsidiaries in: FR, DE, IT, PL, ES, UK 
DBRS  
Capital Intelligence Limited (CY) 
Japan Credit Rating Agency Ltd. (JP) 
External Credit Assessment Institutions (ECAI)155's approved by the competent authorities156  
                                                 
154  This list lists EU based CRAs which are currently providing sovereign debt ratings. It may not be 
complete and also other CRAs may start rating sovereign debt ratings.  
155  As defined in article 81 of Directive 2006/48/EC of  the European Parliament and of the Council of 14 
June 2006 relating to the taking up and pursu it of the business of credit institutions (recast). 
156  ECB response to the public consultation on CRAs: NCBs’ contributions as of 13 July 2010. 
 
 106/193  Table below lists the approved ECAIs by Euro area national banki ng supervisors (data as of 
July 2010). It should be noted that the number of approved ECAIs by supervisors exceed that 
of the Eurosystem in the Eurosystem  credit assessment framework (ECAF).157 Within this 
framework, the Eurosystem accepts four ECAI s (S&P, Moody’s, Fitch and DBRS), National 
Central Banks in-house credit as sessment system source (ICASs)158 and rating tools such as 
Lince, ICAP159 and Coface. Various national banking s upervisors have approved at a national 
level other ECAIs (i.e. Japan Credit Rating Agency, Banque de France, Coface, and Rating 
and Investment Information (R&I)). During 2009, no new ECAI  was approved by national 
supervisory authorities. 
 
Source: ECB response to the public consultation on  CRAs: NCBs’ contributions as of 13 July 2010.  
2 – Market Concentration within the Rating Industry 
Market share of outstanding rati ngs by rating agencies in the US  for industrial corporations 
and financial institutions end 2009 was the following: 
                                                 
157  The Eurosystem credit assessment framework (ECA F) defines the procedures, rules and techniques 
which ensure that the Eurosystem requirement of high credit standards for all elig ible assets is met. In 
the assessment of the credit standa rd of eligible assets, the Euro system takes into account credit 
assessment information from credit assessment system s belonging to one of four sources, namely 
external credit assessment institutions (ECAIs), NCBs’ in-house credit assessment systems (ICASs), 
counterparties’ internal ratings-based (IRB) system s, or third-party providers’ rating tools (RTs). 
Additionally, in the assessment of the credit standard the Eurosystem takes into account institutional 
criteria and features guaranteeing sim ilar protection for the instrument holder such as guarantees.  More 
information can be found on: www.ecb.europa.eu .  
158  Currently Banco de España, the Banque de France, the Central Bank of Ireland, the Deutsche 
Bundesbank, and the Oesterreichische Nationalbank have set up a ICAS facility. 
159  Lince is recognised as an ECAI for Capital Requirements purposes by Banca d’Italia and is recognised 
as a Rating Tool for ECAF purposes. ICAP is r ecognised as an ECAI for Capital Requirements 
purposes by Bank of Greece and is recogni sed as a Rating Tool for ECAF purposes. 
 
 107/193  Industrial corporations Financial institutions
Standard & Poor's 43,2% 24,0%
Moody's 32,3% 35,1%
Fitch 13,1% 33,0%
TOP 3 rating agencies 88,6% 92,1%
others 11,4% 7,9% 
Source: Lynn Bai, The performance Disclosures of Credit Rating 
Agencies: are they effective r eputational sanctions, New York 
University Journal of Law & Business, 2010, p.32. 
This data shows that the thre e largest CRAs had a share of re spectively 88,6% and 92,1% of 
ratings for respectively industria l corporations and financial institutions end 2009. Similar 
market shares can be expected for other rating segments and territories, and applies also for 
credit ratings within the EU. 
The table below presents a non-exhaustive list of acquisition by three largest CRAs. 
 
Source: Norbert Gaillard (2007): “les méthodologies de notation souveraine”, thèse de 
doctorat en économie, Institut d’études politiques de Paris  
 
3 – Overview of the "big three" CRAs  
Organisation and financial performance 
 
 108/193  These entities of Standard and Poor's Moody's and Fitch have their h ead offices and main 
management, administrative and supervisory bodi es in the US (although Fitch Ratings is dual 
headquartered in New York and London). They  operate in the EU through subsidiaries 
established in several countries.160 Their activity does not have  a territorial character.  
Moody's Investor Services is owned by Moody's Corporation (listed on the New York Stock 
Exchange - NYSE). Standard & Poor's is owned by the American publisher Mc Graw-Hill (which is a listed entity on th e NYSE). Fitch is a subsidiary of the French financial company 
Fimalac (listed on Euronext Paris).
161  
Standards and Poor's 
Standard and Poor's Ratings Services is a divisi on of Standard and Poor's (S&P), a division of 
The McGraw-Hill Companies, Inc. ("McGraw-Hill" ), a U.S. listed publishing and information 
services group. 
In the E.U, S&P operates in France, Germany,  Italy, Spain, Sweden and the UK via local 
subsidiaries, branches or divisions of McGraw-Hill: 
• Standard & Poor's España, S.A. (Spain) 
• McGraw Hill International (U.K.) Limited (UK) 
• Standard & Poor's AB (Sweden) 
• The McGraw-Hill Companies GmbH (Germany) 
• The McGraw-Hill Companies, SA (France) 
• The McGraw Hill Companies, SRL (Italy) 
As S&P's ratings are issued from an entity th at also conducts other business (for example, 
maintaining financial indices) making it difficult to locate financial information referring only to the ratings business. 
In 2010, Standard & Poor's (including non-ratings  activity), increased profits in absolute 
terms, but fell slightly in terms of operati ng margin.  The operating margin was nonetheless 
significant at 45%: 
Revenue ($ million) 2010 2009 2008 
Transaction 662.5 549.8 554.9 
Non-transaction 1032.9 987.5 1028.1 
Total revenue 1695.4 1537.3 1583 
Operating profit 762.4 712.2 749.3 
% Operating margin 45.0 46.3 47.3 
Source: McGraw Hill 2010 Annual Report, p. 24, accessible at: 
http://www.mcgraw-hill.com/about/annual_report/ar2010.pdf .  
Some estimates have placed the operating margin for the ratings section of the business on its 
own at 50% in recent years.162 
                                                 
160 Standard &Poor's has subsidiaries in France, Ge rmany, Italy, Spain, Sw eden and UK; Moody's has 
subsidiaries in Bulgaria, Cyprus, Czech Republic, France, Germany, Italy, Spain and UK. Fitch has 
subsidiaries in UK ("Fitch Europe"), Fran ce, Germany, Italy, Poland and Spain. 
161 Fitch merged in 1997 with the British IBCA ratin g company, which is specialised in rating banks. 
Fitch-IBCA then bought the fourth-l argest American rating agency, Duff & Phelps, in June 2000 and, in 
December 2000, Thomson BankWa tch, another agency spec ialised in rating banks. 
162  The Credit Rating Industry: Competition and Regulation, Fabian Dittrich, p. 20. Available from: 
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991821 . 
 
 109/193  S&P published 870,000163 new and revised ratings in 2009.  Ratings are issued for a number 
of different sectors, such as structured fina nce, sovereign and corporate.  Although S&P does 
not appear to publish a detailed distribution of  the ratings and revenue by region and sector, 
S&P does note that a fall in the issuance of AB S and RMBS declined in the US and Europe in 
2010, resulting in lower structured finance revenues.164 S&P rates 126 sovereign 
governments.165 
In the absence of S&P revenues by geographich  region, the table belo w shows McGraw Hill 
revenues 
Revenue ($ million) 2010  2009  2008  
US 4367.4 70.8% 4226.4 71.0% 4579.4 72.1%
European Region 987.2 16.0% 963.7 16.2% 1020.5 16.1%
Asia 499.4 8.1% 467.8 7.9% 438.8 6.9%
Rest of the world 314.3 5.1% 293.9 4.9% 316.4 5.0%
Total 6168.3  5951.8  6355.1  
Source: McGraw Hill 2010 Annual Report, p. 64, accessible at: http://www.mcgraw-
hill.com/about/annual_report/ar2010.pdf .  
Moody’s Investors Service  
Moody's Corporation, based in the U.S., ha s a number of subsidiaries in various 
jurisdictions.166 Its ratings business is primarily asso ciated with Moody's Investors Service  Inc 
("MIS"), based in Delaware, U.S. MIS claims to rate or analyse debt in more than 110 countries, 25,000 public finance issuers, 12,00 0 corporate issuers and 106,000 structured 
finance obligations, employing 2,700 staff, includ ing 1,200 analysts.  640 of the total staff are 
employed in the EU by MIS EU subsidiaries and one branch. 
167 
MIS has the following seven EU subsidiaries168: 
• Moody’s Investors Service Ltd, (UK) (incl udes its Czech branch, Moody’s Investors 
Service Ltd, organiza ční složka), 
• Moody’s EMEA Ltd, 
• Moody’s Deutschland GmbH, 
• Moody’s France SAS, 
• Moody’s Investors Service España S.A., 
                                                 
163  Standard and Poor's website, About Standard and Poor's. Available from: 
http://www.standard andpoors.com/about-sp/main/en/eu .  
164  McGraw Hill 2010 Annual Report p 24 – 25. Available from: http://www.mcgraw-
hill.com/about/annual_ report/ar2010.pdf . 
165  Standard and Poor's request for comment on Sovereign Government Rating Methodology And 
Assumptions, p 7, available from: 
http://www.interest.co.nz/sites/default/files/S& P%20Sovereign%20Government%20Rating%20Method
ology%20And%20Assumptions%20RFC.pdf . 
166  For a complete list of subsidiaries, see Moody's Co rporation Form 10-K (Annual Report) filed with the 
SEC, available from: http://www.sec.gov/Archives/edgar/data/1059556/000119312511047974/d10k.htm
, and Exhibit 21 of 
this filing, available from: 
http://www.sec.gov/Archives/edgar/data/1059556/000119312511047974/dex21.htm .  
167  European Union Transparency Re port issued in respect of the y ear ended 31 December 2010, published 
March 2011, p 2, available from: 
http://www.moodys.com/PublishingImages/MCO /EU%20Transparency %20Report%202010.pdf . 
168  European Union Transparency Re port issued in respect of the y ear ended 31 December 2010, published 
March 2011, p 8, available at: http://www.moodys.com/PublishingImages/MCO /EU%20Transparency %20Report%202010.pdf
.  
 
 110/193  • Moody’s Investors Serv ice Cyprus Ltd, and 
• Moody’s Italia S.r.l. 
Moody's Corporation also includes details of re venue by sector and geog raphic jurisdiction in 
its Annual Reports. MIS issues rati ngs in the corporate finance, structured finance, financial 
institutions and public sector areas.  The follo wing table gives a breakdown of MIS revenue in 
these four sectors: 
Revenue ($ million) 2010  2009  2008  
Corporate finance 563.9 38.5% 408.2 31.9% 307.0 24.2%
Structured finance 290.8 19.8% 304.9 23.9% 404.7 31.9%
Financial institutions 278. 7 19.0% 258.5 20.2% 263.0 20.7%
Public, project, infrastructure  271.6 18.5% 246.1 19.3% 230.0 18.1%
Other 61.3 4.2% 60.0 4.7% 63.6 5.0%
Total 1466.3  1277.7  1268.3  
Source: Moody's Corporation Form 10-K (Annual Report  2011), p 99, filed with the SEC, available at: 
http://www.sec.gov/Archives/edgar/d ata/1059556/000119312511047974/d10k.htm .  
These data show the declining role of structur ed finance in generati ng revenues falling from 
31.9% in 2008 to 19.8% in 2010, which is in line with an  expected fall in structured finance 
product issuance since the crisis.   
In the absence of a geographic breakdown of re venue for Moody's Investors Service, the table 
below shows that over half of the Corporation' s consolidated revenue derives from the US, 
and a still significant proportion derives from th e EMEA area. In 2009, 71% of Corporation's 
consolidated revenue is derived from Moody's Investors Service: 
Revenue ($ million) 2010  2009  2008  
US 1089.5 53.6% 920.8 51.2% 910.1 51.8%
EMEA 627.4 30.9% 624.7 34.8% 603.1 34.4%
Other 315.1 15.5% 251.7 14.0% 242.2 13.8%
Total 2032.0  1797.2  1755.4  
Source: Moody's Corporation Form 10-K (Annual Report  2011), p 99, filed with the SEC, available at: 
http://www.sec.gov/Archives/edgar/d ata/1059556/000119312511047974/d10k.htm .  
These data show that revenues from the EMEA area continue to provide  over 30% of revenue 
for the Corporation (these figures include busin esses other than MIS).  Although separate EU 
data are not published in these filings, it is reas onable to assume based on the office locations 
of MIS that a large proportion of MIS's EMEA revenue is derived from the EU. 
Fitch Ratings 
Fitch operates through subsidiaries  in the EU. The subsidiaries  outside the UK are owned by 
Fitch Ratings Ltd. of the UK, itself owned by Fitc h, Inc. of the US. These are the subsidiaries 
of Fitch Ratings in the EU: 
• Fitch Ratings Limited (UK) 
• Fitch Ratings CIS Limited (UK) 
• Fitch Ratings España S.A.U (Spain) 
• Fitch Ratings Deutschland GMBH (Germany) 
• Fitch France (France) 
• Fitch Italia S.P.A. (Italy) 
• Fitch Polska S.A. (Poland) 
 
 111/193  Fitch Ratings generated revenues of $657.2 m illion during the 2010 fiscal year, a 7.8% 
increase from $609.8 million for the prior year. After translation in to euros, its contribution to 
consolidated revenue came to €487.5 million ve rsus €450.2 million for the previous period, an 
increase of 8.3% on a reporte d basis and 6.3% like-for-like169. The table below the revenue 
distribution by geographic region. 
Revenue (in %) 2010  2009  
United States 36.1% 37.9%
United Kingdom 11.5% 10.0%
Other European Union countries 21.6% 23.6%
Other countries 30.8% 28.5%
Source: 2010 Fimalac Annual Report, p 15: http://www.fimalac.com/annual-reports.html .  
Ultimately controlled in Europe (unlike the other two large CRAs), by the French parent 
company Fimalac, Fitch Ratings generates a large share of its revenue from the U.S., at nearly 
36% in 2010, but with a comparable 33% from EU countries. 
Though revenues at Fitch Ratings are significantly  lower than at S&P and MIS, Fitch claims 
that its market share of global debt issuance,  measured in terms of dollar issuance volume, 
stood at an estimated 68%. 170 The table below lists global ma rket share for the individual 
sectors where Fitch is an active player. 
Non-Financial Corporates  57% 
Financial Institutions  86% 
Structured Finance  48% 
US Public Finance  60% 
Sovereigns  91% 
Total 68% 
Source: 2010 Fimalac Annual Report, p 18: http://www.fimalac.com/annual-reports.html .  
Fitch Ratings currently maintains coverage of approximately 6,000 fi nancial institutions, 
including over 3,500 banks and 1,400 insurance co mpanies. Finance & leasing companies, 
broker-dealers, asset managers, managed funds, and covered bonds make up the remainder of 
its financial institution coverage  universe. Additionally, the agency currently rates more than 
2,000 corporate issuers, 100 sovereigns, 200 subs overeigns, 300 global infrastructure ratings, 
and 46,000 US municipal transactions. It also  maintains surveillance on over 6,500 US, 1,300 
European and 800 Asian structured finance transactions.171  
Profitability of three largest CRAs 
Over the years, there have been shifts in the revenue structure of the leading CRAs. Until the 
mid-1990s, CRAs specialised in and derived mo st of their revenues from the rating of 
corporate or sovereign debt. However, with the growth of structured markets they 
increasingly engaged in the high ly lucrative activity of rating then new structured finance 
transactions. As a consequence, CRAs earned up to approximately 50% of their revenue from 
structured finance ratings.172  According to the SEC, between 2002 and 2006, revenues 
derived from rating structured products incr eased dramatically: "revenues derived from 
                                                 
169  2010 Fimalac Annual Report, p 17. Available from: http://www.fimalac.com/annual-reports.html . 
170  Ibid, p. 15. 
171  Ibid. 
172 In accordance with a Report on rating agencies  published by the French Autorité des Marchés 
Financiers for 2006 the ratings income of the agencies in Europe represented in 2006 between 16% and 30% of worldwide income, with transactions in the United States representing more than half of the 
income of the agencies. Structured finance busine ss represented between 35% and 45% of European 
earnings. See AMF 2006 Report on rating agencies, Part I, Credit rating of  corporate issuers and 
structured finance, 26.01.2007, p. 11. Available from: http://www.amf-
france.org/documents/general/7640_1.pdf .    
 
 112/193  RMBS ratings increased between  2002 and 2006 by a percentage that varied among the three 
largest NRSROs from approximately 100% for the firm which had the lowest percentage 
growth in revenues to over 200 % for the firm which had the hi ghest percentage growth. For 
CDOs, during the same period, ra tings revenue increased by a pe rcentage that varied from 
approximately 200% for the firm which had the lowest percentage growth to over 800% for the firm which had the highest percentage growth."
173   
The tables below give a comparison of the re latively high profit margins of the major CRAs. 
S&P 2010 2009 2008
($ million)
Total revenue 1.695,4 1.537,3 1.583,0Operating profit 762,4 712,2 749,3
% 45,0% 46,3% 47,3%
Moody's Investor Services
($ million)
Total revenue 1.466,3 1.277,7 1.268,3Operating profit 649,4 557,2 600,6
% 44,3% 43,6% 47,4%
Fitch Ratings
(€ million)Total revenue N/A 450,4 486,8Operating profit N/A 178,0 159,0
% N/A 39,5% 32,7% 
45%44%44%
40%
33%46%47% 47%
0%5%10%15%20%25%30%35%40%45%50%
2010 2009 2008
S&P Moody's Inv estor Serv ices Fitch
 
Figure 1 . Profit margins of three largest CRAs 
Shareholding structure 
Figures 2 and 3 below detail a group of shareholders who collectively own simultaneously 
37.9% of shares in The McGraw -Hill Companies (which wholly  owns S&P) and 53.0% of 
shares in Moody's.                                                  
 
173  2011 Annual Report on Nationally Recognised Statistical Ratings Organisations, SEC, p22. 
 
 113/193   
 
 
The group, aligned by shareholding s in the two largest CRAs, is composed of large financial 
services companies such as Northern Trust Corporation, 
State Street 
Corporation, Black Rock Inc, Bank of New York.  Other firms that do not 
hold shares in one 
or the other of these CRAs also have significant holdings, which are also 
indicated. 
Figure 4 shows 
shareholdings by the companies aligned by shareholdings in S&P and Moody's, or with significant holding s in one or the other 
of these CRAs.  Companies' (on the left) ho ldings in the other companies in the group 
(including in their own shares) can be read acr oss the matrix. For example, Northern Trust 
holds 6.55% of its own shares, 4.01 % of CRG's shares, and so on. 
The final row at the bottom of the matrix show s the total holdings of the group in each of the 
companies listed across the top of the matrix.  For example, the group holds collectively 
21.67% of State Street and 16.72% of Black Rock Inc. 
The data in this table are not necessarily comp lete – there may be further cross shareholdings 
not yet indicated.  
  
 
 
 S&P's Moody's
1 Northem Trust Corp 1,75% 1,32%
2 Capital Group Companies 16,15% 21,98%3 Vanguard Group Inc. 4,44% 3,97%
4 State Street Corp. 4,41% 3,91%
5 T. Rowe Price Associates 3,90% 3,98%6 Fidelity Investments 1,27% 8,15%
7 Black Rock Inc. 4,59% 6,89%
8 Bank of New York 1,23% 2,25%9 Massachuset. Financial Services 0,21% 0,62%
38% 53%
Figure 2.  Group of shareholders who collectively own S&P's and Moody's 
Sources: Roland Berger Strategy Consultants, research from Bloomberg, 
websites of investors and the CRAs, May 2011.N° Group of ShareholdersCurrent situation
 
 114/193              
 
  
 
  
 
 
Figure 3  Shareholder structure of S&P and Moody's  
Sources: Roland Berger Strategy Co nsultants, research from Bloom berg, websites of investors and 
the CRAs, May 2011.  
 

 
 115/193            
 
  
 
 
Figure 4.  Cross shareholdings of Moody's and S&P shareholders 
Sources: Roland Berger Strategy Consultants, research from Bloom berg, websites of investors and 
the CRAs, May 2011.  
 

 
 116/193  ANNEX V. OVERVIEW OF RECENT VOLUNTARY IN ITIATIVES UNDERTAKEN BY MAJOR CRA S 
TO ENHANCE RATINGS QUALITY  
Standards and Poor's (S&P)  
Since announcing an initiative on 7 Februa ry 2008, focusing on enhancing various areas 
comprising governance, analytics, transparency  of information and addressing education 
issues, S&P has put a number of implementi ng actions in place. The following actions are 
mentioned in the most recent upda te relating to this programme: 
• In February 2009 the firm's appointed Ombu dsman began work, after appointment in 
January by the McGraw Hill Audit Committee.   
• Further steps have been taken to ensure the independence of ratings analysts, as 
introducing separation between analysts a nd other areas including policy governance, 
criteria management and development and quality assurance. 
• There have been a number of organisatio nal changes, intended to increase the 
independence of various groups and ultimately ensure the independence of ratings issued 
by S&P174. 
• In the area of activity of the analysts, S&P has introduced a separate  group charged with 
model validation and increased  its ongoing education requirem ents for analysts.  New 
measures relating to CDS, bond and loan sp reads are now highlighted in analysis. 
• In the area of transparency, S&P will cease providing ratings for some products whose 
sponsors or issuers do not agre e to the publication of certain information.  S&P has also 
developed earl warning i ndicators in relation to st ructured finance products. 
After launching a consultation paper in Nove mber 2010, S&P updated their sovereign debt 
rating methodology.175 (see figure 1.). 
                                                 
174  See Standard and Poor's "Standard and Poo'r commitment: Quality and Independence" on 4.8.2009 
175  Sovereign Government Rating Methodology and Assumptions, Standard & Poor's, June 30 2011  
 
 117/193  
 
Figure 1.   S&P's Sovereign Rating Framework 
The update is intended to provide additional clar ity by introducing a finer calibration of the 
five major rating factors that form the foundatio n of a sovereign analysis and by articulating 
how these factors combine to derive  a sovereign's credit ratings  
Standard & Poor's analysis of a sovereign's creditworthiness starts with its assessment and 
scoring of five key rating factor s. Each factor receives a scor e, using a six- point numerical 
scale from '1' (the strongest) to '6' (the weakest). A series of quantitative factors and 
qualitative considerations form the basis for assigning the scores. The criteria then combine 
those five scores to form a sovereign's "politi cal and economic profile," and its "flexibility 
and performance profile".  
• The political and economic profile reflects the view of the Agency of  the resilience of a 
country's economy, the strength and stability  of the government's institutions, and the 
effectiveness of its policy-making. It is th e average of the political score and the 
economic score. 
• The flexibility and performance profile reflects the Agency's view of the sustainability of 
a government's fiscal balance and debt burden, in light of the country's external position, 
as well as the government's fiscal and moneta ry flexibility. It is  the average of the 
external score, the fiscal score, and the monetary score. 
Those two profiles are then used in figure 2. to determine an indicative rating level. 
The sovereign (foreign-currency)  rating would in most cases fall within one notch of the 
indicative rating level, based on the sovereign's positioning relative to peers. For example, for 
a sovereign having a "moderately strong" politic al and economic profile and a "very strong" 
flexibility and performance prof ile, the Agency would most likel y assign a rating within one 
notch of 'AA-'. 
 
 118/193  
 
Figure 2.  Indicative Rating level from the combination of the two profiles 
A sovereign (foreign-currency) rating might differ  by more than one notch compared with the 
indicative rating level if it meets one or more of the following exceptional characteristics below:  
• Extremely weak external liquidity. 
• Extremely weak fiscal situation 
• Exceptionally large net general government asset position 
• Very high political risk and high debt burden 
• Rescheduling risk 
• High security risk 
• Severe natural catastrophes 
If a sovereign combines several of the excep tional factors, its fore ign-currency rating would 
be adjusted by the cumulative effect of thos e adjustments. Those exceptional adjustments are 
based on a forward-looking analysis.  
The analysis of each of the key five factor s mentioned above embodies a combination of 
quantitative and qualitative elements. Some fact ors, such as the robustness of political 
institutions, are primarily qualitative, while othe rs, such as the economy, debt, and external 
liquidity use mostly quantitative indicators.  
Moody's  
Starting in August 2008, Moody's has began to issue a series of ' Special Comment' 
documents in relation to its global credit policy,  detailing measures taken to strengthen the 
 
 119/193  quality, transparency and independence of ratings.176 Updates provided in December 2008 and 
August 2009 indicated progr ess on these measures.177 The latter report outlin es progress in the 
six broad areas that Moody's is ta rgeting in these initiatives:  
• Strengthening Analytical  Integrity of Ratings 
• Enhancing Consistency Across Rating Groups 
• Improving Transparency of Ratings and the Ratings Process 
• Increasing Resources in Key Areas 
• Bolstering Measures to Mana ge Conflicts of Interest 
• Pursuing Industry and Market-Wide Initiatives 
In addition, in September 2008, Moody's Globa l Sovereign published its rating methodology 
for sovereign debt.  The paper aims at increas ing transparency by further clarifying the areas 
that Moody's takes into account when  issuing its sovereign ratings so that market participants 
are better informed.178 
The document stresses the importance of interp reting quantitative fact ors through qualitative 
perspectives and without relying on any measure mechanistically.179  Moody's sovereign 
ratings take into account four main areas: economic strength; inst itutional strength; 
government financial strength; su sceptibility to event risk.  Th ese areas are further divided 
and have different interactions in order to fo rm a basis on which the final rating judgement is 
made (see figure 3 below) 
 
                                                 
176  European Union Transparency Re port issued in respect of the y ear ended 31 December 2010, published 
March 2011, pp 2 – 3, available from: 
http://www.moodys.com/PublishingImages/MCO /EU%20Transparency %20Report%202010.pdf . 
177  See Strengthening Analytical Quality and Transparency, An Update on Initiatives Implemented by 
Moody’s in the Past Twelve Months, August 2008 (Document No. 110613), Strengthening Analytical 
Quality and Transparency, An Update on Initiatives  Implemented by Moody’s in the Past Eighteen 
Months, December 2008 (Document No. 113751), available from: http://v2.moodys.com/cust/content/content.ashx?sour ce=StaticContent/Free%20P ages/Products%20and
%20Services/Downloadable%20Files/Strengtheni ng%20Analytical%20Quality%20and%20Transparen
cy.pdf , and Strengthening Analytical Quality and Transparency, An Update on Initiatives Implemented 
by Moody’s Over the Past Two Years, August 2009 (Document No. 119843), available from: 
http://www.moodys.com/researchdocument contentpage.aspx?docid=PBC_119843 . 
178  Rating Methodology, Sovereign Bond Ratings, Moody's Investors Service, September 2008, p 1, 
available at: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_109490 . 
179  Ibid. 
 
 120/193  
 
Figure 3.  Moody's Sovereign Rating Mechanics: example of country A 
The first step consists in determining the s hock-absorption capacity of the country, based on 
the combination of two key factors:  
• The country’s economic strength, captured in  particular by the GDP per capita – the 
single best indicator of ec onomic robustness and, in turn, shock-absorption capacity.  
• The institutional strength of the country, the key question being whethe r or not the quality 
of a country’s institutional fr amework and governance – such as the respect of property 
right, transparency, the efficien cy and predictability of gove rnment action, the degree of 
consensus on the key goals of political action – is conducive to  the respect of contracts.  
Combining these two indicators helps determine the degree of resiliency, and position the 
country in the rating scale: very high,  high, moderate, low or very low.  
The second step focuses directly on debt matters , and especially the combination of two other 
factors:  
• The financial strength of the government. The question is to determine what must be 
repaid (and how “tolerable” the debt is) an d the ability of the government to mobilize 
resources: raise taxes, cut spending, sell assets, obtain foreign currency  
 
 121/193  • The susceptibility to event risk – that is th e risk of a direct a nd immediate threat to 
debt repayment, and, for countries higher in th e rating scale, the risk of a sudden multi-notch 
downgrade. The issue is to determine whether th e debt situation may be (further) endangered 
by the occurrence of adverse economic, financial or political events.  
Combining these two indicators helps determine de grees of financial robu stness and refine the 
positioning of the country on the rating scale.  
The third stage consists in adjusting the degr ee of resiliency to the degree of financial 
robustness. This results in the identifi cation of a rating range (see figure V.4).  
 
Figure 4.  Sovereign rating Road Map 
The final determination of the sovereign bond rating is based on th e output of the "rating road 
map" (see below), combined with all additiona l information that a ra ting committee will deem 
relevant to assess the creditwor thiness of a government. The dete rmination of the exact rating 
is done on the basis of a peer comparison, and we ighting additional factors that may not have 
been adequately captured earlier.  
Fitch, Inc. 
After separating in 2008 its non-rating business into a separate division, Fitch Solutions, 
which focuses on risk, analytical and data tool s, including distribution of ratings issued by 
Fitch Ratings, and a number of other initiatives intended to enhance the quality of ratings, Fitch Ratings, like the other two large rating ag encies, has also issued its sovereign rating 
methodology.
 180 
                                                 
180  Master Criteria: Sovereign Rating Methodology, issued on 16 October 2009, and updated on 16 August 
2010, available from http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547765 .  
 
 122/193  The recently updated methodology of Fitch Rating, similarly to what happens for the other 
two large rating agencies, is ba sed upon the interplay of qualita tive as well as quantitative 
inputs into the ratings process181.    
Fitch's approach to sovereign risk analysis is presented as a synthesis of quantitative and 
qualitative judgements that try to capture th e willingness as well as  the capacity of the 
Country to meet its debt obligations.  
The sovereign rating analysis incorporates a wi der range of factors than only the financial 
strength of the sovereign and in cludes an assessment of the following (see detail in figure 5. 
below):  
• macroeconomic performance and prospects;  
• structural features of the economy that render it more or less vulnerable to “shocks”, 
including the risks to macro economic stability and public fi nances posed by the financial 
sector, as well as “political risk” and governance factors;  
• public finances, including the structure and sust ainability of public debt as well as fiscal 
financing; and  
• external finances, with a particular focus on the sustainability of international trade 
balances, current account fundi ng and capital flows, as well as the level and structure of 
external debt (public and private).  
 
Figure 5.  Sovereign Rating Model – Key variables 
Fitch has developed a proprietary Sovereign Ra ting Model (SRM) that generates on the basis 
of the variables described in the above figur e a score calibrated to the Long-Term Foreign-
                                                                                                                                                         
A number of other 'Master Criteria' documents were also issued in August 2010, available from: 
http://www.businesswire.com/ne ws/home/20100813005704/en/Fitch-Publishes-Updates-Global-
Master-Criteria . 
181  See Fitch Ratings, Sovereign Rating Methodology. Master Criteria, 15 August 2011, available from: 
http://www.fitchratings.com/creditdesk/re ports/report_frame.cfm?rpt_id=648978 .  
 
 123/193  Currency IDR. However, the outcome of the SR M is treated as only one of a range of 
qualitative and quantitative inputs into the rating process. The act ual rating determined by the 
sovereign rating committee can and does differ from that implied by the rating model. 
 
 
 124/193  ANNEX VI. PROBLEM DEFINITION – BACKGROUND AND TECHNICAL DETAILS  
1 – Background on the Financial Crisis  
Since August 2007 financial markets worldwide ar e suffering from a majo r confidence crisis. 
The crisis originated in the US residentia l subprime mortgage market and subsequently 
developed into other sectors of the financial markets.  
This subprime turmoil hit Europe through three di fferent channels. Firstly, some EU financial 
institutions faced losses because they were e xposed to the US sub-prime market. Secondly, 
the US sub-prime problems have considerably  slowed down US grow th prospects. Given 
global trade inter-linkages this affects the EU economic growth as well. Thirdly, the general 
market uncertainty eroded equity market prices also in Europe as well as reduced consumer and business confidence.  
CRAs were close to the origin of the problems th at have arisen with subprime markets: they 
were giving favourable opinions on instruments that were financ ially engineered to give high 
confidence to investors. The inve stors – relying on CRAs' expertis e – very often took little or 
no interest in the risks characteristics of thes e instruments, performance of underlying assets 
and general market outlook.  
CRAs failed to reflect early enough in their ra tings the worsening of market conditions. The 
explanation for this poor performance by CRAs could be found in the unsatisfactory way the 
agencies manage their conflicts of interest, the lack of quality of the ratings they issued, the 
need for improved transparency of the agencies  and the inappropriate internal governance. 
The subprime debacle demonstrated that the existing framework for the operation of CRAs 
needs to be significantly reinforced. 
 
 
 
 125/193  Figure 1 . Cumulative changes in average five-years so vereign CDS premia for euro area countries 
and iTraxx financial index182 (15 September 2008- 25 March 2009; bps) 
The analysis of the announcements and downgrades from 3 large rating agencies (S&P, 
Moody's and Fitch) in the period from Octobe r 2006 until August 2010 covers the financial 
crisis and the consequent Euro debt crisis . In this period, 46 rating announcement of EU 
Member States have been observed, of whic h there were 30 rating changes (of which 29 
downgrades and 1 upgrade), 13 outlook revisions , and one review for future downgrade. 
Concurrent with the announcemen t of bank rescue packages in Euro-area countries, pressure 
on the financial sector eased while the opposite o ccurred at the general government level. This 
was felt though a sharp increase in sovereign cr edit default swap premiums for most EU 
countries, whereas the credit default swap pr emiums for European financial corporations 
reversed their upward trend and started to decline. Figure VI.1 illustrates these developments. 
Appetite for risk on markets rapidly decreasing, markets for sovereign bonds started 
penalising more heavily the lack of absolute so lidity in public financ es of individual Euro-
zone countries, as well as they started pe nalising other macroeconomic imbalances, in 
particular with respect to Germany.183 
In this context, CRA intervened with some negative rating changes that surprised market, 
especially for the scale of the change.  
 
                                                 
182  iTraxx (Bloomberg code 'ITRX') is the brand name for the family of credit default swap index products 
covering regions of Europe, Australia, Japan and non -Japan Asia. They form a large sector of the 
overall credit derivative market. The indices are constructed on a set of rules with the overriding criterion being that of liquidity of the underlying Credit Default Swaps (CDS). The iTraxx suite of 
indices are owned, managed, compiled and published by International Index Company (IIC), who also 
license market makers.
 
183  Attinasi M.G., Chcherita C., Nickel  C. (2009), What explains the surge in Eurozone sovereign spreads 
during the financial crisis of 2007-09?, ECB Working Paper no. 1131/2009 and Archyrou M.G., Kontonikas A. (2011), The EMU sovereign-debt crisis: fundamentals, expectations and contagion, 
Economic Paper no. 436, European Commission. 
 
 126/193  Date Country Action CRA
23/10/2006 Lithuania Upgrade Fitch
11/07/2008 Latvia Downgrade Moody's
11/07/2008 Hungar yDowngrade Moody's
12/08/2008 Czech Outlook Moody's27/10/2008 Romania Downgrade S&P
30/10/2008 Bulgaria Downgrade S&P
17/11/2008 Hungar
yDowngrade S&P
13/01/2009 Portugal Outlook S&P14/01/2009 Greece Downgrade S&P
19/01/2009 Spain Downgrade S&P
21/01/2009 Portugal Downgrade S&P07/02/2009 Ireland Downgrade Moody's
24/02/2009 Estonia Downgrade S&P
24/02/2009 Latvia Downgrade S&P24/02/2009 Lithuania Downgrade S&P
25/02/2009 Greece Outlook Moody's
21/03/2009 Hungar
yDowngrade Moody's
27/03/2009 Slovakia Outlook Moody's
30/03/2009 Hungar yDowngrade S&P
11/04/2009 Ireland Downgrade Fitch23/04/2009 Latvia Downgrade Moody's23/04/2009 Lithuania Downgrade Moody's
04/08/2009 Estonia Downgrade Fitch
06/08/2009 Ireland Downgrade S&P12/08/2009 Greece Downgrade Fitch
01/09/2009 Ireland Outlook S&P
03/09/2009 Spanish Maintain Moody's12/09/2009 Spain Outlook S&P
29/10/2009 Portugal Outlook Moody's
01/12/2009 Spain Outlook S&P16/12/2009 Greece Downgrade S&P
22/12/2009 Greece Downgrade Moody's
21/01/2010 Bulgaria Outlook Moody's24/03/2010 Portugal Downgrade Fitch31/03/2010 Lithuania Outlook Moody's
31/03/2010 Latvia Outlook Moody's
31/03/2010 Estonia Outlook Moody's22/04/2010 Greece Downgrade Moody's
27/04/2010 Greece Downgrade S&P
27/04/2010 Portugal Downgrade S&P28/04/2010 Spain Downgrade S&P
05/05/2010 Portugal Review Moody's
04/08/2010 Latvia Downgrade Fitch04/08/2010 Lithuania Downgrade Fitch
 
Figure 2.  Overview of sovereign rating announcements of EU Member States184 
 
 
2008:Q1 2008:Q2 2008:Q3 2008:Q4 2009:Q 12009:Q 22009:Q3 2009:Q4 2010:Q 12010:Q 22010:Q 32010:Q4
EU Up 0 0 0 0 00 0 0 000 0
EU No change 0 0 1 0 30 3 2 410 0
EU Down 0 0 -2 -3 -9 -3 -3 -2 -1 -4 -1 0  
Figure 3.  Upgrades/Downgrades for Sovereign Debt ratings of EU Member States by the 3 largest 
credit rating agencies185 
According to the IMF186, while downgrades were somehow e xpected by markets, their extent 
- as they sometimes involved several notches at the same time - surprised markets.  
In most cases rating changes arrived after al ready substantial movement in government bond 
spreads. Very few announcements were in fact  before the third quarter of 2008. It appears 
therefore that the 3 main rating agencies have  not sufficiently anticipated the macroeconomic 
                                                 
184  IMF working paper, Sovereign Rating News an d Financial Markets Spillovers: Evidence from the 
European Debt Crisis. Rabah Arzeki, Bertrand Candelon and Amandou N.R.Sy, IMF Working Paper, 
Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis, 
March 2011, WP/11/68. 
185  European Commission, analysis based on data from IMF working paper, Sovereign Rating News and 
Financial Markets Spillovers: Evidence from the European Debt Crisis? 
186  IMF, Global Financial Stability Report, Chapter 3,  The uses and abuses of Sovereign Debt Ratings, 
October 2010, p. 88. 
 
 127/193  weaknesses of European economies cons ecutive to the financial crisis 187 and, that they have 
been slow in reacting to the changing economic situations in some Member States. A shown 
in Figure 4, the pick of negative announcements  was reached in the first Quarter of 2009. The 
number of negative rating announcements afterw ards decreased but continued and reached a 
further "peak" of downgrades the second quarter of 2010 wh en the European Financial 
Stability Facility (EFSF) was adopted. 
-10-8-6-4-20246810
EU Up 000000000000
EU Down 0 0 -2 -3 -9 -3 -3 -2 -1 -4 -1 0
EU No change 0010303241002008:Q1 2008:Q2 2008:Q3 2008:Q4 2009:Q1 2009:Q2 2009:Q3 2009:Q4 2010:Q1 2010:Q2 2010:Q3 2010:Q4
 
Figure 4.  Sovereign Debt Ratings - U pgrades/Downgrades of EU Member  States by the 3 largest 
credit rating agencies 
This Euro-zone debt crisis was not the first time that CRA seemed  to react to events rather 
than anticipating them. It was already the case during the Mexican Crisis of 1994-95, and 
during the Asian Crisis of 1997. Also in those cases CRA were  accused of both being too 
slow initially in downgrades, and subsequen tly of downgrading more than the worsening 
fundamentals justified.188 
As ratings actually influence markets189, their inaccuracy and/or ill timing creates concerns for 
financial stability.  
                                                 
187  Rabah Arzeki, Bertrand Candelon and Amandou N.R.Sy, IMF Working Paper, Sovereign Rating News 
and Financial Markets Spillovers: Evidence from th e European Debt Crisis, March 2011, WP/11/68. 
188  See IMF (1999), International Capital Markets, and Ferri G., Liu L., and Stiglitz J. (1999), the 
Procyclical role of Rating Agenci es: Evidence from the East Asia Crisis, Economic Notes, 28-3. 
189  See Arezki R., Candelon B., Sy, A. (2011), S overeign rating News and Financial markets Spillovers: 
Evidence from the European Debt Crisis, IMF Working Paper 11/68 
 
 128/193  
 
Figure 5.  Ireland's observed and predicted ratings according to Regression (I)190 
Regarding ill-timing, if sovereign ratings lag ra ther than lead financial markets, improving 
ratings tend to reinforce euphoric expectations  and stimulate excessive speculation during the 
booming periods, while during the bust, downgr ading can spread panic among investors, 
driving money excessively out of markets.191 A good example of this lagging behaviour from 
CRA can be resumed from recent academic works.192 Figure 5 shows for example how, for 
the case of Ireland, ratings seems to have been  changed in the beginni ng too late compared to 
macro-economic fundamentals, and then too much once again compared to what justifiable on 
the basis of macroeconomic variables. 
Regarding inaccuracy, first of all CRA cannot  easily acquire superior information on 
sovereigns. Second, there are reasons to consider that cardinal accuracy of ratings, i.e. their 
relationship with reference probabi lity of defaults, important. However, it should be noted that 
while banks are subject to ri gorous calibration tests of their internal ratings, CRAs are 
normally not even transparent about they calib rate and about how they validate ratings to 
default risk metrics. 193 
                                                 
190  A regression line known as a "line of best fit". 
191  Reisen H., von Maltzan J. (1999), Boom and Bust and Sovereign Ratings, International Finance, 2(2). 
192  Gärtner M., Griesbach B., Jung F. (2011), PIGS or Lambs? The European Sovereign Debt Crisis and 
the Role of rating Agencies, University of St. Gallen, Discussion Paper 2011-06.  
193  On how ratings cardinal accuracy can be validated  on the basis of statistical text, see Coppens F., 
Gonzalez F., Winkler G. (2007), The performance of credit rating  systems in the assessment of 
collateral used in Eurosystem Monetary Policy opera tions, ECB Occasional Paper n. 65, and De Lisa R., 
Marchesi M., Zedda S. (2009), Thresholds fo r Ratings' Forecast Default Probabilities: Some 
Quantitative Evidences in “New Frontiers in insura nce and risk management”, McGraw-Hill, Milano.  
 
 129/193  
 
Figure 6.  Positive and negative announcements over time (from 09/2006 to 01/2010) 
 
Figure 7.  CDS Spreads for Selected European Countries and Greece Credit Ratings (from 01/2008 to 
01/2010) 
 
 130/193  
 
Figure 8.  Comparison of European sovereign spreads (bp) (from 01/2006 to 04/2011)194 
 
The recent financial and economic crisis had put a heavy burden on public finances in euro 
area countries and othe r EU Member States. 195 It resulted a heavy bur den on taxpayers that 
may have to come to the rescue of a failing systemic relevant institutions. 
The main factors that have contributed are (1) In  some countries large fi scal costs are related 
to capital injections for fina ncial institutions; (2) The econom ic downturn had an immediate 
impact on tax receipts and unemployment-relate d spending; (3) The discretionary measures 
adopted to compensate for declining private demand in the economy had an adverse impact 
on fiscal positions.  
The ECB has reported196 that over the last three years,  governments have taken various 
measures to strengthen the financial system an d reduce the systemic risks in the financial 
sector which emerged in the context of the global financial crisis. The direct costs are 
recorded in government debt (e.g. capital inj ections for banks for which the government had 
to borrow in the market) and the recovery of th ese costs will depend on the future value of the 
acquired bank assets.  
 
                                                 
194  Source Bloomberg. 
195  For an overview, see van Riet, A. (ed.), “Euro area fiscal policies and the crisis”, Occasional Paper 
Series, No 109, ECB, Frankfurt am Main, April 2010. 
196  Monthly Bulletin April 2011, European Central Bank, Eurosystem, p. 69.  
 
 131/193  
 
Figure 9.  Cumulated financial sector stabilisation o perations and their impact on government debt and 
contingent liabilities (2008-10)197 
 
Figure 10.  Deficit, borrowing requirement198 and change in debt (four-quarter moving sum as a 
percentage of GDP)199 
 
2 – Description and Analysis of Problem Drivers and Problems 
2.1 References to ratings in  EU Financial Regulation   
Banking The Capital Requirements Directive (CRD)
200 requires credit institut ions to have their own 
sound credit granting criteria and credit decision processes in place.201 This applies 
                                                 
197  Monthly Bulletin April 2011, European Central Bank, Eurosystem, p. 70. 
198  Borrowing requirement (general government): net incurrence of debt by the general government. 
199  Sources: ECB calculations based on Eurostat and national data. For an overview, see Monthly Bulletin 
April 2011, European Central Bank, Eurosystem, p. 151.  
200 Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the 
taking up and pursuit of the bu siness of credit institutions (r ecast) (OJ L 177/1, 30.6.2006). 
 
 132/193  irrespective of whether institutions grant loans to customers or whether they incur 
securitisation exposures. Basing credit decisions solely on ex ternal credit rating agency 
ratings does not fulfil this require ment under EU-banking legislation. 
For the specific purposes of calculating regulatory bank capita l requirements, rating agency 
assessments are, in certain inst ances, applied as a basis for di fferentiating capital requirements 
according to risks202, and not for determining the minimum required quantum of capital itself. 
The CRD framework as a whole provides banks with  an incentive to use internal rather than 
external credit ratings even for purposes of  calculating regulatory capital requirements.203 In 
the specific case of securitisation exposures and due to a lack of sufficiently objective internal 
methodologies within banks, most of them woul d be expected to calc ulate their regulatory 
capital requirements by reference to external ratings.204 
Insurance and reinsurance 
The existing directives on the supervision of  insurance and reinsura nce undertakings do not 
contain any provisions which place  reliance on credit rating agencies. There is actually no 
credit risk charge for the solvency margin  in the existing framework of insurance and 
reinsurance directives ("Solvency I").205  However, "Solvency I" is a minimum harmonisation 
and a number of Member States' national laws  implementing the investment and capital 
requirement rules of the current "Solvency I" Directives206 do refer to ratings.207  
The "Solvency II" Framework Directive208, which introduces ri sk-oriented solvency 
requirements for insurance and reinsurance undert akings, addresses credit risk but it does not 
contain any provisions referring to or placing reliance on credit rating agencies. Capital 
requirements are calculated using a standard fo rmula or, subject to supervisory approval, by 
the undertaking's internal model.209 The precise design of the standard formula capital 
requirements, including the market risk210 and counterparty default ri sk capital charge, will be 
set out in the future level 2 implementing meas ures which are currently being developed. In 
the fifth Quantitative Impact Study (QIS5)211, which is currently being carried out, credit 
                                                                                                                                                         
201  Annex V point 3 of Directive 2006/48/EC. 
202  This concerns the "Standardized Approach" ( Art. 78 ff Directive 2006/48/EC ) and Securitizations (Art. 
94, 96 Directive 2006/48/EC). 
203  Articles 78 and 84 in connection with Annex VII of Directive 2006/48/EC. 
204  Articles 94, 96 Directive 2006/48/EC. 
205  See provisions on the solvency margin: Article s 27 to 31 of Directive 2002/83/EC, Article 1 of 
Directive 2002/13/EC of 5 March 2002, OJ L 77, 20.3.2002, and Articles 37 to 39 of Directive 
2005/68/EC of 16 November 2005, OJ L 232, 9.12.2005.  
206  Articles 22 to 26 of Directive 2002/83/EC and Articles 20 to 23 of Directive 92/49/EEC. 
207    For example, in the Netherlands, De Nederl andsche Bank publishes credit spreads that (smaller) 
pension funds can use when they cannot obtain ma rket data to determine buffers to cover against 
reinsurance defaults. In the United Kingdom, the Insu rance Prudential Sourcebook 1.6 provides a table 
with “listed rating agencies” Credit ratings from th ese firms are used in determining assumed spread 
stresses. Ratings are also used in the German insu rance sector for asset identification as one possible 
criterion to determine the safety of the asset. 
208  Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the 
taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) , OJ L 335, 17.12.2009. 
209  Articles 100 to 127 of Directive 2009/138/EC. 
210  Market risk is caused by the day to day fluctuation in assets or securities pri ces which could be resulted 
in loss or profit. This risk is common to an entire cla ss of assets and liabilities. Since this risk is caused 
by market itself it can not be diversified away. For instance changes in exchange rate, interest rate fall 
under this risk. Also a natural disaster which can have  great impact on the prices of assets and securities 
are known as market risk. For the banking sector Basel II has proposed two main approaches to 
calculate this risk: standardized  approach and model approach. 
211  In order to assess its impact the development of  "Solvency II" is accompanied by five Quantitative 
Impact Studies. In these studies insurance and rein surance undertakings as well as insurance groups 
 
 133/193  ratings are used in the calculation of the standa rd formula, but QIS5 te chnical specifications 
do not prejudge any final decision as  regards the standard formula. 
Pensions  
The Institutions for occupational re tirement provision (IORP) Directive212 does not contain 
any provisions referring or placing reliance on cr edit rating agencies.  A few Members States' 
rules and supervisory practices regarding IORP s do make use of credit ratings, for example 
with respect to investment rules and determ ination of an appropriate discount rate.  
Investment funds (UCITS) 
There is no reference to  credit ratings in the UCITS directive 2009/65/EC.213 It does not 
provide for an obligation to take into account exte rnal credit ratings in the investment decision 
making process. 
Money market funds   
There are no references to external ratings in the UCITS directive with respect to money 
market funds. However, the CESR Guidelines on money market funds214 contains references 
to external ratings. According to  this guideline, when assessi ng the quality of a money market 
instrument, a management company must consider  the credit quality of that instrument. For 
this purpose a money market instrument is not considered to be of high quality unless it has 
been awarded one of the two highest availabl e short-term credit ratings by each recognised 
CRA that has rated the instrument or, if the instru ment is not rated, it is of equivalent quality 
as determined by the management company's internal rating process. However, the guideline clarifies that the responsibility for the assessmen t of the quality of a money market instrument 
lies with the management company. In making su ch assessment it should take into account a 
range of factors and should not place undue we ight on the credit rating of the instrument. 
Money market funds may hold sovereign issuances of at least investment grade as awarded by 
one or more recognised CRAs.  
Investment firms 
For the purposes of defining high quality money market instruments that must be held by 
qualifying money market funds (whi ch are allowed – at par with credit institutions and other 
eligible entities – to re ceive on a temporary ba sis clients funds from an investment firm), 
Article 18 of Directive 2006/73/EC (t he MiFID Implementing Directive)
215 makes reference 
to ratings of these instruments issued by competent CRAs.216 It requires that these instruments 
should have been awarded the hi ghest available credit rating by each competent rating agency 
                                                                                                                                                         
under the scope of "Solvency II" determine their eligible own funds and capital requirements according 
to preliminary specifications of the new rules. 
212 Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities 
and supervision of institutions for occupational retirement provision, OJ L 235/10, 23.9.2003. 
213  Directive  2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the 
coordination of laws, regulations and administrative provisions relating to undertakings for collective 
investment in transferable securitie s (UCITS), OJ L 302 /32, 17.11.2009. 
214  CESR's guidelines on a common definition of European money market funds of 19 May 2010, 
CESR/10-049. These guidelines are not legally bind ing but national regulators will be expected to 
implement them. 
215 Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the 
European Parliament and of the Council as re gards organisational requirements and operating 
conditions for investment firms and defined terms fo r the purposes of that Directive, OJ L 241/26, 
2.9.2006). 
216 According to the same article, a rating agency shall be considered to be competent if it issues credit 
ratings in respect of money market funds regularly and on a professional basis and is an eligible external credit assessment institution (ECAI) with in the meaning of Article 81(1) of Directive 
2006/48/EC. 
 
 134/193  which has rated that instrument. An instrume nt that is not rated by any competent rating 
agency shall not be considered to be of high quality. 
Disclosure requireme nts for securities 
When securities are offered to the public or admitted to trading on a regulated market 
according to the Prospectus Directive217 a prospectus needs to be  published. On debt issues 
for instance Annex V paragraph 7.5 of the Prospectus Implementing Regulation218 requires 
that the prospectus must contain information on cr edit ratings – if available – assigned to an 
issuer or its debt securities at  the request or with the coopera tion of the issuer in the rating 
process including a brief explanation of the meani ng of the ratings if this  has previously been 
published by the rating agency.  
ECB Regulation 
The Eurosystem credit assessment framework (ECAF) defines the procedures, rules and 
techniques which ensure that the Eurosystem requirement of high credit standards for all 
eligible assets is met.219 
In the assessment of the credit standard of e ligible assets, the Eurosy stem takes into account 
credit assessment information from credit assessment systems bel onging to one of four 
sources, namely:  
• external credit assessment institutions (ECAIs),  
• NCBs’ in-house credit assessment systems (ICASs),  
• counterparties’ internal ratings -based (IRB) systems, or  
• third-party providers’ rating tools (RTs).  
Additionally, in the assessment of the credit standard the Eurosystem takes into account 
institutional criteria and features guaranteei ng similar protection for the instrument holder 
such as guarantees.  
The Eurosystem's normal benchmark for establ ishing its minimum requirements for credit 
quality threshold is defined in terms of a "single A" credit assessment—corresponding to a 
probably of default (PD) over a one-year horizon of up to 0.10 percent. In October 2008, the 
credit quality threshold was te mporarily relaxed and allowed to admit up to triple-B 
collateral—with a PD equal to 0.40 percent. In April 2010 the Governing Council of the ECB 
decided to prolong the use of th at category of assets beyond th e end of 2010. The new eligible 
instruments need to be monitored against the credit quality thresholds. 
European Financial Stability Fa cility Framework Agreement  
The establishment of the European Financial Stability  Facility (EFSF)220 framework 
agreement 221 of 7 June 2010 between the EFSF and th e "euro-area Member States" or "EFSF 
Shareholders" sets out detailed  operating conditions of the EFSF that contain references to 
                                                 
217  Directive 2003/71/EC on the prospectus to be pub lished when securities are offered to the public or 
admitted to trading and amending Directive 2001/34/EC (OJ L 345/64, 31.3.2003). 
218  Regulation (EC) No 809/2004 implementing Directive 2003/71/EC (OJ L 215/3, 16.6.2004). 
219  The general documentation on the ECAF is in Section 6.3 of the General Documentation, Section 6.3, 
as well as the amendments set out in Guideline ECB/2009/01, available from: http://www.ecb.int/p aym/coll/elisss/html/index.en.html
.  
220  The EFSF is a "société anonym e" incorporated in Luxembourg. 
221   European Financial Stability Facility (EFSF) framework agreement available from: 
http://www.efsf.europa.eu/attachment s/efsf_framework_agreement_en.pdf .  
 
 135/193  external ratings222. The European Financial Stability Mechanism will be replaced by a new 
instrument as of 2013, the European Stability  Mechanism (ESM). The treaty establishing223 
the ESM does not contain any direct references to external ratings.  
State Aid 
Credit ratings are currently used by the Co mmission in assessing measures adopted by 
Member States under the State aid Rules in different contexts.  
First, the Communication from the Commission on the revision of the method for setting the 
reference and discount rates and the Commissi on Notice on the application of Articles 87 and 
88 of the EC Treaty to State ai d in the form of guarantees224 uses an entity's credit rating (but 
not limited to external rating) to establish wh ether state guarantees or loans constitute State 
aid.225 
Second, in the context of the pricing of stat e guarantees for banks, since July 2010, a step-up 
fee (in addition to the level recommended by the ECB) is app lied and depends on the bank's 
credit rating. 
Third, in assessing whether state guarantees are being appropriately pric ed pursuant to the 
Communication from the Commi ssion on the Application of St ate Aid Rules to Measures 
Taken in Relation to Financial Institutions in  the Context of the Current Global Financial 
Crisis226, the Commission will use a bank's credit rati ng as a measure of its creditworthiness. 
Fourth, the current rating and the outlook of a fina ncial institution is one of the four criteria 
set out in Annex I of the Commission Co mmunication on Recapitalis ation of Financial 
Institutions of 5 December 2008227 for evaluating whether a bank can  be classified as sound or 
distressed. However, this Communication is currently being revised and as such, this 
requirement may be removed from the rule s applicable from January 2011 onwards. 
Finally, the Communication from the Commission on the Treatment of Impaired Assets in the 
Community Banking Sector of 25 February 2009228 requires banks to disclose the current 
rating (when available) for each basket of activi ties they hold, such as structured products and 
securitised positions. This information is used as complementary source of information to the 
assessment of the impaired assets which are to  be transferred to or  guaranteed by a Member 
State, but is not the primary benchmark for the valuation of such impaired assets. In this 
respect, a detailed and independe nt look-through analys is is performed to calculate expected 
losses and when relevant, confronted with the results deriving from external credit ratings. 
2.2 – Sovereign Debt Ratings 
Definition of Sovereign Ratings and Sovereign Default Sovereign credit ratings can be defined as a c ondensed assessment by credit rating agencies of 
a government’s ability and willingness to repay its public debt both in principal and in                                                 
 
222  More particularly, point 2 (3) regarding issues of guarantees states that the EFSF may also request the 
Guarantors to issue Guarantees under this Agreemen t for other purposes which are closely-linked to an 
issue of Funding Instruments and which facilitates the obtaining and maintenance of a high quality rating for Funding Instruments issued by  EFSF and efficient funding by EFSF 
223  Treaty establishing the European Stability Mechanism (ESM) signed on 11 July 2011, currently under 
ratification by the Eurozone Member States. http ://www.efsf.europa.eu/attachments/esm_treaty_en.pdf 
224  OJ C 155, 20.6.2008, p. 10–22. With effect from 1 December 2009, Ar ticles 87 and 88 of the EC Treaty 
have become respectively Articles 107 and 108 of the TFEU. The two sets of provisions are in 
substance identical.  
225  OJ C 14, 19.1.2008, p. 6–9. 
226  OJ C 270, 25.10.2008, p.8. 
227  OJ C 10, 15.1.2009, p. 2-10. 
228  OJ C 72, 26.03.2009, pages 1-22. 
 
 136/193  interests on time. In this, context, they are c onsidered forward-looking qu alitative measures of 
the probability of default put  forward by rating agencies.229  
A sovereign defaults when it fails to make timely payment of principal or interest on its debt, 
or if it offers a distressed exchange for the original debt230. According to the IMF, default 
events do not usually incl ude the failure to repay debt owed  to other governments and official 
creditors, including th e IMF and World Bank.  
However, definition of default risk varies among the main rating agencies. S&P measures 
default risk in terms of default probability whereas Moody’s ratings measure expected loss. 
Fitch rates issuers on a default probability basis and instruments on an expected loss basis. As 
a result, at least in theory, Moody’s ratings should dive rge from Fitch’s and S&P’s on the 
same issuer according to variations in loss seve rity. According to the IM F, in practice, little 
divergence is observed, particular ly among investment-grade ratings.231 
CRAs typically signal in advance their intention to consider rating changes232. For example, 
Fitch, Moody’s, and S&P all use ne gative “review” or “watch” notif ications to indicate that a 
downgrade is likely within the next 90 days. Th ey use a negative “outlook” notification to 
indicate the potential for a dow ngrade within the ne xt two years (one year in the case of 
speculative-grade credits).  
Importance of Sovereign Debt Ratings 
Sovereign credit ratings are considered important  for at least three reasons. First, sovereign 
ratings are a key determinant of a country’s bor rowing costs in international capital markets. 
In this context sovereign ratings affect countri es access and the terms of that access to capital 
markets, with the threshold between investment -grade and speculative-g rade ratings having 
important market implications.233 
Second, according to a recent study, the soverei gn rating generally sets  a ceiling for the 
ratings assigned to domestic banks and companies234, and therefore affect s private financing 
costs. Therefore, sovereign ratings affects not only financing costs for the sovereign but also 
corporates and credit institutions with international capital market access are constrained by 
the sovereign ratings. In this context, it should be noted that there exists a direct link between 
sovereign ratings and ratings of financial ins titutions located within the territory of the 
sovereign.  
Third, some institutional investor s have lower bounds for the risk  they can assu me in their 
investments and will choose thei r portfolio composition taking in to account the credit risk 
signalled by the rating notations. Therefore, according to a recent study, sovereign ratings" 
also expands the pool of potential buyers of  a country’s bond issuances to institutional 
investors235.  
Sovereign debt –Sources of spillover effects 
                                                 
229  Afonso, A., P. Gomes, and P. Rother (2007), What ‘Hides’ Behind Sovereign credit Ratings? ECB 
Working Paper No. 711. 
230  IMF, Financial Stability Report, 2010, chapter 3: the uses and abuses of sovereign ratings. 
231  Ibid. 
232  Ibid. 
233   Jaramillo L., Determinants of Investment Grade Status in Emerging Markets, IMF working paper, 2010. 
reference WP/10/117.same comment as above –reduce the number of footnoes 
234  Ibid. 
235  Ibid. 
 
 137/193  A recent study236 has demonstrated that sovereign downgrades have statistically and 
economically significant spillover effects bot h across countries and financial markets. 
According to the study, there are many poten tial channels through which sovereign rating 
news may have spillover effect across countries  and across financial markets. Another recent 
study237 has shown that there's asymmetry in ma rket reactions to sovereign debt rating 
changes, i.e. while there is a significant reac tion of sovereign yield sp reads (and particularly 
CDS spreads) to negative events, the reacti on to positive events is much more muted.  
In this context, a sovereign rating downgrade in a given country  is likely to affect the 
profitability of domestic banks of  the country and of banks in other countries where banks are 
holding this debt. This is the case of Europe where banks hold at times substantial amount of 
sovereign debt in both th eir trading and banking books.238  
Sovereign rating news may spill over across countries and markets when banks across 
countries hold claims on banks in  other countries and ar e thus exposed to one another. As this 
cross-holding feature is an important element of the European financial markets sovereign 
credit rating announcements may spillover to other markets as a result of  rating-based triggers 
such as those in banking regulation, ECB colla teral rules, CDS contracts or investment 
mandates. 
According to the study, sovereign rating downgr ades have statistica lly and economically 
significant spillover effects both across countries  and financial markets implying that rating 
agencies announcements could spur financial instability. Those spillover effects depend both on the type of rating announcements, on the sour ce country experiencing the downgrade and 
the rating agency from which the announcements  originates from. Furthermore, the study 
found evidence that some rating announcements su ch as rating downgrades near speculative 
grade (for example, the. downgrade of Greece to BBB+ from A- by Fitch on December 8, 
2009) have a systematic spillover effects across Eu ro zone countries under consideration (For 
example, it resulted in a 17 and 5 basis point s increase respectively for Greek and Irish CDS 
spreads). Another example of spillover effects is the Austrian CDS spreads and stock market 
indices moved which sharply following the downgrades of Baltic countries, while the 
Austrian credit rating remained unchanged. One possible channel of this spillover effect is the exposure of Austrian banks to the Baltic countries. 
Analysis of sector and cross-sector  risks related to sovereign ratings 
According to the Cross-Sectoral Risk Task Force
239 (hereafter referred to as the CSR TF) of 
the three European Supervisory Authorities (ESAs), there has been a visible link between 
sovereign and bank CDS spreads multiple countries , including GR, PT, IT as shown in chart 1 below. However, in the insurance sectors, such a correlation is less evident (as shown in 2 below). Contagion to other EU countries has be en limited and mainly stems from cross-border 
holdings of government bonds and increased difficulty  in issuing debt secu rities. So far, there 
                                                
 
236  Rabah Arzeki, Bertrand Candelon and Amandou N.R.Sy, IMF Working Paper, Sovereign Rating News 
and Financial Markets Spillovers: Evidence from th e European Debt Crisis, March 2011, WP/11/68. 
237  See Afonso, Furceri, Gomes, ECB paper n. 1347, June 2011. according to th e Authors the reaction of 
CDS spreads to negative rating events has increased co nsiderably after the beginning of the crisis (i.e. 
the 15.9.2008 – day of Lemahn bankruptcy). 
238  Blundell-Wignall, A. and P. Slovik (2010), “The EU Stress Test and Sovereign Debt Exposures”, 
OECD Working Papers on Finance, Insurance and Private Pensions, No. 4, OECD Financial Affairs 
Division. Available from: www.oecd.org/daf/fin .  
239  Cross-Sectoral Risk Task Force of the Europe an Supervisory Authorities: Cross-sectoral risk 
assessment report: March 2011. The report focuses on the common sources of risk for the different 
sectors of financial institutions and on cross-sector al contagion links. The assessment of the risks is 
provided on the basis of the information collected in January 2011. 
 
 138/193  has not been evidence of destabilising specu lation or market manipulation in the markets 
related to specific sovereign bonds.  
The threats for the EU financial sy stem involve, according to the CSR TF240 , first, increased 
default risk premia for highly indebted countri es propelling writedowns on all sovereign asset 
holdings that are marked-to-market. Second, the sovereign debt market unrest can spill-over 
to other markets such bank funding markets (i ncreasing banks’ funding costs) or equity 
markets as e.g. in May 2010, resulting in higher ma rket risk levels for financial institutions. 
Third, the fiscal austerity measures, possibl y aggravated by sove reign and bank funding 
problems, can contain economic growth a nd increase private sector credit risk. 
 
 
  
Source: Internal study from BaFin, Germany 
Figure 11. Bank vs Sovereign CDS spreads by country and Insurance vs. Sovereign CDS spreads by 
country  
 
Sectorial risks due to Sovereign debt ratings 
According to the CSR TF, the higher default risk  premium of the affect ed countries and their 
rating downgrades also negatively affect the banks domiciled in these countries . These banks 
face higher funding costs irrespec tive of their own performance as their spreads and ratings 
are linked to those of the sovereign. Banks also  hold large quantities of their own government 
debt, which has caused significant losses on market -value terms, and their credit risk outlook 
depends on the impact of the austerity measures on the real economy and asset prices, 
especially real estate.  
Regarding the rest of the EU banking sector , according to the CSR TF, significant risk relates 
to the holdings of the sovereign debt of the aff ected countries. However, the most part of the 
exposure (on average around 80%) is held in  the banking book. Banking book exposures are 
supposed to be held to maturity  and are not marked-to-market.241 While significant, most of 
the largest cross-border banking groups have relatively containe d exposures to sovereign debt 
of countries other than their own domicile. Ne vertheless, market concerns may spill over to 
other assets from the affected  countries, like covered bonds.242  
                                                 
240  Ibid. 
241  The EBA does not as yet have statistics regarding the proportion of assets allocated in the Available For 
Sale (AFS) portfolio of the banking book, for which market value losses are deducted from banks’ own 
funds, unless own funds are insulate d from market value changes through the use of "prudential filters".  
242  EBA’s assessment of sovereign debt risk will be repeated in the forthcoming stress test.  
 
 139/193  EU insurance undertakings and occupational pension funds manage a large government bond 
portfolio. For insurance undertak ings the overall exposure to wards government bonds of EEA 
countries (plus Japan, Switzer land and the U.S.) is roughly 1,300 bn EUR (24% of total 
assets) according to the data collected by Eu ropean Insurance and Occupational Pensions 
Authority (EIOPA)243. The same figure for occupational pension funds is estimated around 
350 bn EUR (14% of total assets). The impacts on specific undertakings depend on the extent 
of asset diversification. Generally, the portfolios are well-diversified. 
In insurance and occupational pension sector there is no evidence of fire sales,  but in some 
cases a partial shift towards more secured sovereign debt has taken place.  In general, de-risking of the portfolios has taken place in th e second and third quarters of 2010, according to 
the EIOPA survey.  
In some EU countries, investment patterns of asset managers may be characterised by above-
average exposures towards sovereign debt issued  with “average plus” –yields, which could be 
an indication of the “search for yi eld” and greater risk taking.  
Cross-sectorial and contagion risks due to sovereign debt ratings 
According to the CSR TF, some banks followed by the European Banking Authority
244 (EBA) 
have already suffered from consequences of the fisca l consolidation measures,  as reductions 
in disposable income has lead to  an increase in loan loss provisions. In particular, the quality 
of the consumer loan portfolio has experienced a severe deterioration. Fiscal consolidation 
can reduce economic activity, leaving fewer grow th and profit opportunities for all financial 
institutions, although it might al so have longer-term beneficial  effects, for example through 
improved confidence and lower funding costs.   
According to the CSR TF, all EU banks could suffer from contagion effects via funding 
markets  should the concerns related to sovereign risk persist. Also financial markets can more 
widely be affected by turmoil in sovereign de bt markets, as was evidenced during 2010. The 
consequence can be hits in the pricing of assets a nd higher market volatil ity. This would in 
particular affect insurance undertakings and pension funds that have large investment 
portfolios. 
According to the CSR TF, there is also cl ose interaction between the sovereign and municipal 
debt. Municipal financing is a relatively importa nt business for a number of major banks 
followed by the EBA. So far defaults on munici palities are rare, but the market pricing of 
municipal default risk is closely linked to that of the sovereign. 
 
Risk description:  Further negative developments in sovereign debt markets  
Sector affected Impact Details 
Banking High  Heightened li quidity and funding risks 
Decreased quality in loan portfolios   
Market value losses on sovereign debt instruments 
Insurance Medium to high  
Financial conglomerates Medium to high  Market value losses on sovereign debt instruments  
 
Asset management Medium Potential risks related to “search for yield” 
Pension funds Low  Market value lo sses on sovereign debt instruments 
Consumers High  Reduced public s ector benefits and decreased 
                                                 
243  EIOPA is one of the three supe rvisory authorities responsible for the insurance sector, accessible at: 
https://eiopa.europa.eu/ .  
244  EBA is one of the three supervisory authorities re sponsible for the banking sector. More information is 
available at: https://eba.europa.eu/ .  
 
 140/193  private consumption  
Cross-sector contagion issues Risk of contagion to othe r financial markets (bank fundi ng, equity, municipal debt) 
Reduced business activities due  to fiscal consolidation 
Geographic impacts Vary significantly per country - institu tions in highly indebted countries most affected 
Policy implications Supervisory attention towards in stitutions’ sound risk management and adequacy of 
diversification 
Incentives are created to hold sovereign debt  as prudential regulation in banking or 
insurance does not take into account  increased sovereign risk premia 
 
2.3. Competition in the Credit Rating Sector  
The root causes of the limited competition wi thin the rating industry can be explained by 
market characteristics both on the demand si de, which includes issuers and investors and 
supply side, which includes th e credit rating agencies.  
On the demand side, there is little willingness fr om issuers to pay for low or medium range 
ratings and many investors concentrate on secu rities rated by highly reputable agencies, 
channelling demand for ratings to a small number of CRAs.245 This is related to the signalling 
function of ratings for issuers and the perceived informational quality and value of ratings to investors. Demand is also driven by "network effects", as ratings provide investors with a 
comparative risk evaluation.
246 More specifically, an important aspect of the value of a rating 
is its comparability to other ratings. Therefore, issuers favour ratings from leading rating 
agencies that can ensure the largest comparability of ratings for investors which increases market concentration.
247 
On the supply side, market concentration is re inforced by barriers to en try. Investors attribute 
considerable importance to reputation which is hard to acquire for new market entrants.248 In 
this context, it should be noted that for a sma ll rating agency with a low absolute number of 
ratings, even a single badly perceived rating coul d have a statistically relevant impact on its 
performance and reputation. 
Furthermore, ratings from newly registered a nd authorised CRAs face restricted uptake by the 
market as they cannot always be used for regulat ory capital purposes if they have not obtained 
the External Credit Rating Institute (ECAI) statute249. As shown in Annex IV, section 1, 
mainly 3 CRAs have obtained ECAI approval from  the majority of national regulators while 
all other CRAs have obtained ECAI approval in only a very limited number of Member States,
250 thus limiting the choice for issuers and in vestors of CRAs whose ratings can be used 
for regulatory purposes.251 Furthermore, due to the absence of a standardized rating scale, 
                                                 
245  Fabian Dittrich, The Credit Rating Industry: Comp etition and Regulation, 2007, p59. Available from: 
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991821 .  
246  Financial instruments from diverse areas such as structured finance products or sovereign debt can be 
compared, whereas the "absolute risk" of the rati ng category can change over time, See BIS (Bank of 
International Settlements, Basel Committee on banking supervision, 2000: "Credit Rating and 
Complementary sources of credit Quality Information", Working Papers No 3, August 2000. Available 
from: http://www.bis.org/publ/bcbs_wp3.pdf .  
247  Fabian Dittrich, The Credit Rati ng Industry: Competition and Regulation, 2007, p73-74 Available from:  
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991821 .  
248  OECD, Organisation for Economic Co-operation and Development, Credit Rating Agencies: 
Competition related issues, June 2010, DAF/COMP(2010)20, p.11.  
249  Article 1 of the CRA regulation states that regi stration is only a precondition to obtain ECAI statute 
under Directive 2006/48/EC.of the European Parliament and the Council of 14 June 2006 relating to the 
taking up and pursuit of the business of credit institutions. A CRA needs to be ECAI to ensure that its 
ratings can be used for regulatory capital purpose as required in article 80-83 of Directive 2006/48/EC. 
Therefore, additional requirements provided for in Directive 2006/48/EC apply.  
250  All other CRAs have obtained ECAI approval in 6 or less Member States in July 2010. 
251  This is particularly relevant for issuers aiming to sell their debt instruments in an international context, 
requiring an ECAI statute in all Member States. 
 
 141/193  small CRAs' ratings are not always readily comp arable. A further barrier to entry is that 
issuers and investors are sometimes un aware that alternative players exist.252 
For investors, this implies that there is a strictly limited choice of ratings and limited 
alternatives available to compar e ratings from a wide range of  CRAs, while they have limited 
opportunity to assess rating quality. For issuers, market concentration implies limited choice 
and alternatives to be rate d, and most probably, higher pr ices for ratings due to the 
oligopolistic structure of the market.253 In addition, some segments of issuers, particularly 
Small and Medium-sized Enterprises (SMEs) or small sovereigns, might experience difficulty 
obtaining a rating as not all market segments  are covered by rating agencies. For these 
enterprises ratings from existi ng rating agencies might be t oo expensive or these markets 
might be considered too small for existing rating agencies. This could be  an additional barrier 
for Small and Medium-sized issuers to access capital markets. Furthermore, new entrants 
experience difficulty establishing themselves in the market and in  gaining reputation. 
Evidence shows that those who are able to succe ssfully establish themselves have often been 
taken over by existing rating agencies.254  
It should be noted that th e CRA regulation partially addr esses this problem through 
registration and official endorsement.255 Registration and official endorsement of new rating 
agencies under the CRA regulation is expected  to improve the visibility of new rating 
agencies establishing themselves on the EU mark et. Furthermore, the high standards for rating 
methodology and the supervision of registered rating agencies  are elements which could 
contribute to some extent to the reputation of newly establishe d rating agencies among issuers 
and investors. Over a long period of time this co uld eventually contribute to diversity of rating 
agencies available on the EU market.  
Some studies have argued that increased  competition has reduced rating quality.256 In this 
context, some authors believe that greater co mpetition increases the risk of rating shopping 
and decreases reputation cost s for CRAs, leading to infl ated, lower quality ratings.257 It should 
be noted that "increased" competition occurred in the market segment of structured finance 
products for which only a limite d number of investment banks  participated. CRAs' quality 
standards decreased as they raced to offer "be tter ratings" in order to retain business. This 
problem is addressed by the CRA Regulation, requiring high quality ratings and 
methodologies subject to regulat ory supervision by ESMA.  
2.4. Civil Liability 
Survey of Member States' civil legal orders in respect of provisions on which investors could 
base claims against CRAs having infringed the CRA Regulation 
The Commission services asked ESMA to survey  a sample of Member States civil legal 
orders in respect of provisions on which inve stors could base claims against CRAs having 
infringed the CRA Regulation. 
                                                 
252  European Association of credit rating agencies (ECRA), contribution to the public consultation of 7 
January 2011.  
253  Fabian Dittrich, The Credit Rating Industry: Compe tition and Regulation, 2007, p100. Available from:  
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991821 . 
254  E.g. Fitch has established itself by an aggressi ve acquisition strategy, see Dodd, Randall ad Gautam 
Setty, 2003, "Credit Rating Agencies: Their Impact on Capital Flows to Developing Countries". 
Financial Policy Forum, Special policy report 6, 2003, p.7. Available from:  
http://www.financialpolicy.org/FPFSPR6.pdf .  
255  As provided for in Article 14-20 of the CRA Regulation. 
256  Becker, Milbourn, How did increased competition affect cred it ratings? Harvard Business School, 
Working Paper 09-051, p.30. 
257  Camanho et al., 2010; Bolton et al., 2009; Skreta and Veldkamp, 2009. 
 
 142/193  All respondents said that invest ors could at least in theory ba se claims against CRAs having 
infringed the Regulation. The Me mber States did not in gene ral have specif ic provisions 
relating to civil liability  of CRAs. Only France adopted in 2010 a specific law in relation to 
the liability of CRAs not only to  clients but also to third pa rties (including investors using 
ratings) "in case of delict and quasi-delict, for the harmful consequences of any negligence or 
breaches".   
Investors without a contractual relationship w ith a CRA (which is th e normal situation under 
the prevalent issuer-pays model) mu st refer to liability in tort, while a party with a contractual 
relationship can refer to contractual liability.  
It seems that in many Member States it is not cert ain that an action based on liability in tort by 
an investor  would be successful .  In Sweden and Poland for exam ple, it is rather unlikely that 
a party with no contractual rela tionship with a CRA could esta blish an indemnity liability 
claim under tort law.  In other member states (UK, Netherlands) civil liability of a CRA vis-à-
vis investors depends on a range of criteria and courts take a flexible approach depending on 
the circumstances of the case. In Germany, civil liability vis-à-vis invest ors that do not have a 
contractual relationship with the CRA could theo retically be based on de lict (Art. 823 (2) of 
Bürgerliches Gesetzbuch (German civil code), howe ver this requires that courts consider that 
the specific provision of the CRA Regulation that  has been infringed intends to protect the 
investors and it is not clear  whether courts will actual ly make this assumption.  
Also notable was the various de grees to which civil liability could be excluded or limited 
under the different legal orders; again varying fro m state to state.  There was a common need 
to establish a causal link leading to the damage s, and most Member States had a standard of 
fault of negligence and intention. 
The following summary contains assumptions (f or example where there is no existing case 
law) and is intended as a ge neral, non-exhaustive guide: 
 
 Specific 
CRA civil 
liability 
regime? Provisions Standard of 
Fault Exclusion of 
liability possible 
Austria No §§1293 ff ABGB(General 
Civil Code), (financial) damage (cf. §1293 s.1 ABGB) due to an unlawful (cf. §1294 s.2 
ABGB) culpable (cf. 
§1295 par.1 ABGB) behavior esp. in breach of the CRA Regulation's (protection) requirements (cf. §1311 ABGB; called "Schutzgesetzverletzung")Intention, 
negligence or carelessness To a limited 
extent 
Belgium No Article 1382 and 1383 of 
the Belgian Civil Code related to general non-contractual civil liability  In some cases, but 
not for fraudulent misrepresentation, or where such an exclusion empties the obligations of their substance 
 
 143/193   Specific 
CRA civil 
liability 
regime? Provisions Standard of 
Fault Exclusion of 
liability possible 
Cyprus No Civil Procedures Rules, 
Civil Wrongs Law, Contract Law, Law of Evidence Various, 
including intent Yes 
Czech 
Republic No Act No. 40/1964 Coll., 
Civil Code, as amended, section 420 Negligence Yes, except if 
caused by negligence or intention 
France Yes Law  2010-1249 on 
banking and financial regulation of October 22nd 2010, article 10: codified into Monetary and Financial Code MFC (articles L. 544-4 to L. 544-6 in chapter IV of title IV of book V), referring to article 1382 and 1383 of Civil Code Negligence, 
intent or omission Under tort law, 
exclusion clauses generally considered null and void, however, claims under contract cannot rely on tort to void such exclusions 
Germany No Bürgerliches Gesetzbuch 
(BGB), contract with CRA; § 611, § 433, § 459 BGB, third party; § 823 para 2 BGB, § 611, § 433, § 459 BGB Intention, 
negligence  
Greece No 914 Civil Code  By law or 
contract 
Latvia No Article 1 of the Civil 
Procedure Law No specific 
standard of fault No 
Lithuania No General provisions of 
civil liability established in the Civil Code of the Republic of Lithuania   
Luxembourg No Code civil, articles 1382 
and 1383 Fault or 
negligence No 
Malta No Maltese Civil Code: Of 
Contracts: art. 993   Maltese Civil Code: Of Torts and Quasi Torts: art. 1031 – 1032, 1033, 1037, 1038, 1044, 1045, 1047, 1049 – 1051   Maltese Civil Code: Of the Effects of Obligations: 1125 – 1141  Negligence, 
intent Yes, in some 
cases, exclusion clauses must be consented to by all parties and not be illegal or contrary to public policy 
 
 144/193   Specific 
CRA civil 
liability 
regime? Provisions Standard of 
Fault Exclusion of 
liability possible 
Netherlands No Dutch Civil Code (CC), 
6:162 CC (non-contractual liability)  or 6:194 CC (misleading advertisement) (lex specialis of the above general tort provision) Likely to be 
negligence Yes, but not for 
non-contractual liability, though it can be limited to a certain extent 
Poland No Article 415 of the Civil 
Code No specified 
standards Not for tort 
liability 
Slovenia No Code of Obligations (OZ, 
Official Gazette of the Republic of Slovenia, Nos. 83/2001… 97/2007), Articles 131-189 Intent or 
negligence No 
Sweden No Pursuant to the Swedish 
Tort Liability Act (SFS 1972:207), Chapter 2 Section 2   
UK No General law of contract 
and tort. In tort, the most relevant cause of action is likely to be the tort of negligence. Contract, 
negligence Yes, but only 
enforceable as far as court assesses such a clause to be reasonable 
 
2.5. Conflicts of Interest due to remuneration models  
In the following the main remuneration models for credit rating agencies are presented 
followed by a description of potential conflicts of interest linked to the respective model. 
Issuer-pays model 
This model relates to the case where issuers solicit and pay for the ratings of their own debt 
instruments. The issuer-pays model is by far th e dominant remuneration model currently used 
by credit rating agencies. On average, the revenue generated by th e issuer-pays model 
represents more than two-th ird of total CRAs' revenues. 
The issuer-pays model entails conflicts of interest by its nature. The inherent conflict of 
interest in this model is that rating agencies have a financial interest in generating business 
from the issuers that seek the rating, which could lead to assigning higher ratings than 
warranted in order to increase its revenues from the issuer. A low rating might affect future 
business. If reputational concer ns or regulation are not str ong enough to discipline credit 
rating agencies, the issuer-pays mode l can result in inflated ratings.  
Investor/subscriber-pays model 
Under this model, credit rating agencies would ea rn fees from users of the ratings. In the mid-
1970s, as credit ratings started to  become more important because of the increasing reliance 
on ratings in rules and regulations, CRAs stoppe d selling ratings to investors and instead 
began charging the companies that issue the debt  they rate. Still, in the US, some of the 
smaller CRAs, such as Egan-Jones Rating Comp any (which focuses on corporates), Lace 
 
 145/193  Financial Corporation, and Real point, LLC (which focuses on structured finance), use the 
investor/subscriber-pays models. 
Even if the conflicts of interests related to the investor/subscriber-pay s model are in general 
considered to be less strong than those attribut ed to the issuer-pays m odel, the investor-pays 
model is by far not free form conflicts of inte rests: A large investor may try to influence 
CRAs to provide lower initial ratings (which tend  to provide higher yields), while institutions 
that can only invest in highly rated instruments due to regulatory requir ements might pressure 
a CRA to assign an investment-grade  rating on a particular security.  
It has also been shown that unde r the "investor-pays" model there is the ri sk of "free-riders" 
when an investor accesses the information paid  by another investor, wi thout having to support 
the cost of the information production258.   
Moreover, some experts doubt whether the investor-pays model would provide enough 
resources for credit rating agen cies to deliver hi gh quality ratings and employ a sufficient 
number of analysts, as investors are not always able or willing to pay for rating services. Ultimately the investor-pays model could marg inalise ratings for smaller issuers and less 
liquid issuances.  
The public utility/government model 
This model is currently not applied in practi ce. It would require tr ansforming a credit rating 
agency into a public utility and f unding it with government revenues. 
Also the public utility/government model is not free from conflicts of interest, especially with 
regard to sovereign debt ratings .  It involves taxpayers' money. 
                                                
 
258  A user/investor-pays-based business model is diffic ult to maintain because of the inability to restrict 
access to ratings and their public good characteris tic of aggregating difficult-to-obtain private 
information. See the International Monetary Fund, World Economic and Financial Surveys Global 
Financial Stability Report, October 2010, p.14. 
 
 146/193  ANNEX VII.  DESCRIPTION OF OPTIONS  
Identified policy options regarding objective 1 - Diminish the impact of “cliff" effects on  
financial institutions and markets by reducing reliance on external credit ratings 
 
Policy option Description (Potential) 
Instrument  
Option 1 (baseline) The base line scenario applies.  
Option 2 
(Reduce reliance on external 
ratings by enhancing internal risk management and promoting the use of 
internal rating models for 
regulatory purposes) All explicit references to external credit ratings in regulatory 
capital frameworks for financial institutions would be 
reviewed. This would include the guidelines from the 
European Supervisory Authorities. A specific obligation should be included in EU legislation encouraging European 
Supervisory Authorities to use other means for assessing 
creditworthiness rather than pure reliance on ratings. 
Option 2 would require financia l firms (credit institutions, 
investment firms, insurance and reinsurance undertakings, pension funds, UCITS managers and in the future alternative 
investment fund managers) to assess the credit/market risk 
using their own methodology. Financial firms' investment decisions would not rely solely or mechanistically on 
external ratings but would have to be based in addition, on 
information obtained through own due diligence, external 
research or market based measures (such as CDS prices). 
Firms with material and complex credit risk exposure 
(banks, certain investment firm s, insurance and reinsurance 
undertakings) will be required to develop and use internal models for the calculation of capital requirements, rather 
than relying on external ratings under a standardized 
approach.  
Standardised approach would remain available for smaller 
institutions for which the development of internal models would be disproportionate or for those institutions whose 
exposure to credit risk is less material or less complex. 
However, also those firms would have to assess if the inherent credit risk of an ex posure is significantly higher 
than the one that corresponds to the capital requirement 
assigned under the standardised approach based on external 
ratings, and to reflect the higher  degree of credit risk in the 
evaluation of their overall cap ital adequacy. This measure is 
also recommended by FSB and thus would ensure coherence 
at the international level. 
It should also be made sure that references to external 
ratings will be avoided to the extent possible in any future EU legislation including technical standards and guidelines All references 
to ratings in 
EU Financial  
CRDIV 
proposal as 
adopted on 20 
July 2011.  
Solvency II 
implementing 
measures
259, 
UCITS260 and 
AIFMD261  
                                                 
259 Implementing measures of Solven cy II are expected in Q2 2012. 
260 Directive 2009/65/CE of the European Parliament and the Council of 13 July 2009 on the coordination 
of laws, regulations and administrative provisions relating to undertakings for collective investment in 
transferable secur ities (UCITS), OJ L 302, 17.11.2009. 
261 Alternative Investment Fund Managers (AIFM) Directive (“AIFMD”). On 11 November 2010, the 
European Parliament and the Council have reached a political agreement on the "Draft Directive" and 
the publication of the Directive in the Official Journal of the European Union is expected in Q1 2011. 
 
 147/193  Policy option Description (Potential) 
Instrument  
of the European Supervisory Authorities. 
Option 3 
(Require credit institutions, 
investment firms, insurance 
and reinsurance 
undertakings to use more than one rating, if available) This option would require credit institutions, investment 
firms, insurance and reinsurance undertakings to use at least two credit ratings issued by different credit rating agencies, 
where available. These ratings would be required to be used 
for the calculation of capital requirements under the standardized approach.
262  Solvency II 
Option 4 
(Improve disclosure 
requirements for issuers of 
structured finance products 
on an ongoing basis) Improve disclosure requirements for issuers of structured 
finance products on an ongoing basis, enabling the disclosure of the main elements of underlying asset pools for 
structured finance products nece ssary for investors to make 
their own credit assessment and thus not rely on external ratings. Issuers could disclose this information by means of 
a website. Amendment 
of the CRA 
Regulation  
 
Identified policy options regarding objective 2 - mitigate risks of cont agion effects linked 
to sovereign debt ratings  
 
Policy option Description (Potential) 
Instrument  
1. No policy change The ba seline scenario applies.  
2. Require CRAs to publish a 
full research report on 
sovereign debt ratings and 
allocation of staff Strengthen existing disclosure requirements for solicited 
and unsolicited sovereign debt ratings by requiring 
CRAs to disclose free of ch arge their full research 
reports on sovereign debt ratings in order to improve transparency and enhance users' understanding. This 
option could also include the publication of additional 
figures on the allocation of  staff in the annual 
transparency report. Amendment of 
CRA Regulation 
(CRA III ) 
3. Require CRAs to publish 
sovereign ratings after 
closing of EU trading venues Require CRAs to publish sovereign debt ratings only 
after the close of business of European trading venues 
ensuring that all market participants can obtain a full 
understanding of any change of a rating. Amendment of 
CRA 
Regulation 
(CRA III ) 
4. Require CRAs to conduct the 
sovereign debt ratings 
process more frequently Strengthen the current review requirement for credit 
ratings by requiring CRAs to assess sovereign debt ratings more frequently. This could entail, for instance, 
the reduction of the maximum time period after which 
sovereign debt ratings have to be fully assessed to six months from twelve as currently provided for in article 
8 (5) of the CRA regulation. Amendment of 
CRA Regulation 
(CRA III ) 
5. Extend powers of competent 
authorities (ESMA) to 
scrutinize rating 
methodologies Extend the powers of the ESMA by requiring registered 
CRAs to notify it in advance of any change to rating 
methodologies. This could apply for methodologies of 
sovereign debt ratings and also for other asset classes. ESMA would scrutinize whether the changed 
methodology complies with the criteria in Art. 8 (3) of Amendment of 
CRA Regulation 
(CRA III ) 
                                                 
262  Basel II: under this approach banks are required to use ratings from External Credit Rating Agencies to 
quantify required capital for credit risk. 
 
 148/193  Policy option Description (Potential) 
Instrument  
the CRA Regulation will be specified in the future 
regulatory technical standard. In doing so, ESMA shall 
not interfere with the content of credit rating 
methodologies as required in article 23.1 of the CRA 
regulation. Only after a positive assessment by ESMA 
the CRA may proceed with the new methodology. Furthermore, ESMA shall be empowered to restrict for 
a limited period the issuance of ratings if it has 
sufficient concern that a CRAs methodology or application of a methodology is in danger of infringing 
the Regulation.   
6. Require (EU) sovereigns to 
publish a standardized set 
data on economic 
performance to enable credit 
risk assessment Require sovereigns to disclose a limited and 
standardised set of relevant information necessary for 
investors to perform their own credit assessment which 
would be published on a centralised website, facilitating comparability of standardized information for investors.   Amendment of 
CRA Regulation 
(CRA III ) 
7. Grant ESMA the power to 
restrict or ban temporarily 
sovereign debt ratings in 
situations defined by the 
Regulation Define the exceptional conditions under which a 
temporary banning or restriction of sovereign ratings could be imposed in the Regulation. These exceptional 
situations could include an event that poses a threat to 
financial stability, market confidence, excessive 
volatility or cases where there are ongoing negotiations 
on a financial assistance programme for EU Member State. Detailed criteria for determining an exceptional 
situation would be determined by means of a delegated 
act. Amendment of 
CRA Regulation 
(CRA III ) 
8. Encourage an existing, 
independent EU structure or a brand new European Credit 
Rating Agency to issue credit 
ratings Encourage an existing independent EU structure (ECB) 
or promote a brand new European Credit Rating Agency to issue independent credit assessments, particularly for European sovereigns. These assessments could include a 
detailed research report and methodology and would be 
published and remain freely available for investors, offering an independent alternative to existing 
commercial credit ratings. Existing EU structures such as 
the ECB or ESM could be encouraged to provide such a service. Amendment of 
ECB Regulation 
Or  
Council and 
Parliament 
Regulation 
(New Agency) 
9. Prohibit sovereign debt 
ratings Prohibit registered and authorised credit rating agencies 
from issuing sovereign debt ratings. Investors would be required to perform their own assessment of sovereign 
debt products based on all relevant publicly available 
information.  Amendment of 
CRA Regulation 
(CRA III ) 
 
Identified policy options regarding objective 3 - improve credit rating market with a view 
to enhance competition and improve ratings quality 
 
Policy option Description Instrument 
1. No policy change The ba seline scenario applies.  
2. Encourage the emergence of 
a network of small and 
medium size rating agencies A network of European small and medium size rating 
agencies would be promoted under a European 
Programme. This could cons ist of a specific action The common 
strategic 
framework for 
 
 149/193  Policy option Description Instrument 
under the Competitiveness and Innovation Programme 
(CIP)263of the Enterprise and Industry Directorate 
General, which would fall under the financial 
perspectives of the period 2012-2017. This network 
would enable participating small and medium rating agencies to share data, best practice on rating 
methodologies and resources. research and 
innovation 
funding 
(Horizon 2020) 
or 
the new 
Competitiveness 
and SME 
programme for 
the continuation 
of the non-
innovative 
actions of the 
CIP 
 
3. Encourage the emergence of 
a new European rating agency The emergence of a fully independent European rating 
agency in the structure of a private foundation or in the 
form of a new Public Agency (see above option 8 of previous section). To suppor t the private foundation an  
initial funding to cover start-up costs for the first three to 
a maximum of five years could be provided through the European Investment Bank (EIB)  or our of the Union 
Budget Financing 
decision of the 
Commission 
+ 
Grant agreement 
(direct or 
following call 
for tenders) 
4. Harmonise ratings scales to 
improve comparability of 
ratings between CRAs ESMA would be empowered to prepare draft technical 
standards on a harmonised rating scale to be used by 
registered CRAs. All ratings would need to follow the 
same rating scale standards, ensuring that ratings can be compared more easily by inve stors. Furthermore, this 
could include common definitions on sovereign default. Amendment of 
CRA Regulation 
(CRA III ) 
5. Establish a European Rating 
Index (EURIX) All rating agencies would be required to communicate 
all ratings to ESMA, which would publish all available 
ratings on the market for a debt instrument in the form 
of European Rating Index (EURIX), which would be freely available for investors.  Amendment of 
CRA Regulation 
(CRA III ) 
6. Require CRAs to issue joint 
ratings at the level of the 
rating committee Small and larger CRAs would be required to work 
together in order to issue a joint credit rating. This option will thus provide opportunities for the smaller 
agencies to gain exposure, demonstrate capability and 
build reputation over time so  that they become real 
competitors to the current large CRAs, not only in terms 
of size and expertise, but most importantly reputation. 
More than one CRA would be involved in issuing a rating for corporate issuers, structured finance 
instruments or sovereign debt and the 4 eyes principle 
would only apply to certain areas of the rating, mainly 
the final decision at the rating committee level.  Amendment of 
CRA Regulation  
(CRA III) 
7. Ban large CRAs from The larger CRAs would be prevented from acquiring Amendment of 
                                                 
263  The Competitiveness and Innovation Framewor k Programme (CIP) supports innovation activities, 
provides better access to finance and delivers business support services in the regions. The Enterprise 
and Innovation Programme (EIP), one of the specific programmes under the CIP, seeks to support 
innovation and small and medium sized enterprises (SMEs).  
 
 150/193  Policy option Description Instrument 
acquiring small and 
medium-sized CRAs small and medium-sized CRAs. The main purpose is to 
ensure the active presence of a much higher number of CRAs in the EU market once other measures to 
facilitate the growth of smaller CRAs come into effect. CRA Regulation  
(CRA III) 
+ 
Amendment of 
the Merger 
Regulation  
8. Introduce temporary market 
share ceilings for CRAs  No CRA would be allowed to have more than a certain 
percentage, for example 20%, of  total market share. The 
purpose of this measure is to alter the current 
oligopolistic market structure.   
The process would have three phases: (1) transition 
period (for example, 5 years) under which CRAs would 
need to accommodate their rating business to the 
ceiling's requirement; (2) monitoring period (for instance, 10 years) under which the smaller CRAs will 
have the possibility to expand their business and build up 
their reputation to become real competitors to large 
CRAs; (3) the end of the temporary restriction period 
under which all requirements on ceilings would be 
removed. Amendment of 
CRA Regulation  
(CRA III) 
9. Require CRAs to disclose 
pricing of ratings and ensure that prices are not 
discriminatory and based on 
costs  CRAs would be required to disclose pricing of ratings 
and ensure that prices are not discriminatory and based on costs, in an aggregated format, so that issuers have 
clarity on the amount of fees that CRAs charge. The 
information should be transparent and accurate and 
cover all rated asset classes, possibly in aggregated format and via a website. Furthermore, to avoid 
potential conflicts of interest in the provision of rating 
and ancillary services, CRAs will have to ensure that the prices and fees they char ge for their services are (a) 
not discriminatory, i.e. fully based on the costs and 
transparent pricing criteria ; (b) not based on any form 
of contingency. Amendment of 
CRA Regulation  
(CRA III)  
 
Identified policy options regarding objective 4 – ensure right of redress for investors 
 
Policy option Description Instrument 
1. No policy change The ba seline scenario applies.  
2. Introduce civil liability of 
CRAs into EU legislation Investors could directly base  claims against CRAs that 
have infringed the CRA Regulation and caused damage 
to the investor on a provision in the CRA Regulation which would specify  all conditions for civil liability of 
CRAs. Civil liability of CRAs would thus be regulated at 
the Union level and no longer in Member States' own civil law orders. Amendment of 
CRA Regulation 
(CRA III ) 
3. Ensure civil liability of 
CRAs towards users of credit 
before national courts This option would ensure civil liability of CRAs towards 
investors before national courts in case a CRA infringes the CRA Regulation thereby causing damage to an 
investor having relied on a flawed rating. Common 
principles under which CRAs should be held liable (eg. standard of proof) would be defined. Amendment of 
CRA Regulation 
(CRA III ) 
 
 151/193   
Identified policy options regarding objective 5 - improve ratings quality by reinforcing 
independence of credit rating agencies and prom oting sound credit rating processes and  
methodologies 
 
Policy option Description Potential 
Instrument 
1. No policy change The ba seline scenario applies.  
2. Require 
institutional investors to obtain 
their own ratings 
before they can 
purchase a 
particular 
financial 
instrument The issuer would remain free to hire its own rating agency, but each 
institutional investor would be required to obtain its own independent rating before investing in a particular financial instrument for amounts above certain thresholds (e.g. fo r clients who may be treated as 
professionals and whose investme nt portfolio exceeds EUR 500,000
264).  Amendment 
of CRA 
Regulation 
(CRA III ) 
3. Require trading 
venues to set up 
and ensure the 
administration of 
the "Trading 
venues pay" 
model Trading venues would be required to ensure and organise the rating of 
listed and traded companies and instruments. As the bulk of global 
securities is traded outside traditional trading venues, for non-listed 
companies and instruments, the "Subscriber / Investor Pays" model could apply. The platform would be required to organise the rating of a pool of 
loans by one of CRAs. Selection of the CRA rating an instrument could 
be made on the basis of objective criteria.  Amendment 
of MiFID 
4. Require CRA 
selection to be undertaken by an 
independent board An independent "Credit Rating Agencies Board" composed of 
supervisors, representatives of issu ers, subscribers and investors and 
credit rating agencies would be empow ered to select a CRA either at 
random or on the basis of objectively defined criteria to rate an issuer’s 
structured finance instruments. The issuer would remain free to (1) 
secure no rating from selected CRA at all, or (2) hire additional CRAs if desired. Amendment 
of CRA 
Regulation 
(CRA III ) 
5. Introduce rotation 
rules for the CRAs 
engaged by an 
issuer to rate its 
own products and 
to rate the issuer 
itself and in 
introduce 
mandatory 
separation 
between them An issuer's own credit worthiness could not be rated by the same CRA 
for more than 3 consecutive years.  Another CRA would take over thereafter and the outgoing CRA and th e issuer would make available all 
information accessed in the rating process, and hand over appropriately 
to the incoming CRA to enable it to perform ratings effectively. 
A CRA would not be able to rate more than 5 consecutive issues of any 
asset class by the same issuer, or if fewer than 5 issues are made, it 
would not be able to rate the issues of one issuer over a period exceeding 
3 years.  After a CRA has rated 5 consecutive issues for an issuer, that issuer must then solicit any ratings for at least its 5 following issues from 
a different CRA or CRAs or if fewer than 5 issues are made, for a 
maximum period of three years.  Then, after 3 years have passed or 5 issues have been made, whichever is sooner, the issuer could solicit 
ratings from the first CRA again if desired. 
Furthermore, mandatory separation between the rating of an issuer and Amendment 
of CRA 
Regulation 
(CRA III ) 
                                                 
264  The investment portfolio size refers to professionals in all investment services and activities and 
financial instruments as defined in Annex II, Professional Clients, II.1, "the size of the client's financial 
instrument portfolio, defined as including cash deposits and financial instruments exceeds EUR 500.000", Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on 
markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 
2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ L0039, 28.04.2006.  
 
 152/193  Policy option Description Potential 
Instrument 
its products would be introduced, so that a CRA would not be able to 
simultaneously rate an issuer and its products. 
This rule should ensure that a range of CRAs are selected by an issuer to 
rate its products.  CRAs should only rate products for which it has the capacity to rate in compliance with the CRA Regulation. 
This rule would only apply to solicited ratings, as it primarily addresses 
conflicts relating to the issuer-pays model.  Unsolicited ratings could still 
be made at all times. 
6. Introduce  specific 
requirements on 
CRAs' 
independence and 
objectivity in 
relation to their 
shareholders Introduce  specific requirements on CRAs' independence and objectivity 
in relation to their shareholders. ESMA  would be required to ensure: (1) 
shareholders could not either individually or in voting blocs accrue 
potentially controlling stakes in more than one CRA, (2) that CRAs could 
not issue ratings for any firm that holds shares in that CRA, even indirectly (3) any person that directly or indirectly controls a CRA would 
not be allowed to invest in products and entities rated by the CRA and to 
provide advisory services to the entity which or whose products were rated.
265 Amendment 
of CRA 
Regulation 
(CRA III ) 
7. Strengthen rules 
on disclosure of 
rating 
methodologies Existing rules on rating methodologies would be strengthened by (1) 
extending the requirement to disclose methodologies and underlying assumptions behind ratings from structured finance products to all asset 
classes, (2) enhancing the requirement to disclose material changes in 
methodologies by additionally requiring the publication of clear 
reasoning and justification for the changes and (3) enhancing the 
requirement to disclose errors in methodologies or their application by requiring immediate disclosure directly  to the affected parties including 
investors, issuers and competent authorities. Amendment 
of CRA 
Regulation 
(CRA III ) 
8. Require CRAs to 
inform issuers 
sufficiently in 
advance of the 
publication of a 
rating Exiting disclosure requirements266 for solicited and unsolicited ratings 
would be strengthened by requiring CRAs to inform issuers for which 
they are in the process of issuing a rating sufficiently in advance of the 
publication of the rating, of the principle grounds on which the rating is based. This could include a requirement to elaborate on the main 
assumptions which justify the change of rating and would apply both to 
solicited and unsolicited ratings. Amendment 
of CRA 
Regulation 
(CRA III ) 
 
                                                 
265  This option is in line with existing compan y law and free movement of capital provisions. 
266  This option would extend the current requirement of 12 hours, provided for in Annex I D (3) which 
does not reflect the working hours av ailable to perform an assessment. 
 
 153/193  ANNEX VIII.  ANALYSIS OF THE IMPACT OF POLICY OPTIONS ON STAKEHOLDERS  
 
Policy options regarding objective 1 – reduce reliance on external ratings by enhancing 
internal risk management and promoting the use of internal rating models for regulatory 
purposes  
 
 Impact on stakeholders 
Option 1 (baseline) n.a. 
Option 2 
(Reduce reliance on 
external ratings by 
enhancing internal risk 
management and promoting the use of 
internal rating models 
for regulatory purposes) Regarding the use of internal rating models: 
(++) individual investors reassured that management of  investment risk is restoring confidence   
(-)the relevant financial companies be ar ongoing and higher compliance cost  
(+) financial institutions gain comfort that both enhan ced credit risk management systems and external credit 
ratings would mitigate exposures, but w ould need to adapt compliance systems 
(0) issuers – no obvious costs or benefits 
(++) sovereigns/taxpayers – gain comfort that financial institutions less likely to be bailed out   
(+/-) CRAs incentivised to constantly improve rating quality. However, a shift to internal rating models will 
reduce the business activity of CRAs, which may affect  the quality of the services delivered by CRAs 
(+) supervisors gain comfort that financial institutions do not mechanistically rely on external ratings, but 
need  to supervise 
 
Regarding the use of standardised approach: 
(++) individual investors obtain reassurance that risk  of "cliff" effects on financial institutions would be 
mitigated (-) financial institutions bear on-going and higher compliance costs       
(0) issuers – no obvious costs or benefits  
(++) sovereigns/taxpayers gain confidence in  sustainability of financial institutions 
(+) CRAs – the requirement for cred it institutions to compare internal ratings with external ratings may 
incentivize CRAs to constantly improve their rating methodologies 
(-) supervisors would need  to ensure in supervisory processes that rules are applied 
Option 3 
(Require credit 
institutions, investment 
firms, insurance and reinsurance 
undertakings to use 
more than one rating, if available) (0) individual investors - investors could face some additional searching cost. 
(-) financial institutions bear higher compli ance cost to search for ratings and apply 
(0) issuers - issuers will not bear additional cost as it is not an obligation to obtain 2 ratings.  
(0) sovereigns/taxpayers – will not bear additional cost as it is not an obligation to obtain 2 ratings.  
(+) CRAs would potentially increa se the rating market sizeze 
Option 4 
(Improve disclosure 
requirements for issuers 
of structured finance products on an ongoing basis) (++) individual investors and financial firms woul d benefit from increased product information  
(--) issuers face compliance costs to disclose and they may reduce the information for external credit ratings 
(++) sovereigns/taxpayers benefit from possi ble reduced capital market volatility  
(++) CRAs incentivised to improve the rating quality and to provide unsolicited ratings   
(-) supervisors would need  to ensure in supervisory processes that rules are applied 
 
Policy options regarding objective 2 – mitigate risks of contagion ef fects linked to sovereign 
debt ratings  
  
 Impact on stakeholders 
Option 1 (baseline) n.a. 
Option 2 
(Require CRAs to publish a 
full research report on sovereign debt ratings and 
allocation of staff) (++) improves transparency of sovereign debt ratings to investors including credit institutions 
(+) improves transparency on  sovereign ratings towards sovereigns (-) CRAs face opportunity costs as they could loose some revenue from selling research reports.   
Option 3 (+) improves transparency of sovereign debt ratings to investors and ensures that all market participants 
have same information on ratings of sovereigns issuers 
 
 154/193   Impact on stakeholders 
(Require CRAs to publish 
sovereign ratings after closing 
of EU trading venues; Introduce a requirement to CRAs to publish sovereign ratings after closing of EU 
trading venues) (+) ensures good communication on rating changes for sovereign issuers.  
(+) clear and transparent rules on timing of disclosures of ratings by CRAs. 
Option 4 
(Require CRAs to conduct the 
sovereign debt ratings process 
more frequently) (+) improves transparency of sovereign debt ratings to investors, ensures all market participants have up 
to date information on ratings of sovereigns issuers 
(+) Sovereigns will benefit from improve transparency to investors 
(-) CRAs would need to conduct full rating proce ss more frequently and could face therefore limited 
additional costs  
Option 5  
(Extend powers of competent 
authorities (ESMA) to 
scrutinize rating methodologies for sovereign debt ratings (and any other 
ratings with financial stability 
implications)) (+) increased power for competent authorities to scrutinize ratings 
 
(+) investors would benefit from improved quality and  scrutinized rating methodologies for sovereign 
ratings    (-) limited risks that independence of CRAs with re gard to rating methodologies  is undermined. CRAs 
would need to ensure that rating methodologi es are sufficiently justified and explained.  
 
Option 6 
(Introduce a requirement for 
(EU) sovereigns to publish a 
standardized set data on economic performance to enable credit risk assessment) (+) easy access to investors to this information to ensure they can make own assessment.  
 
(-) additional disclosure for sovereign s of already available information 
 (+) easy access for CRAs on already ava ilable information to perform ratings. 
Option 7 
(Grant ESMA the power to 
restrict or ban temporarily sovereign debt ratings in 
exceptional situations) (++) Investor, credit institutions and  sovereigns will benefit from reduced risks of further contagion 
effects in exceptional cases undermining market stability (-) Sovereigns subject to the ban could face risks that  new issuances would have limited market interest 
due to absence of a rating due to the temporarily ban. 
 
Option 8 
(Encourage an existing, 
independent EU structure or a 
brand new European Credit Rating Agency  to issue credit ratings) (+) investors benefit from improved information through an additional independent and credible source 
of credit opinions.  
(+)sovereign issuers and systemic credit institutions benefit from additional credit opinions are available 
from an credible source (-) EU structure entails risks that indepe ndence could be questioned by investors. 
(-) CRAs would be subject to more competition from a stakeholder with important reputation 
Option 9 
(Prohibit sovereign debt 
ratings) (-) lack of existing alternatives for investo rs and limited knowledge to make own assessment 
(-) some credit institutions might face difficulties to further invest in sovereign debt instruments. 
(-) some sovereigns might experience problems to fi nd sufficient investors when issuing sovereign debt 
due to lack of ratings 
(-) SMEs will need to set up their internal assessment for sovereigns 
(-) CRAs deprived from revenue source 
 
Policy options rega rding objective 3 – improve credit rating market conditions with a view to 
improve ratings quality  
 
 Impact on stakeholders 
Option 1 (baseline) n.a. 
Option 2 
 (Encourage the 
emergence of a 
network of small and medium size rating agencies) (++) investors will obtain more choice of ratings and rating agencies ensuring they can better compare credit 
opinions and make their own decisions.  
(++) issuers would have more choice for rati ng agencies which could lead to lower prices 
(-) large CRAs would become subject to  more competition in rating industry;  
 
 155/193   Impact on stakeholders 
(+) small and medium SMEs would be stimulated  to enter rating market at larger scale 
Option 3 
(Encourage the 
emergence of a new 
European rating 
agency) (+) an additional source of credible and independent credit ratings would be available to investors 
(-) new market entrants could face competition by a new EU CRA.  (+) issuers will have more choice of sizeable rating agencies. 
(-) CRAs would be subject to more competition from a new agency with considerable size   
Option 4  
(Harmonise ratings 
scales to improve comparability of 
ratings between 
CRAs) (+) improved understanding and comparison of ratings by investors  
(+) issuers might benefit from better prices due to more competition  (+) small CRAs will benefit from better visibility on ratings (-)large CRAs would face more competition due to better comparability  
 
Option 5 
(Establish a 
European Rating 
Index (EURIX)) (+) investors benefit from improved transparency on ratings  available from distinct CRAs ensuring they can better 
perform their own assessment 
(+) issuers might benefit from better prices due to more competition  (+) small CRAs will benefit from better visibility on ratings (-) large CRAs would face more competition due to better comparability   
Option 6. 
(Require CRAs to 
issue joint ratings at 
the level of the rating committee) (-) The reputational advantage of Big Three CRAs  versus smaller CRAs would decrease overtime 
(+) The reputational disadvantage  of smaller CRAs would decrease overtime  
(-) the increase of cost for i ssuers competition in the market 
(+) investors might  profit from higher rating qu ality and increased reliability of their ratings 
 
Option 7  
(Ban large CRAs 
from acquiring small and medium-sized 
CRAs) 
 (-) bigger CRAs will be in banned from acquiring/ merging with smaller CRAs 
(+) smaller CRAs would be in a better position if the fu rther expansion/ consolidation will be banned for bigger 
CRA. No substantial impact of this measure is foreseen on issuers or investors  
Option 8  
(Introduce temporary 
market share ceilings 
for CRAs) 
 (-) CRAs whose market share exceeds the thre shold will have to give up some clients). 
 (+) Smaller (or new market entrants ) CRAs  will benefit from the growth opportunities  
(-/+) issuers might face higher prices in short run.  In long-run however issuers will have more choice among 
CRA. (≈/+) during the phase-in period (first 5 years) investors will be more inclined to shop for unsolicited ratings. In 
long-run, investors will benefit fr om more choice in the market 
Option 9  
(Require CRAs to 
disclose pricing of ratings and ensure 
that prices are not 
discriminatory and based on costs ) 
 (+) issuers, investors, other purchasers of CRAs servic es will benefit for more transparency on the fees charged 
for CRAs services but also from strengthened inde pendence stemming from restrictions on CRAs' abilities to 
negotiate fees individually with each client (+) smaller/growing CRAs will benefit from  more favo urable market conditions due to price transparency and 
prohibition of price discrimination 
(-) large CRAs will face mo re competition due to increased transpare ncy and limits of price discrimination.  
 
 
    
 
 156/193  Policy options rega rding objective 4 - ensure right of redress for investors 
 
 Impact on stakeholders 
Option 1 (baseline) n.a. 
Option 2 
(Introduce civil liability 
of CRAs into EU 
legislation) (+) investors benefit from effective right of redress and from high quality ratings due to preventive effect on 
CRAs behaviour 
 (+/-) CRAs would be incentivised to produce high  quality ratings but may face restricted business 
opportunities. In addition, CRAs could face civil liability claims from investors 
(+) issuers indirectly profit from higher rating quality and increased reliability of their ratings 
(+) positive impact on right to an effective re medy and a fair trial (Art. 47 Charter) 
Option 3 
(Ensure civil liability of 
CRAs towards users of 
credit ratings before 
national courts) (+) investors benefit from effective right of redress and from high quality ratings due to preventive effect on 
CRAs behaviour  (+/-) CRAs would be incentivised to produce high  quality ratings but may face restricted business 
opportunities. In addition, CRAs would face civil liability claims from investors 
(+) issuers indirectly profit from higher rati ng quality increased reliability of their ratings 
(+) positive impact on right to an effective re medy and a fair trial (Art. 47 Charter) 
 
Policy options regarding objective 5 – Improve ratings quality by reinforcing independence of 
credit rating agencies and promoting sound credit rating processes and methodologies 
 
 Impact on stakeholders 
Option 1 
(baseline) n.a. 
Option 2 
(Require 
institutional 
investors to obtain 
their own ratings 
before they can purchase a 
particular financial 
instrument) (+/-) investors would have a greater number and variety of rati ngs at their disposal.. However, at the same time, this 
option may discourage investors from conducting their ow n due diligence. Investors  would bear most of the  
compliance costs  (-) issuers may face difficulties raising f unding (it would become more expensive) 
(+) sovereigns/taxpayers gain comfort that alternative re muneration models would bring more transparency to the 
market and would therefore contribute to  the stability of capital markets   
(+/-) CRAs gain a new investor pays rating market. Ho wever, it would reduce the issuer pays market  
(+/-) supervisors gain comfort that conflicts of interest due to the issuer pays model would be mitigated. However, 
the FSB principles may be violated as reli ance on external credit ratings would increase 
Option 3 
(Require trading 
venues to set up 
and ensure the administration of the "Trading 
venues pay" 
model) (+) investors would be assured high quality ratings free of conflicts of interest  
(--) issuers may have difficulty raising funds. They would be ar higher on-going costs. It may also reduce market 
liquidity 
(+) sovereigns/taxpayers gain comfort that the stab ility capital markets would be improved    
(-) CRAs could lose  interest in constantly reviewing and improving the quality of ratings 
(+/-) supervisors obtain full independence of credit ratings  on listed instruments, but may face further difficulty 
regulating unlisted instruments 
Option 4 
(Require CRA 
selection to be 
undertaken by an independent 
board) (+) investors would be assured ratings exposed to lower potential risk of conflicts of interest  
(0) issuers – no obvious costs or benefits 
(-) CRAs could face more difficulty in developing business as  it would not have complete control over the amount of 
business it takes on. Potential market entrants coul d face difficulties in proving accuracy and developing 
reputational capital. There could also be a reduced incen tive for CRAs to compete on the basis of rating quality and 
streamline their operational performance 
Option 5 
(Introduce rotation 
rules for the CRAs engaged by an 
issuer to rate its 
own products and to rate the issuer itself and in introduce 
mandatory 
separation between them) (++) Ratings rotation would bring more liquidity into the rating market 
(++) investors could gain further comfort that issuers are not affecting ratings and that they are issued with reduced 
conflict (+/-) issuers could be concerned that  agencies are less likely to compete on rating quality, and they could be forced 
to pay higher fees if a CRA was more certain to gain business from them 
(+) sovereigns/taxpayers could gain comfort that rating agencies could be  less subject to some conflicts of interest, 
and that sovereign ratings issued  (-) CRAs with strong reputations  and successful ratings track records could face more competition from CRAs with 
lesser reputation and track records  
(+/-) supervisors should not incur significant additional burden 
 
 157/193   Impact on stakeholders 
 
Option 6  
(Introduce specific 
requirements on CRAs independence and 
objectivity in 
relation to their shareholders) (++) investors could gain comfort that further potential conflic ts of interest would be mitigated, giving them further 
confidence in ratings without being under additional obligations themselves (-) issuers may have to ta ke further steps in identifying conflicts before approaching CRAs for ratings 
(+) sovereigns/taxpayers could gain comfort that there w ould be more transparency and a reduction in conflicts, 
leading to improve ratings 
(-) CRAs may have to take further step s in identifying conflicts before a ccepting certain issuers as clients 
 (+/-) supervisors might face resource burdens in analysing data in order to enforce thes e requirements.  They may, 
however, develop greater market oversight 
Option 7 
(Strengthen rules 
on disclosure of 
rating methodologies) 
 (++) investors could become better informed about ra ting methodologies and would gai n further understanding of 
the rating process. They could also have quicker a ccess to more detailed information on ratings 
 (++) issuers could gain greater clar ity about the methodologies and about the effect of changes to them on their 
instruments' and their own ratings (+) sovereigns/taxpayers do not appear to incur any additional  burden due to this option, sovereigns might have the 
chance to provide feedback on methodologies, and w ill also have greater clarity of the market 
(-) CRAs may have to delay updates to methodologies if oblig ed to consult.  Changes could mean greater cost of 
updated analysis and communications with stakeholders (++) supervisors do not appear to incur any additional burde ns due to these changes, but would gain comfort that 
market participants were better and more quickly informed  of developments in the market due to methodology 
changes, and could benefit from increased due diligence at  supervised firms (who may be encouraged by easier 
access to methodologies) 
Option 8 
(Require CRAs to 
inform issuers 
sufficiently in 
advance of the publication of a rating) 
 (+/-) investors could gain greater confidence on credit ratings , but the reliance on external ratings might increase  
(++) issuers could gain greater clarit y about the methodologies and they would
 have an opportunity to draw 
attention of the credit rating agency to any factual errors before the rating publication 
(++) sovereigns could gain greater clarity about the me thodologies and they would be able to check the ratings 
before the publication (-) CRAs may have to delay issuance and update of ratings. Delay could mean a risk of insider dealing and greater 
cost of analysis and communications with stakeholders (++) supervisors do not appear to incur any additional burde ns due to these changes, but would gain comfort that 
market participants would have more reliable ra tings, specifically on sovereign debt ratings 
 
 
 158/193  ANNEX IX. ENCOURAGING AN EXISTING , INDEPENDENT EU STRUCTURE OR PROMOTE A 
BRAND NEW EUROPEAN CREDIT RATING AGENCY TO ISSUE SOVEREIGN DEBT RATINGS  
Under this option an existing EU structure with  adequate resources and capacity or a brand 
new European Credit Rating Agency would issu e credit ratings for sovereign issuers to 
provide market participants with  a greater variety of opinions on credit worthiness. As regards 
the use of an existing EU Institutions, only th e option 'ECB/ESCB' is assessed since the other 
two (Commission and EFSF/ESM) would be less e fficient and effective (see analysis in 
section. 6.3).   
 
Sub-options  
 
The implications of the following range of concrete models are considered: 
  EU ratings provide by the European Cent ral Bank in cooperation with the ESCB 
  Independent EU rating agency, fully finan ced by the Union budget (see Annex XI). 
 
a) EU ratings issued by the European Central Bank 
 
Under this sub-option the European Central Bank would determine and issue independent 
credit assessments, particularly for European  sovereigns, based on information provided by 
the Member States. These assessments, includin g a detailed research report and methodology 
would be published on their resp ective websites and remain fr eely available or investors, 
following the "government pays model" and offer an alternative to existing commercial credit 
ratings. 
To establish the credit assessments of European sovereigns, the institut ion could base itself on 
already reported information provided by the ESS (European Statistical  System) coordinated 
by EUROSTAT. 
The ECB would remain free to modify these cr edit assessments at any moment in time and 
update the assessment at l east periodically (for instance twice a year). 
The staff of the service would consist of  approximately 150 up to 250 independent ECB 
Officials necessary to perf orm the ongoing credit assessment for all EU sovereigns and 
systemic credit institutions. This  would ensure that at leas t 2 experts per sovereign are 
available for small Member States and 3-5 experts are available for large sovereigns. These assumptions were made based on input receiv ed from industry experts within the rating 
market. 
Based on an annual cost of EUR 75.000 per full tim e equivalent, as this activity will require 
highly skilled economic profiles, and including overhead costs in the range of 20%-30% of 
headcount, this would result in an incrementa l annual cost of 13.5-24.4 Million to be covered 
by the EU budget.  
It should be noted that in its contribution to the public consultation, the ECB considered this 
policy measure beyond is task. Furthermore, other responses of public consultation raised concerns regarding to credibility  and independence of an public EU structures to issue credit 
ratings. 
 
 159/193  Table 1: Key elements of ratings by ECB 
 Ratings by ECB Objective Concept The ECB performs and publishes 
periodically credit ra tings of sovereigns 
(EU-Member States or EEA-Member States), on validated information provided 
by Member States Offer investors an alternative for 
private ratings for sovereign ratings which entail the largest risks of spill-over effects 
Ensure validation and 
certification of data provided by Member States 
Ensure independency of credit 
assessment 
Legal setup 
and ownership EU regulation, Union ownership  
Funding Union Budget Ensure there is only indirect 
payment by issuer through 
the Union budget 
Payment 
model Government Pays model, Free usage for all 
investors Ensure wide use and availability 
to investors 
Ensure all EU sovereigns  and 
systemic credit institutions are continuously rated 
Governance European Central bank Ensure independence from EU 
Member States and credit institutions 
Staff EU officials  
incremental 150-250 FTE to perform credit 
assessment for EU sovereigns and EU systemic credit institutions 
(Full Time Equivalents) Ensure independence from 
Member States and credit institutions rated 
Capitalise on existing expertise 
available within the ECB 
Type of 
ratings Sovereign ratings Ensure rating of entities with 
systemic and market stability implications which can be used for regulatory purpose 
Budget/costs Staff: EUR 11.2.-18.7 Million per year 
Total: 13,5 -24.4 Million per year  
 
Table 2: Detailed estimation of the costs implications under this option 
Summary   Minimum 
EUR Maximum 
EUR 
Staff in  full time equivalents (FTE)   150 250 
Staff costs per FTE           75.000                 75.000    
Total staff costs     11.250.000          18.750.000    
Overhead costs & IT   20% 30% 
Total overhead costs       2.250.000           5.625.000    
Total costs     13.500.000          24.375.000    
 
 
 160/193  ANNEX X. EUROPEAN NETWORK OF SMALL AND MEDIUM -SIZED CREDIT RATING 
AGENCIES  
The idea of a European network of small a nd medium-sized Credit Rating Agencies received 
support from many small CRAs, Member States and regulators, including the ECB during the 
recent public consultation. Consequently, the feasibil ity of this idea is further explored below. 
 
Benefits of a network/association 
Integration of small and medium-sized credit ra ting agencies into a network or association 
would offer an opportunity to improve competitiv eness of individual small and medium-sized 
credit rating agencies and allow them to expand into the rating of a wider range of entities or 
products, which in long-run would help to provi de credible European alternatives to the 
services provided by the three major credit rating agencies. 
 A network could significantly reduce the costs for individual members due to the economies 
of scale in the development of common IT sy stems and other projects, the costs of which 
would be shared among the members.  The lower barriers to access the CRA market would increase the number and quality of 
ratings. More and better ratings  would enhance investors' info rmation and thus contribute to 
financially sound decision making. 
 The small and medium-sized credit rating agencies forming such a network of agencies should remain independent legal entities and woul d be subject to the current CRA Regulation. 
EU competition rules for co-operation between  competitors should also be respected. 
 
Fields of cooperation 
CRAs could collaborate to create a common rati ng platform by sharing best practices and 
resources, building expert knowledge and en hancing the quality of ratings. A European 
network of small and medium-sized Credit Ra ting Agencies could help CRAs to e.g.: 
 
1. build up expert knowledge and capable human resources 
2. improve methodologies 
3. ensure quality of rating processes 
4. exchange data 
5. facilitate analysis of cross border companies 
6. ensure ratings comparability and consistency 
7. develop joint marketing and sales strategies 
8. disseminate rating results to wider public (joint website) 
9. develop rating indexes 
10. reinforce internal controls 
11. educate investors 
12. manage capacity problems 
13. share or develop common IT systems 
14. share legal, compliance and administrative functions 
 
The need for the pan-European financial support 
There are already some private initiatives to  create a network of European CRAs, which 
however develop quite slowly and do  not have a pan-European reach.  
To speed up the creation of a true pan-European  network of small and medium sized credit 
rating agencies it is therefore important that  adequate financial in centives are established. 
 
 
 161/193  It is essential that EU financially contributes to  the creation of such a structure to make it "up 
and running". Once the creation of a network is completed and the membership costs decrease 
substantially due to a sufficiently large number  of members, the EU fi nancial support in terms 
of co-financing the establishmen t and operations and projects of  such a network from the EU-
budget would be gradually terminated. It is sugg ested that the duration of co-financing should 
be limited in time (5 years). Afterwards, the network would become fully financed by the 
members of a network. 
 
Expected participation 
Based on the recent public consultations and discussions with stakeholders, 15 European 
CRAs may participate in such a networ k in the medium term (5 years). 
 
Expected costs of the pan-European network 
Based on calculations of exte rnal experts and depending on the level of integration, the 
indicative annual costs could fo r the establishment and operatio n of a network could be as 
shown in Table 1:  
• Annual operation cost: 0.7-1.5 million EUR   (o wn staff between 10 and 20 in 5 years, 
mostly dedicated to IT development) 
• overhead costs in the range of 20%-30% of headcount 
 
Table 1 : Detailed estimation of the costs implications under this option 
Summary   Minimum 
EUR Maximum 
EUR 
Staff in  full time equivalents (FTE)   10 20 
Staff costs per FTE            75.000              75.000    
Total staff costs     750.000          1.500.000    
Overhead costs & IT   20% 30% 
Total overhead costs       150.000             450.000   
Total costs       900.000           1.950.000    
 
 
Available means for the EU support 
 
As discussed above, to make a pan-European ne twork an attractive stru cture for a voluntary 
participation of CRAs, the initi al costs of establishment and operation of a network should be 
supported.  
 
In that respect the network could be supported making recourse to one of the two instruments 
under which the actions of the existing CIP (competitiveness and Innovation Framework Programme) will continue as from 2014 onwards
267, i.e.: 
- the common strategic framework for resear ch and innovation funding, called 'Horizon 2020"; 
- the new Competitiveness and SME programme  for the continuation of the non-innovative 
actions of the CIP mentioned above. 
The identification of the programme which woul d fit the best the f unding of the proposed 
network will be done at a late r stage when all the details of the two instruments mentioned 
will be known.   
                                                 
267   The multiannual financial framework 2014-2020 "A budget for Europe 2020" COM (2011) 500 final of 
29.6.2011. 
 
 162/193   
Compliance with EU competition rules 
Any network of small and medium -sized rating agencies would have to adhere to existing 
competition rules which apply to all companie s in the EU. Information exchange between 
competitors can -depending on the market characteristics and the characteristic of the information exchange - be in contradiction with European Competition rules
268. Any rules 
facilitating the cooperation between small and me dium size rating agencies would thus have 
to be carefully drafted to ensure compliance with existing competition rules.  
 Exchange of information linked to rating met hodologies and of statistics on aggregate and 
historical data (defaults, et c.) should normally be consider ed as consistent with EU 
competition rules, as they are unlikel y to lead to a collusive outcome. 
 
On the contrary, information ex change on CRAs individualised intentions concerning future 
conduct regarding prices and quantities (including intended future sales, market shares, territories, and sales to particular  groups of consumers) must not be facilitated as exchange of 
such information is generally considered and fined as cartels. Furt hermore, exchange of 
strategic data related to actual prices and quantities as well as other strategic information can 
have an appreciable adverse impact on one of th e parameters of competition such as price, 
output, product quality, product variety or innova tion. Such information exchange should be 
excluded.                                                  
 
268  Communication from the Commission, Guidelines on  the applicability of Article 101 of the Treaty on 
the Functionning of the European Union to horizontal co-operation agreements, OJ C11/1, 14.01.2011, para 55 – 110. 
 
 163/193  ANNEX XI. EUROPEAN CREDIT RATING AGENCY  
Overall concept of a European Rating agency 
One of the possibilities to increase the number of market participant in the rating agency 
industry is the introduction of a European rating  agency. Such a move was considered in the 
public consultation on rating agencies and the Eu ropean Parliament considered in its "own 
initiative report" that further analysis would be appropriate with rega rd to the design of a 
European rating foundation.   
Proposal of the European Parliament reg arding an independent European Credit 
Rating Foundation (ECRaF) 
 
In its own initiative report prepared by Wolf K linz, the European Parliament calls for a the 
establishment of a fully independent European Credit Rating Foundation (ECRaF)
269 which 
would expand its expertis e into all three sectors of ratings including sovereign ratings, 
corporates and structured finance product. To en sure its credibility the management, staff and 
governance structure of the new ECRaF would need to be fully autonomous  with regard to the 
Member States or any other public bodies. Furt hermore, the European parliament considered 
that after a start-up period, the ne w ECRaF should be fully self sufficient. In the report, the 
European parliament asked the Commission to conduct a detailed impact assessment and 
feasibility study on the establishment of an independent  ECRaF and to come forward with 
legislative proposals.  
Sub-options  
The implications of the following range of concre te models of European credit rating agencies 
are considered:   Independent EU rating agency, fully  financed by the Union budget  
  Foundation, with public start-up financing  
 
a) EU Public Rating Agency, financed by Union Budget 
Under this option, a new and independent EU public rating agency would be established, 
which would issue independent credit assessme nts for EU Sovereigns and systemic credit 
institutions, hereby contributing to the monito ring of market stability. These independent 
credit risk assessments would be  freely available for all investor s and could be used by credit 
institutions or insurance entities for th e purpose of determining regulatory capital. 
The agency would be headed by an independent  management board appointed for a period of 
5 years and would staffed by 250-400 EU offici als which would perform the credit risk 
assessments. This would entail [1-2] analysts  per country dedicated for sovereigns small 
sovereigns and [2-5] for large sovereigns and 1 up to 3 analysts per systemic credit 
institution.
270 
                                                 
269  European Parliament resolution of 8 June 2011 on credit rating agencies: future perspectives (Reference: 
2010/2302 (INI), Rapporteur Wolf KLINZ, ADE, DE).  
270  It is considered that the same credit institutions wh ich are subject to stress testing would obtain a credit 
assessment, which entails approximately 90 credit institutions. See communication from the European 
Banking Authority, press release 21 April 2011: www.eba.europa.eu .   
 
 164/193  Member States and systemic credit institutions  would be required to provide any relevant 
information to the agency in order to perform the credit risk assessment. It should be noted 
that the majority of the info rmation, particularly for sovere igns is already reported and 
processed by the ESS coordi nated by EUROSTAT which woul d be re-used. Furthermore, 
credit institutions would need to provide a sim ilar set of data as they  already perform today 
for the purpose of European Stress testing.  
The new EU public rating agency would entail an annual cost of EUR 24.4-39 million to be 
covered by the Union budget which includes head count base on an annual cost of EUR75.000 
per FTE and overhead costs representing 20%-30% of headcount costs as shown in table 2.  
Table 1. key element of an in dependent EU rating agency 
 EU rating service Objective Concept A new EU agency would be set up to 
perform credit ratings for EU sovereigns and systemic EU credit institutions  Offer investors an alternative for 
private ratings for asset classes with financial stability concerns 
Ensure independency of credit 
assessment 
Legal setup 
and ownership EU regulation, Union ownership  
Funding Union Budget Ensure independence  
Payment 
model Government Pays model, Free usage for all 
investors Ensure wide use and availability 
to investors 
Governance European Commission Ensure independence from EU 
Member States 
Staff EU officials  
incremental 250-400 FTE (full time 
equivalents)  Ensure independence from 
Member States rated institutions 
Type of 
ratings EU Sovereigns and sy stemic EU credit 
institutions Ensure that important  asset 
classes are rated 
Capitalise on existing 
information and expertise available at EU-level 
Budget/costs Staff: EUR 18.8-30 Million per year 
Total: EUR 22.5 -39 Million per year  
 
Table 2: Detailed estimation of co st implications of this option 
Summary   Minimum 
EUR Maximum 
EUR 
Staff in  full time equivalents (FTE)   250 400 
Staff costs per FTE           75.000                 75.000    
Total staff costs     18.750.000          30.000.000    
Overhead costs & IT   20% 30% 
Total overhead costs       3.750.000           9.000.000    
 
 165/193  Total costs     22.500.000          39.000.000    
 
b) EU Rating Foundation, start-up financed  first -5 years by the Union Budget 
Under this option, a new and independent EU pub lic rating agency would be established as a 
private foundation under national law and set up by private investors, including issuers and 
users of credit ratings. Furthermore, to ensure  the agency can establish itself it would be 
financed the first 5 years with public funding. This could be undertaken through a public grant 
or a loan. This is the main distinction with previous option. Also under this option 
government would be attributed to an independent government board.  
The independent foundation would establish cred it assessments for a wide range of asset 
classes including Sovereigns and corporations (including credit institutions) and structured 
finance products, with particularly focus of  debt instruments issued within the EU. 
Furthermore, foundation is expected to start o ff with sovereign ratings  and credit institution 
within the short term, after which it would extend its scope to other corporations and 
structured finance products.  
The foundation could operate according to the "i nvestor pays" model. In this context, 
investors would need to pay a fee if  the would want to obtain a rating. 
The foundation would consist of an independent government board and consist of a workforce 
of 400-1200 analysts to perform ratings. The workforce would evolve gradually over time in 
line with the extension of the product reach covere d, starting of with a limited staff to ensure 
that sovereigns and credit institutions can be rated, gradually extending to other corporate and 
structured finance products for which w ould require an increase of staffing 
An EU rating foundation would entail an annua l cost of EUR 39-97.5 million to be covered 
by the Union budget which includes headcount base on an annual cost of EUR 75.000 per 
FTE and overhead costs representing 20%-30% of headcount costs as shown in Table 4.  
Under this option, during the fi rst 5 years these operational costs would be borne by the  
Union budget. This financing could be provid ed through a loan pr ovided by the European 
Investment Bank. After the init ial period of 5 years, which should enable to EU rating 
foundation to establish itself on the market and reach a stable an sufficient client base, the 
loan would need to be paid back based on the by revenue linked to rating services according 
to the investors pays model.  
Table 3. Key elements of an EU Rating Founda tion, start-up financed first 5 years by the 
public sector 
 EU rating service Objective Concept A private foundation would be set up to 
perform credit ratings for a wide range of asset classes. This could include sovereigns and credit institutions, corporates and could over time cover structured finance products. 
Public sector funding necessary to finance 
start-up phase Offer investors an alternative for 
private ratings for a wide range of asset classes  
Ensure independency of credit 
assessment 
 
 166/193  Legal setup 
and ownership Private foundation with public financing 
for first 5 year. 
 Allow for fast set-up 
Ensure stable financing to 
ensure agency can establish itself on market. 
Funding Private/Public sector. Only start-up phase 
financed by public sector. Ensure independence from 
public sector while  
Payment 
model Investors pays model [alternatively the 
existing "issuer pays" model could also be applied to this types of ratings] Turn away from issuers pays 
model to avoid key conflict of interest 
Governance Private sector, maximisation of 
transparency through disclosure Prevent third-party influence, 
ensure independence  
Staff Incremental 400-1000 FTE (full time 
equivalents) to perform of a wide range of asset classes Ensure a wide range of assets 
can be covered over time 
Type of 
ratings EU Sovereigns , EU cr edit institutions, EU 
corporates and EU structured finance products  Step by step approach starting 
with sovereigns and extending to other asset classes. 
 
Budget/costs Staff: EUR 30 - 75 Million per year 
Total: EUR 39 -97.5 Million per year 
Public financing during first 5 years: EUR 
195-487.5 million depending on the number of asset classes covered.  
Table 4: estimation of annua l costs under this option. 
Summary   Minimum 
EUR Maximum 
EUR 
Staff in  full time equivalents (FTE)   400 1000 
Staff costs per FTE           75.000                 75.000    
Total staff costs     30.000.000          75.000.000    
Overhead costs & IT   20% 30% 
Total overhead costs       9.000.000          22.500.000    
Total costs     39.000.000          97.500.000    
The public consultation outline strong opposition from  a large majority of stakeholders with 
regard to a public European rating agency. The main concerns expressed regard the credibility 
and independence of a public agency. Furthermore, the costs in relation to such an initiative as 
as describe above cannot  be underestimated.  
 
 167/193  ANNEX XII.  ASSESSMENT OF ADMINISTRATIVE BURDEN AND COMPLIANCE COSTS  
 
This annex provides an assessment of complia nce costs, including administrative burdens, 
resulting from individual policy options. They are grouped in five categories according to 
specific objectives (see section V). 
1 – Policy options to reduce overreliance on ratings 
Introduction 
This chapter identifies policy options that aim to reduce market overreliance on CRAs. The 
measures will impact the compliance costs and administrative burdens of CRAs, regulators or 
other stakeholders. In 2009 there were 25 CRAs271 established in 44 locat ions (see Annex IV.). 
Option 1 – No policy change 
Under this option existing rules and corres ponding administrative burdens or compliance 
costs remain equal. 
Option 2 – Reduce reliance on external ratings by enhancing internal risk management and 
promoting the use of internal ra ting models for regulatory purposes  
The requirement to strengthen their internal risk management requirement would ensure that 
financial firms (credit institutions, investment firms, insurance and reinsurance undertakings, 
pension funds, UCITS managers and in the futu re alternative investme nt fund managers) to 
assess the credit/market risk by them selves, using their own methodology.  
However, the requirement to strengthen intern al risk management could lead to some 
compliance costs. This measure would apply to  all types of financial firms including credit 
institutions, insurance an d re-insurance undertakings and investment firms.  
As this measure does not entail any re porting requirement it would not entail any 
administrative burden. However, to conduct own internal risk managements, entities which 
currently do not provide for such function would need to set this up in  their organisation. For 
others which already perform internal risk  management this would require only limited 
additional efforts or would remain business ass usual.  
Currently, while there is limited information on wh ich institutions already perform such a risk 
management, it can be assumed that the majority of institutions alread y apply internal risk 
management to some extent. However, for those institutions which do not have such a 
function in place, the additional effort would be proportionate to the risks to which they are 
exposed. Some other would need to enhance th eir efforts to perform the internal risk 
assessment. 
In respect to the use of internal rating models for the calculation of regulatory capital 
requirements , a distinction is made between (A) fina ncial firms with material and complex 
risk exposures which would be required to use internal models for the calculation of 
regulatory capital, and (B) financial firms wh ich will be allowed to continue to use the 
"standardised approach" based on external rating s which would need to complement this with 
assessment of the inherent credit risk of an e xposure and where appropriat e reflect this in the 
capital requirement.  
                                                 
271  Impact Assessment Accompanying document to the Proposal for a Regulation of the European 
Parliament and of the Council amending Regulation (EC) No 1060/2009 on credit rating agencies COM(2010) 289 final, dated 2.6.2010. 
 
 168/193  A. Financial firms with material and complex272 credit risk exposure would be required to 
develop and use internal rating models rather th an using the standard approach, which relies 
on external ratings.  
In this context, the key variable to identify compliance costs relates to the identification of 
material and complex credit risk exposures whic h would be defined on th e basis of specific 
technical guidelines. Such an as sessment would be attributed to the supervisory authorities 
such as the European Banking Authority (EBA ). This assessment would be subject to a 
specific cost-benefit analysis.  
As the material and complex credit risk ex posures has not yet been determined by the 
regulatory authorities through a technical standard the number  of the amount of financial 
firms which would be subject to this requirement is currently un certain. As a result, a detailed 
assessment of the compliance costs of admini strative burdens would be premature.  
As a preliminary qualitative assessment, one could consider that for those institutions 
impacted by this new rule, the additional effort would most likely be pro portionate to the risks 
to which they are exposed. For those institutions which currently rely solely on ratings, they 
would need to design internal rating models. For some institutions, this could require to set up 
a new risk management department to determine these models and apply them for their risk 
exposures. For these institutions, the add itional workload would be material. Other 
institutions which already toda y perform partly or fully such  assessments, would be only 
minor affected. A more detailed assessment would need to be conducted by EBA to design 
the detailed technical standard.  
B. Those financial firms allowed to use the "s tandardised approach" based on external ratings 
for calculating their regulatory capital requirements would need to assess if  the inherent credit 
risk of an exposure is significantly higher than the one that co rresponds to the capital 
requirement assigned under the "standard approa ch" based on external ratings (or the absence 
thereof). They would be required to reflect if there would be a higher de gree of credit risk in 
their evaluation of their overall capital adequacy . This requirement could lead to some further 
compliance costs for institutions which curren tly do not assess the credit risk of their 
exposures.  
• For large financial institutions, it can be assume they perform such an assessment and 
therefore can be considered business as usual.  It can be assumed that these entities would 
have the most material part of exposures.  
• For smaller financial firms which do not necessa ry assess the credit risk of an exposure 
would most likely need to in troduce this activity. The magnit ude of the cost related to 
introducing this activity would mo st likely be proportionate to  the size and magnitude of 
the risk exposures themselves. Small firms with extensive exposures would most likely 
face material compliance costs proportionate to the risk of this activity. This could include 
setting up an internal servic e to perform such an activity. Small financial firms without 
material credit exposures would face limited compliance costs or no costs at all.  
As there is a lack of date on risk exposur es which would be covered under this option, a 
quantitative assessment remains beyond the scope of this analysis.  
Option 3 - Require credit institutions, inves tment firms, insurance and reinsurance 
undertakings to use more than one rating (if available) 
                                                 
272  A good proxy for large or complex exposures is ex posures of "large or sophisticated institutions" for a 
sectoral legislation where entities are mainly exposed  to credit risk (e.g. banking sector). This would 
also allow applying the proportionality principle in sectors where credit risk is usually not the 
predominant risk of large or sophisticated entities (e .g. insurers). Finally, this would also capture the 
pending developments on complex exposures such as securitisation that are being discussed in Basel. 
 
 169/193  This option would require credit institutions, i nvestment firms, insurance and reinsurance 
undertakings to use at least two credit ratings  issued by different CRAs, where available. 
These ratings would be required to be used for the calculati on of capital requirements under 
the standardized approach. 
As this option would require financial firm s using the standardized approach for the 
calculation of capital requirements to identify if there is more then one  rating available when 
calculating capital requirements.  
This option is not expected to generate any additional administrative burden as this does not 
entail any new reporting require ments for parties involved. This option could however result 
in some very limited compliance cost to check av ailability and use of al ternative ratings when 
available. 
As ratings are published by CRAs under the issuer s pays model, and are therefore mainly free 
of charge available to issuers this option are lim ited to additional searching cost to identify if 
there are more then one rating available. Furt hermore, financial firms might be required to 
adapt their process for calculati ng capital requirements to take into account a second rating. 
As search costs are limited a nd ratings freely available compliance costs are considered not 
material.   
Overall, there are 8,094 relevant financial institutions in total of which 6,458 Credit 
institutions and 1,636 insurance companies. Thos e institutions using "standardised approach" 
based on external ratings would need to research  2 ratings instead of 1 rating to determining 
their capital requirements. However as explaine d above, it can be assumed this is not a time-
consuming change in the process of determin ing capital requirements under the "standardized 
approach".  
Option 4 – Improve disclosure requirements fo r issuers of structured  finance products on an 
ongoing basis 
Under this option, all issuers of structured finance products  would be required on an ongoing 
basis to disclose main elements of underlyi ng asset pools for structured finance products 
necessary for investors to make their own credit assessment a nd not rely on external ratings. 
Issuers could disclose this in formation by means of a website. 
Compliance cost and administrative burden: This option would entail some compliance cost to  set up a system to disclose information and 
an ongoing cost to update information periodical ly. It can be plausibly assumed that the 
information on structured finance products that need s to be disclosed is av ailable at the issuer 
to some extent, particularly as this information is communicated to CRAs for obtaining a credit rating.  
To set up a system to comply with disclosure requirements to issuers of a structured finance 
instruments or their related third parties would face a one-o ff cost. These costs would be 
related to the information disclosure and consist of a one-off investment in information 
systems (website) development and compliance pr ocedures. In order to quantify the one-off 
costs for the relevant structured finance issuers, we made the following assumptions: 
(1) According to our estimates there are approximately 125 EU-wide issuers 
273 of 
structured finance instrument s and related third parties. 
                                                 
273  Extraction made from Securitisation data on all s ecurities issued worldwide backed by EU collateral for 
the year 2010, Association for Financial Market in  Europe (AFME), Securities Industry and Financial 
Market Association (SIFMA) and Euro pean Securitisation Forum (ESF). 
 
 170/193  (2) The Commission Services estimated that it would take an issuer approximately 300 
hours274 to develop a website, as well as proced ures to disclose the information This 
would result in a total one-off hour burden of 37,500 hours for 125 EU-wide issuers. 
(3) The average hourly cost for a Compliance Ma nager is 53€ and the average hourly cost 
for a Programmer Analyst is 40€. Therefore, the average one-time co st to an issuer 
would be (150 hours × 53€) + (150 hours × 40€) = € 13,950. 
For these reasons, the Commission estimated th at the average one-off administrative burden 
to each issuer would be € 13,950 and the total aggregate one-o ff administrative burden to the 
industry would be € 1.7 million (13,950€ x 125 issuers). 
The main part of the on-going co sts would be related to the issuer's or related third party's 
obligations to place on a website all the informa tion on an on-going basis that is necessary for 
investors to make their own credit assessment. In order to quantify the on-going costs for the 
relevant structured finance issuers,  we made the following assumptions: 
(1) Based on the data275 used by the US Securities and Exchange Commission (SEC) 
which proposed a similar measure (SEC ru le 17g-5), the Commission estimated that 
each issuer or its related third party woul d on average disclose information with 
respect to approximately 125 transactions  on an on-going basis and that the 
information would have to be updated on a m onthly basis to allow investors to make 
and monitor their own credit assessment. 
(2) The Commission Services estimated an av erage of 125 on-going transactions each 
month and 30 minutes spent on the monthly di sclosure for each transaction, that each 
issuer would spend approximately 750 hour s [125 transactions × 30 minutes × 12 
months = 45,000 minutes/60 minutes = 750 hour s] on an annual basis disclosing 
information consistent with the representati ons to be made for a total aggregate annual 
burden of 93,750 hours [750 x 125 issuers = 93,750]. 
(3) The average hourly cost for a Webmaster is 20€. Therefore, the average annual cost to 
an issuer would be 750 hours × 20€ = 15,000€. 
The Commission Services estimated that the av erage annual administrative burden to an 
issuer would be 15,000€ and the total administrative burden to the industry would be € 1.9 million (15,000€ x 125 issuers). 
 
2 – Policy options to mitigate the risks of co ntagion effects from sovereign debt ratings 
Option 1 - No policy change 
Under this option existing rules and corres ponding administrative burdens or compliance 
costs would remain the same. 
Option 2 - Require CRAs to publish a full re search report on sovereign debt ratings and 
allocation of staff 
                                                 
274  Based on the data used by the US Securities and Exchange Commission (SEC) when they proposed a 
similar measure under the US rule 17g-5, we estimated that it would take an issuer or related third party 
approximately 300 hours to develop an information sy stem (website), as well as policies and procedures 
to disclose the information. It is estimated that this would entail 150 hours for a Compliance Manager 
and 150 hours for a Programmer Analyst. 
275  Federal Register N°74, Securities and Exchange Commission, 17 CFR Parts 240, 243 and 249b 
Amendments to Rules for Nationally Recognized St atistical Rating Organisations; Proposed Rules for 
Nationally Recognized Statistical Rating Organisations; Final Rule and Proposed Rule, 12/2009. Available from: http://www.sec.gov/rules/final/2009/34-61050fr.pdf
.  
 
 171/193  CRAs already today design a full re search report which is made available to subscribers of 
this information in combination with other re search data provide by CRAs. Making this report 
available to all stakeholders would lead to  negligible administrative burden of €13,000 (€520 
per CRA): 8 hours x €65 hourly rate x 25 rating agencies.  
Due to making these report public CRAs will lose income from the sale of these reports to 
subscribers. The following assumptions are made: 
• 6 CRAs currently provide sovereign debt  ratings: 3 CRAs provide ratings for 
approximately 120 countries; 3 CRAs provide ratings for approximately 40 countries; 
• The sales price of a full research report on sovereign debt ratings is estimated at 1,500 
US$ per report (1 US$ = 0.723 EUR: €1,085); 
• For each CRA only a limited number of reports  per country are sold separately each 
year. This is assumed to be an  average of 10 reports per year. 
Based on the above mentioned assumptions, this option could lead to a loss of income for 
CRAs estimated at €5,208,000 per year. This  is €868,000 per CRA (3 large CRAs x 120 
Sovereigns rated x 10 reports/sovereign x €1,085;  3 small CRAs x 40 Sovereigns rated x 10 
reports/sovereign x €1,085). 
Option 3 - Require CRAs to publish sovereign ra tings after closing of EU trading venues 
This option would not increase ad ministrative burden or othe r compliance costs as only the 
timing of publication is modified.  
Option 4 - Require CRAs to conduct the soverei gn debt ratings process more frequently 
This option would lead to additional compliance costs for the CRAs. Reducing the time 
period for regular review of a rating (whether sovereign or not ) means that the CRA has to 
undertake the full review proce ss in order to determine rati ngs based according to the 
methodologies and the quality expected. In order to quantify the substantive costs for relevant 
CRAs the following assumptions can be made:  
• The CRAs time spent on each re view will stay the same. The extra workload to 
perform the full rating process is estimated at  100 hours. This includes:  analysis (40 hours), 
committee meeting, including preparation by comm ittee members (40 hours); preparation of 
the new rating for publication (20 hours). 
• There will be one additional full rating process per year. 
• The hourly rate of employee of a CRA is estimated at €65. 
• The amount of analytical work required is not determined by the size of the country 
being analysed. 
• There are 6 CRAs providing sovereign debt ra tings: 3 larger CRAs provide ratings for 
approximately 120 countries; 3 smaller CRAs provi de ratings for approximately 40 countries. 
Based on the above mentioned assumptions, the substantive additional compliance costs for 6 
CRAs arising out of this option are estima ted at €3,120,000 per year  (3 large CRAs x 120 
sovereign ratings x 100 hours/rating x €65 hourly rate= €2,340,000; 3 small CRAs x 40 
sovereign ratings x 100 hours/rati ng x €65 hourly rate = €780,000)   
The substantive costs per entity are estimat ed at €780,000 per year for large CRAs, and 
€260,000 per year for smaller CRAs. 
Option 5 - Extend powers of competent authoritie s (ESMA) to scrutinize rating methodologies 
 
 172/193  As rating methodologies are not frequently re vised, compliances costs for this option are 
difficult to estimate. For the purpose of this impact assessment costs, following assumptions 
were made: 
• On average rating methodology changes once every 2 years for CRAs. Designing and 
updating rating methodologies is a business as usual cost for rating agencies. 
• Additional costs to verify rating methodol ogy would require 50 wo rking hours per CRA 
per year 
• 25 CRAs could be affected by methodological changes, which would be checked once 
every year. 
• Revision by ESMA would entail a workload of 1 full time equivalent per year for all rating 
agencies which is equivalent to 220 working hours 
This option would not increase administrativ e burdens. Compliance costs are estimated at 
€150,550. Verification cost for CRAs would amount to €81,250 (25 rating agencies x 50 
working hours x €65 hourly cost; verification co sts incurred by ESMA are estimated at 
€69m300 (220 working days x 7 hours x €45 hourly cost). 
Option 6 - Require (EU) sovereigns to pub lish a standardized data set on economic 
performance to improve credit risk assessment 
This option would not lead to administrative burden for enterprises. However it would entail 
compliance costs for sovereigns to repub lish this already available information. 
Following assumptions can be made to de termine compliance costs for sovereigns: 
• All EU sovereigns would be s ubject to this requirement. 
• The information to be published is  currently available by sovereigns. 
• The information would be published on an  existing website of the sovereign. 
• Hourly rate is assumed to be €45.  
• It is assumed that this publication woul d be quarterly and entail 20 working hours. 
The compliance cost for sovereign issuers w ould amount to €108,000 per year (30 Sovereigns 
(European Economic Area EEA) x 4 times per year x 20 working hours x €45 hourly rate). 
Option 7 - Grant ESMA the power to restrict or ban temporarily sovereign debt ratings in 
situations defined by the Regulation 
This option could give the ESMA the power to temporarily restrict or ban sovereign debt 
ratings in certain exceptional situations wh ere there exist risks of financial stability. 
Exercising this power would lead to compliance costs, but since an ac tion to ban ratings is 
expected to be rare; the related co mpliance costs are estimated nil.  
Option 8 - Encourage an existing, independent EU structure or a brand new European Credit 
Rating Agency to issue credit ratings 
This option would involve substantial complian ce costs in adapting an existing EU structure 
suitable for issuing credit ratings. This would include compliance costs to set up, develop and 
maintain rating issuance by th is EU structure. These annual costs are estimated at 
€13,500,000 to 24,300,000 (equivalent to the staff le vel; see Annex IX for more detailed 
analysis). 
Option 9 - Prohibit sovereign debt ratings 
 
 173/193  This option would prohibit sovere ign debt ratings and would requi re issuers and investors to 
develop and use their internal models to assess  credit risks. This approach would entail 
significant costs. Since the opti on is clearly not seen as cost-effective, the more précised 
calculations are not made. However, roughly one c ould estimate that for issuers and investors, 
the costs should be similar to ones estimated under option 3.  
3 – Policy options to improve credit rating market conditions 
Option 1 - No policy change 
Under this option existing rules and corres ponding administrative burdens or compliance 
costs would remain the same. The CRAs will c ontinue to reach abnormal profit margins, 
which between 2008 and 2010 stayed within a range of 33% - 46% (see annex IV).  
If effective, policy measure to increase comp etition could achieve significant savings for 
stakeholders, primarily issuers. On the assumption that improved competition reduces 
operating profit margins of biggest 3 CRAs to  30% and on the basis of 2008 – 2010 operating 
profit margins and revenues presented in annex IV, this would lead to annual savings of 
almost $489 million (€340 million) to business a nd investors. Assuming that 30% of revenues 
come from Europe and that the profits ar e distributed proportiona lly across the regions, 
increased competition would lead to €102 million in  annual savings to European stakeholders. 
Whereas if more competitive environment would lead to a decrease in the biggest 3 operating 
profit margins to 20%, this would end up ceteris paribus with 173€ million in annual savings 
to European businesses and investors . 
Option 2 - Encourage the emergence of a networ k of small and medium sized rating agencies 
This option is not expected to generate any reporting requirements and consequently, does not 
generate any additional admini strative burden. However, the creation of a network of SME 
rating agencies will create othe r substantial compliance costs.  
Based on the recent public consultations and discussions with stakeholders, 15 European 
CRAs may participate in such a networ k in the medium term (5 years).  
Based on calculations of exte rnal experts and depending on the level of integration, the 
indicative costs could for the establishmen t and operation of a network could be the 
following:  
• One time investment cost: €3-5 million (mostly in IT to develop a database of best 
practices and underlying data to  perform credit ratings; website) 
• Annual operation cost: €1-3 million (own staff up to 30 in 5 years) 
• (optional) annual training cost (analy sts, advisors, investors): €3-5 million 
The compliance costs are expected to be substa ntial and estimated to be in range between €3 
to 5 million as an initial setup costs and between €800,000 to 1,600,000 as annual recurring 
costs. No significant administrative costs are foreseen. 
Option 3 - Encourage the emergence of a new European rating agency 
The costs necessary to set up and maintain such an agency are substantial. These costs amount 
to €300-500 million over a period of 5 years. This estimation is based on a staff level of 350 
up to 1000 to develop and issue ratings depe nding on the number of asset classes to be 
covered by the agency. Depending on the financing model, these costs would need to be born 
fully or partly by the pr ivate sector or subject to a loan or financing by the public sector 
during the start-up phase during the first 3 up to 5 years (s ee annex X for more detailed 
analysis of costs). 
Option 4 - Harmonise ratings scales to impr ove comparability of ratings between CRAs 
 
 174/193  Harmonisation of the rating scales would imply compliance costs, since rating agencies would 
need to determine a mapping between the ex isting rating scales an d the new harmonised 
scales. Also users of ratings, including i ssuers and investors could face some limited 
compliance cost to adapt to the new harmonised scales (e.g. the costs of changing IT systems). 
In order to quantify the compliance co sts the following assumptions are made: 
• There will be mainly one-off costs; 
• The standardisation is with respect to ma in rating scales used  for sovereign debt 
ratings, corporate ratings and stru ctured finance products ratings 
• The common standard(s) to be used shal l be determined by a technical standard 
established by the European Commission or  by the European Securities and Markets 
Authority (ESMA), rather than CRAs. 
• The costs would include traini ng of staff concerning the ne w ratings, informing clients 
about the new system, validation of the s cale with the competent authority (ESMA). 
• It is estimated that 25 different CRAs would need to adapt rating scales.  
• The hourly tariff of employees is set to € 65 
• It is estimated that the 3 main large ra ting agencies have around 1,200 employees. All 
the other rating agencies together have 500 employees. 70% of employees would require 
training. Therefore, 2.870 analysts have to fo llow a training of 2 hours to understand new 
rating scales. 
• Each rating agency would spend € 25,000 to inform their clients. 
Compliance cost to design and implement rating scales are estimated at €1,079,350, of which 
adaptation costs €81,250 (25 agencies x 50 hours to adapt scales x €65 per hour), education & training €373,100 (2,870 analysts to be traine d x 2 hours x €65 per hour), information of 
investors & issuers on the website, which is  considered administrative burden €625,000 (25 
CRAs x €25,000 information cost).  
Option 5 - Establish a European Rating Index (EURIX) 
This option would lead to administrative burden as all rating agencies would be required to 
report any change of rating to ESMA. The creation of a European Rating Index (EURIX) would incur the following substantial compliance costs:  
• a database of ratings and th eir publication on a dedica ted website. Setting up such a 
database and website is expected to cost  €300,000 and entail an annual maintenance costs 
of €75,000 (which entail the cost of one full tim e equivalent to monitor the database and 
website). The EURIX could be an extension of the central repository provided for in article 
11.2 of the CRA regulation. Theref ore, such a cost could be covered by the existing ESMA 
budget which provides for IT investments; 
• Updating of data into the database would be directly performed by rating agencies. Daily 
update of ratings by rating agencies would re quire one hour of work per CRA. This would 
amount to the total cost of €357,500 (25 rati ng agencies x 220 working days x 1 hour x 
hourly cost of €65). 
Option 6 - Require CRAs to issue joint ratings at the level of the rating committee  
Under this option, small and larger CRAs would be required to work together in order to issue 
a joint credit rating.  
 
 175/193  The compliance costs in issuing credit rating jo intly by two credit rating agencies could 
roughly amount to 10% of overall costs incurred in issui ng credit ratings.276 There will be no 
additional administrative burdens from this requirement. 
Option 7 - Ban large CRAs from ac quiring small and medium-sized CRAs 
Under this option, the larger CRA s would not be allowed to ac quire small and medium-sized 
CRAs. This option will not lead to administra tive burden as it will not entail any additional 
reporting obligations.  
Option 8 - Introduce temporary market share ceilings for CRAs  
Under this option, the larger CRAs would introdu ce market ceilings for CRA s. To ensure that 
ESMA can verify compliance with this opti on, CRAs would be require d to periodically, once 
a year) to provide information on market vo lume and fees to ESMA in their annual 
transparency report. Based on this, ESMA c ould evaluate market share and evaluate 
implementation of this option. 
Based on the above information, th e annual administrative burden resulting from this option is 
estimated at €13,000 (8 hours x €65 hourly rate  x 25 rating agencies) and an annual 
compliance cost of €4,500 incurred by ESMA (4 hours x €45 hourly rate x 25 rating agencies). 
Option 9 - Require CRAs to di sclose pricing of ratings and ensure that prices are not 
discriminatory and based on costs  
Since CRAs possess information on the pricing a nd the actual fees received from individual 
clients, this option would not require CRAs to undertake admini strative activitie s other than 
providing detailed information on fees to ES MA and publishing the summary in aggregated 
format information on fees and actual pricing on the CRA's website, which should not exceed 
16 man-hours /year /CRA. The hourly tariff of employees is set to € 65. It is e xpected that 
there should be no more  than 25 CRAs concerned. 
Based on the above information, the total co st of administrative burden for CRAs from 
disclosure of fees is estimated at €26,000 pe r year (16 working hours x  €65 hourly rate x 25 
rating agencies). 
 
4 – Policy options to ensure the right of redress of investors 
The proposed options on civil liability of CRA s do not place any furt her burden on CRAs or 
market participants in terms of administra tive costs or burden. However, the increased 
opportunities for investors to recover their losses from CRAs will result in increased costs for 
CRAs. To continue as a going concern, CRAs would need to insure their civil liability or, in 
the absence of the insurability, to create a fi nancial buffer to cover potential claims from 
investors. The exact impact on the costs is difficu lt to quantify, but are likel y to be significant.  
 
5 – Policy options to reinforce independen ce of credit rating agencies and improve 
ratings quality 
Option 1 – No policy change 
Under this option existing rules and corres ponding administrative burdens or compliance 
costs remain the same.                                                 
 
276  The analogy has been made with joint audits as required in France.  
 
 176/193  Option 2 – Require institutional investors to obtain their own ratings before they can 
purchase a particular financial instrument 
Under this option, an issuer would remain fr ee to hire a CRA of its own choice, but each 
institutional investor would be required to obt ain its own independent rating before investing 
in a particular structured fina nce product for amounts above certa in thresholds (e.g. for clients 
who may be treated as profe ssionals and where the investment portfolio exceeds EUR 
500,000277). 
In order to quantify the compliance costs for the relevant financial institutions for this option, 
we made the following assumptions: 
• The Commission Services estimates that  there should be approximately 973 new 
structured finance deals per year278 in the EU market. 
• We assumed that all investments in new stru ctured finance deals in the EU would be 
made exclusively by institutional investors. 
•  We assumed that an average rating pric e for structured finance instrument is € 
200,000.   
• There is no business as usual costs. 
Based on the above assumptions, the compliance costs for this option are estimated at € 
194,600,000 per year (973 x 200,000). None of this is to  be considered as "business as usual 
costs". 
Option 3 – Require trading venues to set up and ensure the administration of the "Trading 
venues pay" model 
Under this option, trading venues would be requir ed to ensure and organise for the rating of 
their listed / traded companies / instruments. In the case of non-listed companies / instruments 
the "subscriber / investor pays" model could apply. The platform would be required to 
organise the rating of the pool of  loans by one of CRAs. CRA to rate an instrument would be 
selected on the basis of objective criteria. 
In order to quantify the compliance costs for th e relevant stakeholders for this option, we 
made the following assumptions: 
• We assume that under "trading venues pay"  model the credit rating price would 
decrease by 5%. 
• Turnover of the big 3 CRAs is $5.3 bil lion (around €3.8 billion). Smaller rating 
agencies together have an estimated tur nover of €500 million. Total turnover would be around 
€ 4.3 billion.  
• The total turnover should be adjusted because:  
                                                 
277  The investment portfolio size refers to professionals in all investment services and activities and 
financial instruments as defined in Annex II, Professional Clients, II.1, "the size of the client's financial 
instrument portfolio, defined as including cash deposits and financial instruments exceeds EUR 500.000", Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on 
markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 
2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ L0039, 28.04.2006.  
278  Commission Services estimated 973 new structured finance deals per year in the EU market. Extraction 
made from Securitisation Data Base on all securities issued worldwide backed by EU collateral for the year 2010, Association for Financial Market in Europe (AFME), Securities Industry and Financial 
Market Association (SIFMA) and Euro pean Securitisation Forum (ESF). 
 
 177/193  o the EU-turnover in the total turnover is  estimated at 25% (€ 4.3 billion x 25% 
= € 1.075 billion). 
o the part of the total ratings admitted by trading venues is estimated at one-third 
(€ 1.075 billion x 1/3 = € 358 million). 
• We assumed that one extra annual report pe r trading venue is necessary and also 
trading venues have to interact with CRAs. Th is is estimated at one employee's time for one 
year (1,800 hours) per trading venue. The hour ly tariff of employees is set to € 45. 
• The total number of trading venues is estim ated of 219 (92 Regulated Markets and 127 
MTFs).  
On one hand, based on the above assumptions the co sts of ratings via trading venues are lower. 
The reduction is estimated at €17,916,667 (€358 milli on x 5%). This is a loss of income for 
CRAs. On the other hand, there are extra costs because of one employee's work per year per 
trading venue € 17,739,000 (1,800 hours x € 45 x 219).  
Option 4 – Require CRA selection to be  undertaken by an independent board 
In order to quantify the administrative costs fo r the relevant CRAs for this option, we made 
the following assumptions: 
• The Commission Services estimated that  there are approxim ately 125 EU-wide 
issuers there should be approximately 973 new structured finance deals per year.279 
• Currently CRAs total turnover would be of around € 4.3 billion and the EU-
turnover in the total turnover is estimated 25% of total. 
• CRAs earn on average 30% of their revenue  from structured finance ratings.  
• We assume that this policy option could lead to an average decrease of credit 
rating price by 5%. A potential economy w ould be of € 16.1 million (€ 4.3 billion x 
25% x 30% x 5%). 
• We assumed an annual budget of an i ndependent "Credit Rating Agencies 
Board" to ensure its proper functioning could be financed by fees resulting from credit 
rating price decrease, as mentioned above.  
Option 5 - Introduce rotation rules for the C RAs engaged by an issuer to rate its own 
products and to rate the issuer itself and introduce mandatory separation between them 
Under this option, the requirements would be: 
• It is applicable only to solicited ratings;  
• Issuer's own credit worthiness should not  be rated by the same CRA for more 
than 3 consecutive years; 
• Another CRA should take over thereafte r and the outgoing CRA and the issuer 
should make available all information accessed in the rating process, and hand over 
appropriately to the incoming CRA to enab le it to perform ratings effectively; 
• A CRA shall not rate more than 5 cons ecutive issues of any asset class by the 
same issuer. After a CRA has rated 5 consecutiv e issues for an issuer, that issuer must 
solicit any ratings for at least its 5 followi ng issues from a diff erent CRA or CRAs; 
                                                 
279  See policy options to reduce overreliance on external credit ratings. 
 
 178/193  • If fewer than 5 issues are made, a CRA shall not rate the issues of one issuer 
over a period exceeding 3 years. After 3 years have passed or 5 issues have been made, 
whichever is sooner, the issuer can solic it ratings from the first CRA again; 
• A CRA shall not simultaneously rate  an issuer and its products; 
• CRAs should only rate products for which it has the capac ity to rate in 
compliance with the CRA Regulation; 
• All solicited ratings and all assets cl asses (corporates, structured finance 
instruments and sovereigns) will be concerne d. The rated entities and the issuers of 
finance instruments would be required to co mply with the rotation rules and ensure the 
monitoring and reporting. 
In order to quantify the administrative costs for the relevant stakeholders for this option, we 
made the following assumptions: 
• We assume that rating administration for all entities or products rated by 
solicited CRAs are bus iness as usual. 
• We also assume that reporting administ rative burden for the industry to the 
regulators/national competent authorities would be entirely compensated by a lower 
price of competing CRA.  
• We assume that the regulators/national competent authorities will be required 
to disclose quarterly compliance reportin g to ESMA. We estimate that reporting 
disclosure information will take 2 hours. 
• In order to calculate the administra tive burden, we use the hourly wages280 of 
managers in EU Member States (see table below). 
Estimates for reporting to ESMA on-going costs: 
                                                 
280  The hourly wages are based on standardised ESTAT data (the four-yearly labour cost survey and the 
annual updates of labour costs (ALC) statistics), reflecting 2006 figures. They already contain the standard 25% overhead costs, as required by the Standard Cost Model for administrative burden 
measurement. 
 
 179/193  Member State Hourly wage of 
mana gersReporting disclosure 
cost/ year
(1) (2)=(1)*2*4
Austria 51,53 412
Belgium 50,63 405Bulgaria 3,3 26
Cyprus 31,64 253
Czech Republic 11,52 92Denmark 51,99 416Estonia 8,1 65Finland 44,75 358France 51,14 409Germany 46,4 371Greece 26,98 216Hungary 11,66 93Ireland 49,56 396Italy 61,5 492
Latvia 5,86 47
Lithuania 7,38 59Luxembourg 56,63 453Malta 16,67 133Netherlands 36,88 295Poland 13,02 104Portugal 31 248Romania 9,73 78Slovakia 7,83 63Slovenia 18,34 147Spain 37,11 297
Sweden 50,8 406
United Kingdom 52,81 422
TOTAL 6.758
 
Based on the above mentioned assumptions, the on-going costs from this option are estimated 
at € 6,758 per year. 
Option 6 – Introduce specific requirements on C RAs' independence and objectivity in relation 
to their shareholders 
Introduce specific requirements on CRAs indepe ndence and objectivity related to their 
shareholders. Under this option,  ESMA would be requ ired to ensure th at CRAs cannot issue 
ratings for any firm that holds shares in that CRA, even indirectly281; and that a firm that has a 
shareholding in a CRA should not be allowe d to invest in produc ts rated by this CRA.282 
This option will incur only administrative burdens  to CRAs in the provision of information to 
ESMA. In order to quantify the administrative  costs for the CRAs for this option, we made 
the following assumptions: 
• The Commission services estimates that there are 25 registered CRAs in the EU. 
• We assumed that CRA will be requested to fill an annual complia nce report to ESMA 
related to their shareholders an d at any time to inform ESMA when a substantial change was 
incurred under this option.  
                                                 
281  The CRA Regulation alread y includes a specific provision (see Sect ion B, 3.b) related to the operational 
requirements under which a CRA is prohibited from issuing ratings in certain circumstances. However, 
the provision does not contain a specific reference to shareholders and no clear definition of "control". 
282  This option is in line with existing compan y law and free movement of capital provisions. 
 
 180/193  • The Commission services estimated that th e preparation of annual compliance report 
would take approximately 4 hours.  
• The hourly tariff of employees is set to € 65. 
Based on the above mentioned assumptions, the costs from this option are estimated at €  
6,500 (25 CRAs x 4 hours x € 65)  per year. 
Option 7 - Strengthen rules on disc losure of rating methodologies  
Under this option the existing rules on rating methodologies will be strengthened by (1) 
extending the requirement to disclose met hodologies and underlying assumptions behind 
ratings from structured finance products to all asset classes, (2) enhancing the requirement to 
disclose material changes in methodologies by additionally requiring the publication of clear 
reasoning and justification for the changes and (3) enhancing the requirement to disclose 
errors in methodologies or their application by requiring immediat e disclosure directly to the 
affected parties including investors,  issuers and competent authorities. 
In order to quantify the administrative costs fo r the relevant financia l institutions for this 
option, we made the following assumptions: 
-  Sub-option (1) extending th e requirement to disclose  methodologies and underlying 
assumptions behind ratings from structured finance products to all asset classes:  
a) The Commission Services estimated that there are 25 registered CRAs in the 
EU. 
b) CRAs earn on average 30% of their revenue  from structured finance ratings. 
-  Sub-option (2) enhancing the requirement to  disclose material changes in methodologies 
by additionally requiring the publication of clear reasoning and justification for the 
changes. 
-  Sub-option (3) enhancing the requirement to  disclose errors in methodologies or their 
application by requiring immediat e disclosure directly to the affected parties including 
investors, issuers and competent authorities. 
Strengthened rules on the disclosu re of rating methodologies in re lation to structured finance 
products will entail costs for CRA in publishi ng such information. However since this 
information will be already available to CRA, th e administrative burdens from disclosing this 
information will be negligible. 
Option 8 – Require CRAs to inform issuers su fficiently in advance of the publication of a 
rating 
Under this option the disclosure procedural283 requirements for soli cited and unsolicited 
ratings will be strengthened. CRAs will be required – sufficiently in advance of the publication of the rating – to inform issuers of the principle grounds on which the rating is 
based. This could also include a requirement to elaborate on the main assumptions which 
justify the change of rating and would apply bot h to solicited and unsolicited ratings. As only 
the timing of information changes, this option is expected not to entail any substantial additional administrative burdens or other compliance costs.                                                 
 
283  This option would extend the current requirement of 12 hours, provided for in Annex I D (3) which 
does not reflect the working hours av ailable to perform an assessment. 
 
 181/193  ANNEX XIII.  COHERENCE WITH MAIN LEGISLATIVE INITIATIVES  
A Comprehensive strategy to restore Fina ncial Stability to underpin Sustainable 
Growth in the EU 
As soon as the crisis broke in 2007, the EU acted promptly adopting a series of urgent 
measures to prevent the crisis spreading and limi t its extent and impact. In particular the focus 
was on coordinating the European economic stimul us package to promote recovery, applying 
the state aid regime firmly but flexibly so as to avoid distortions of competition while 
allowing banks to restructure, and increa sing the amounts guaranteed by Deposit Guarantee 
Schemes (DGSs) up to €100,000 per account.  
Following this wave of “emergency” measur es, the Commission launched a programme of 
reforms which implements the commitments taken by the G20 and aims at tackling more structural issues in the EU fina ncial sector and address the main sources of its vulnerability as 
unveiled by the crisis: 
• The low levels of high quality capital and insufficient liquidity in the banking sector, 
partly reflecting inadequate and pro-cycli cal prudential requirements and failures in 
risk assessment and management;  
• Supervisory shortcomings, particularly with  regard to the supervision of individual 
institutions operating in a cr oss-border context and to the unregulated financial sector;  
• Corporate governance failures which contribute d to excessive risk taking practices in 
financial institutions;   
• Insufficient market transparency and inade quate disclosure of information to the 
authorities including supervisors, particular ly with reference to complex structured 
financial products;  
• Lack of adequate regulation and supe rvision of Credit Rating Agencies;  
• Insufficient macro prudential surveillance of th e financial sector as a whole to prevent 
macro-systemic risks of contagion;  
• The absence of a harmonised framework to facilitate the orderly wind-down of banks 
and financial institutions which has contribu ted to put pressure on Member States to 
inject public money into banks to prevent a general collapse  
The building blocks of this programme were illustrated in the Communication of 4 March 
2009, Driving European Recovery, and the Communication of 2 June 2010 'Regulating 
financial services for sustainable growth" whic h set out the details of the financial reform 
package.  
The first elements were put in place in the period 2009-2010. The most important is 
represented by the new architecture for fi nancial supervision which involved the 
establishment of the  European Systemic Risk  Board, which will ensure that macro-prudential 
and macro-economic risks are detected at an ear ly stage, and three new European Supervisory 
Authorities responsible for banking (Europe an Banking Authority or EBA), insurance 
(.European Insurance and Occupa tional Pensions Authority or EI OPA) and securities markets 
( European Securities Markets Authority ESMA) to ensure reinforced supervision and better 
co-ordination among supervisors.  
An important gap in regulation has been pl ugged through the Regulations on credit rating 
agencies ('CRA I' and 'CRA II') introducing stri ct authorisation requirements and supervision 
 
 182/193  for CRAs, and entrusting ESMA  with the supervision on CRAs. Moreover the Capital 
Requirements Directive (CRD) was amended (' CRD III') to reinforce capital rules for the 
trading book and for complex derivatives and to introduce binding rules on remuneration and 
bonuses in financial institutions. A further regu latory and supervisory gap has been plugged 
with the Directive on managers of alternative investment funds, includ ing hedge funds (AIFM 
Directive) providing robust and harmonised re gulatory standards for all managers and 
enhancing transparency towards investors. 
The interplay between the persisting fragilities of the financial sector, particularly due to the 
funding conditions for the banking sector, and pr essures on governments' public finance and 
sovereign debt markets, the so called twin cris is', became of mounting source of concern in 
the end of 2010 and during the first half of 2011.   
In order to tackle effectively th e twin crisis and to restore th e EU economy to sustainable long 
term growth, the Commission and Member States  have developed a coordinated and gradual 
approach to address both dimensi ons, i.e. the structural fragilit ies of the financial sector and 
the vulnerabilities of sovereign markets, in para llel. This requires bringing to completion the 
on-going reform programme to achieve a healthier financial sector along a series of measures 
to deliver a new quality of economic policy coordination to reduce the contagion risks from 
the vulnerable Member States to other sovereig n markets and ensure public-debt sustainability. 
The first component is articulated along three dimensions: 
I. Improving stability and governance of financial institutions 
Improved stability of financial institutions will be achieved thr ough the new European 
Supervisory Authorities which will coordinate the work of national supervisors, ensuring coherent supervisory practices and contributin g to the establishment of a common rulebook 
for financial institutions. In July 2011, the Ca pital Requirements Directive (CRD) was revised 
again in order to implement the “Basel III” agreement, which si gnificantly increases the levels 
of capital which banks and investment firms mu st hold to cover their risk-weighted assets. 
The proposal includes provisions to improve risk  control and oversight as well as enhance 
supervisory review of risk govern ance in financial institutions. 
At the end of 2011, a new legislative proposal on CRAs ('CRA III') will tackle further risks 
related to the functioning of the rating business, such as the "issuer-pays" model, the 
overreliance on ratings, the lack of competition in the sector, and the specificities of sovereign debt. In that respect the initiative will contri bute also to reducing the pressure on sovereign 
markets. 
A proposal for a review of the Directive of financial conglo merates has been adopted to 
simplify and clarify the Directiv e with respect to a number of  current problems (inadequacy 
of thresholds, complexity of supervisory tools etc.), and harm onize its application. 
The publication of the results of  the 2011 EU-wide stress test, ba sed on stricter requirements, 
better coordination and peer review and a sign ificantly higher degree of transparency, will 
provide the right incentives for banks to restructure their oper ations, strengthen their capital 
base, and regain viability. Coordinated back-sto p measures, with market based recapitalisation 
in the first place, will be set-up to take remedial action for banks failing the stress test. In last 
resort case of public interventions, the EU State aid rules will provide the appropriate framework to ensure financial stab ility and a level playing field.  
Market conditions permitting, new State Aid c ontrol measures based on Article 107(3)(c) 
TFEU will be introduced as of 1 January 2012 wi th a gradual tightening of conditions towards 
a new permanent State Aid Regime. The conti nuation of the crisis regime under Article 
 
 183/193  107(3)(b) could be envisaged for those Member States th at would be subject to a 
macroeconomic adjustment programme  accompanying financial assistance 
The legislative proposal for a new EU bank resolu tion regime will establish a series of legal 
arrangements that allow the relevant authorit ies to more easily restructure or resolve a 
distressed credit institution without recourse to public financial support. The new regime will 
include certain tools ("bail-in") to ensure th at the objective of making shareholders and 
creditors of the credit institutions contribute to the restructuring and resolution of the banks. The approach of increasing market discipline by  clearly setting the rules for burden sharing 
between public and private sector in crisis si tuation will be a common  element also in the 
State aid framework and in the European Stability Mechanism created for the sovereign, which foresees some private sector involvement. 
II. Enhancing efficiency, integrity, li quidity and transparency of markets 
The review of the  Markets in Financial Instruments Directive (MiFID) will improve 
transparency, efficiency and integrity of secur ities markets in several ways. For example, the 
scope of MiFID will be extended to new types of trading platform and financial products, thus removing some opaque areas of securities mark ets. Some derogations will be also removed, 
and transparency requirements will be extended to  all kinds of securities, not just shares.  
The Market Abuse  Directive (MAD)  will also be revised to provide for a more effective 
prevention, detection and sancti oning of market abuses.  
A Regulation has been proposed on Over-T he-Counter (OTC) derivatives markets 
implementing the G20 commitment that standard ised OTC derivative tran sactions be cleared 
via central counterparties (CCPs) .  If a party to a transacti on fails in mid-transaction, the 
existence of a CCP would remove the risk and uncertainty as to whether the transaction will 
be completed. A further obligation for OTC derivatives to be registered in trade repositories, with access for supervisors in the EU, will provid e a better overview of who owes what and to 
whom and to detect any potential proble ms, such as accumulation of risk, early on.  
A proposed  Regulation regarding short selling and Credit Default Swaps (CDSs)  will increase 
transparency via a requirement for flagging of s hort orders on trading venues, and notification 
or disclosure of significant short positions relating to shares and sovereign debt (including through the use of CDSs). This will enable superv isors to detect when such transactions are 
reaching dangerous levels and consider intervention on markets.  
Further security will be  provided by a planned  Securities Law Directive (SLD), which will 
ensure that intermediaries always posses the secu rities which they maintain for the account of 
their customers. In addition, envisaged legisl ation on Central Securitie s Depositories (CSDs) 
will further secure the post trading handli ng of securities till th eir final settlement. 
 
III. Achieving a greater protection and inclusion of consumers and investors 
The Commission has brought forward proposals to  reform Deposit Guarantee Schemes (DGS) 
and Investor Compensation Schemes (ICS), on top of recently agreed increase of the guaranteed amount (to € 100,000 under DGS, € 50,000 under ICS). The proposed revised 
Directives include improved payout times, better funding of schemes, and a proposal for 
interlinkages and a mutual support mechanis m between schemes (both deposit guarantee and 
investor compensation), to ensure that schemes in difficulties do not fail, to the detriment of 
consumers.  
A legislative proposal on fair practices relati ng to mortgage credits will improve the way in 
which mortgages are sold to consumers,  analogous to existing obligations in place for 
 
 184/193  consumer credit; and ensure that all mortga ge lenders and intermediaries are properly 
regulated and supervised.  
The Commission has proposed a Regulation setting an end-date for the completion of the 
Single European Payments Area (SEPA) for direct debits and credit transfers to speed up the process that will make payments all over the Euro zone as easy and quick as domestic 
payments.    
For packaged retail investment products (PRIPs),  a proposal is planned to make sure that all 
consumers in Europe will in the future be ab le to get short, focused, and plainly-worded 
information about investments in a common form at, with risks and costs made much clearer 
and easier to understand, aiding comparisons. In  addition, EU rules governing those selling 
the products will be made more consiste nt and standardised where necessary.  
To enhance financial inclusion the Commission will table a propos al to ensure EU citizens 
might have access to a basic bank account with electronic payment instruments. 
On a macro-financial level, the positive impact on public debt sustainability of these 
initiatives will be backed by implementing the decisions taken by the European Council in March 2011 on delivering a new quality of econo mic policy coordination through reinforced 
economic governance, including th e excessive imbalance procedure (EIP), the "Pact for the 
Euro" and the new European Stability Mechanism (ESM). 
 
 
 
 185/193   
 
 
Ultimate objective intermediate objectives Immediate objectives Policy initiatives (Tools)
Improved efficiency, integrity, liquidity 
and transparency of MarketsMIFID and MAD Directives reviews
Regulation on Short selling/Credit Default Swap (CDS)
Regulation on Central Securities Depositories (CSD)Regulation on Over-the-co unter (OTC) Derivatives
Securities Law Directive
Building a healthier financial 
sector: safer, sounder, more 
transparent and more responsibleEnhanced stability and governance of 
financial InstitutionsCapital Requirement Directive (CRD) IV/Basel III
Follow-up to Green Paper on Corporate Governance
Bank Resolution framework
Directive on Financial Conglomerates revision
CRA III
Restoring financial 
stability as a 
precondition for sustainable growth Strengthened inclusion and consumer 
protectionDeposit Guarantee Schemes (DGS) 
Investor Compensation Schemes (ICS)
Packaged Retail Investment Products (PRIPs)
Single European Payment Area (SEPA)Basic payment account
Mortgage credit
Restoring public finances 
(tackling the sovereign crises)
DG ECFIN
Strengthening economic governance 
in the EUExcessive Imbalance Procedure (EIP)
Pact for the Euro                                
European Stability Mechanism (ESM)Stress Tests (EBA)
Backstop measures (Member States)
Review of the EU State-Aid framework (DG COMP)
 
 186/193   ANNEX  XIV  – ADDITIONAL TECHNICAL CHANGES  
The European Commission will also suggest some  technical clarifications for which no major 
impacts are expected:  
Clarification which requiremen ts apply to rating outlooks  
 
Rating outlooks are opinions issued by CRAs regard ing the likely directi on of a credit rating 
over the short and medium term. The releva nce of credit outlooks for investors and 
issuers and their effects on markets are comparab le to the effects of any "normal" rating 
decision. Therefore, also the pr ocedural requirements of th e CRA Regulation which aim at 
ensuring that ratings are accurate an d understood by investors should apply. 
 A definition of rating outlooks should be added and it should be specified which requirements 
of the CRA Regulation apply to  rating outlooks. Even if under current supervisory practice 
some of the requirements in the Regulation al ready apply to rating outlooks, the introduction 
of a definition for rating outlooks and the clar ification which specific provisions apply to 
outlooks will clarify the rule s and provide legal certainty. 
 
Application of certain reporting and disclosure obligations to certified credit rating agencies 
 
It should be clarified that the requirement acco rding to Article 11 (2) of the CRA Regulation 
which obliges credit rating agencies to make ava ilable in a central repository established by 
ESMA information on its historical performan ce also applies to certified credit rating 
agencies. This understanding is justified becau se ratings issued by certified CRAs may be 
used for regulatory purposes by investors in th e same way as investors use ratings issued by 
registered CRAs. Including performance data  from certified CRAs in the central repository 
allows investors to compare their performa nce (in comparison with other certified or 
registered CRAs). This understanding is shar ed by ESMA, national comp etent authorities and 
credit rating agencies.  It should also be clarified that certified CRA s have a regular reporti ng obligation to ESMA. 
Even if certified CRAs are supervised primar ily by the supervisory authority of the third 
country where they are established, in accordance with third country rules that have been 
considered equivalent to th e EU CRA Regulation, ESMA shoul d have the right to request 
information from certified cred it rating agencies. This understanding is suggested by ESMA's 
role in the certification process according to Article 5 of the CRA Regulation which refers to 
a role in ongoing supervision (to verify that the conditions for initial certification are 
continuously met). This understa nding is shared by ESMA, nati onal competent authorities and 
credit rating agencies.  
 
 187/193  ANNEX XV.  MEASURES AGAINST OVER-RELIANCE ON EXTERNAL CREDIT RATINGS IN 
CRDIV   
The following should provide you with an overvie w of what we do about reliance on ratings 
in CRD IV. 
 
First, the most problematic overreliance on rati ngs takes place when banks invest in rated 
securities without understa nding the risks of these securities . Misguided investment decisions 
may create bubbles. The worst of this problem, in the field of securitisation, has already been 
addressed by CRD II. That directive required banks  to carry out a range of analysis for their 
securitisation investments, even if they are AAA rated. 
 Beyond securitisation, CRD IV will also require th at banks' investment decisions must never 
rely solely and mechanistically on ratings but always form their own internal credit opinion 
on every exposure.  
 
Distinct from the banks' internal reliance on ratings, there is the calculation of regulatory 
capital requirements according to the Basel II framework and hence, the CRD. Capital requirements are meant to be risk-sensitive and therefore require measures of credit risk as 
inputs. 
 
Avoiding overreliance in this field does not mean  making no references to rating whatsoever. 
References to ratings may still be the best ava ilable policy alternative in some instances. For 
instance, as an option for banks, the CRD also allows the use of internal ratings for calculating capital requirements. However, the n ecessary systems are costly to implement and 
to supervise. In some instances, developing in ternal ratings may be outright impossible (when 
there is a limited number of material c ounterparties the bank has, for instance). 
 The compromise that it was therefore to prop ose with CRD IV is to require banks with a 
material number of exposures in a given portfolio (be it sovere igns, banks, or corporates) to 
develop internal ratings for that  portfolio. In other words, a clear preference was expressed for 
using internal rather than external ratings where possible. This requirement on the bank is without prejudice to the decision of the supervisors to validate the rating system and allow its 
use for calculating capital requirements. The notion of "materiality" in that context would still 
have to be defined by delegated act, trying to find the right bala nce in order not to overburden 
smaller institutions. 
 CRD IV will however also require  (smaller) banks that do not use internal ratings to compare 
their internal credit opinion (as opposed to a mo re formal and validated rating system) to the 
capital requirement resulting from an external rating. If the inte rnal assessment shows that for 
a given loan, the external rating and the resu lting capital requirement are too favourable 
compared to the internal cred it opinion, the bank will be required under Pillar 2 to hold 
additional capital.  In addition, CRD IV will require EBA to survey:  
¾ to what extent banks internally rely on external ratings; 
¾ what progress is made across the banking sect or in implementing internal ratings for 
capital requirements purposes; 
¾ to what extent other national legislating (ie not implementing the CRD) relies on 
ratings. 
 
 188/193  ANNEX XVI.  GLOSSARY  
Term Explanation 
ABS (Asset Backed Security) An Asset Backed Security is a security whose value and income 
payments are derived from and collateralized (or "backed") by a 
specified pool of underlying assets which can be for instance 
mortgage or credit cards credits. 
AIFMD (Alternative Investment Fund Managers Directive) The Alternative Investment F und Managers Directive created a 
comprehensive and effective regulatory and supervisory framework for managers of hedge funds and private equity funds in the 
European Union.  
Asset write down An asset write down recognises that an asset's value has fallen by 
reflecting this new, lower val ue in accounting treatment.  
Barrier to entry A barrier to entry is an obstacle to entering a particular market.  
Barriers to entry could include regulatory requirements or competing 
large, well-established ex isting market players.  
Basel II Basel II is the second Basel Accord issued by the BCBS (see 
separate entry), which is a series of recommendations on banking 
supervision and regulation.  The aim of the Accord was to produce 
an internationally recognised standar d approach to the amount of 
capital that banks should hold. 
Basel III Basel III is the third Basel accord , currently being developed, by the 
BCBS (see separate entry), which will propose a further series of 
standards on capital and liquidity for banking supervision and regulation. 
BCBS (Basel Committee on Banking Supervision) The BCBS is an institution created by  the Governors of the central 
banks of the Group of Ten nations. It was created in 1974 and meets 
on a quarterly basis. 
CDO (Collateralised Debt Obligation) A collateralised debt obligation is a type of asset backed security in 
which the assets are debt  obligations (see ABS). 
CDS (Credit Default Swap) A credit default swap is a contract between a buyer and a seller of 
protection to pay out in the case t hat another party (not involved in 
the swap), defaults on its obligat ions. CDS can be described as a 
sort of insurance where the purchaser  of the CDS owns the debt that 
the instrument protects; however, it is not necessary for the 
purchaser to own the underlyi ng debt that is insured. 
CESR (Committee of 
European Securities 
Regulators) CESR was the predecessor body to ESMA.  See ESMA. 
"cliff" effects "cliff" effect refers to a positive feedback loop, where downgrading a 
single security can have a disproportionate cascading effect. This 
has become pronounced with respec t to the assessment of credit 
risk in a bank's portfolio. If a Credit Rating Agency has the expectation that the credit risk of a position rises, it will downgrade its 
rating. As a consequence, a bank faces additional capital charges in 
order to comply with national capital requirements. 
CMBS (Commercial Mortgage Backed Security) A commercial mortgage backed security is a type of asset backed 
security for which the assets ar e commercial mortgages (see ABS). 
Contagion effect Financial contagion refers to a scenario in which small shocks, which 
initially affect only a few financial institutions or a particular region of an economy, spread to the rest of financial sectors and other 
countries whose economies were previously healthy, in a manner 
similar to the transmission of a m edical disease. Financial contagion 
happens at both the international level and the domestic level. At the 
domestic level, usually the failure of a domestic bank or financial 
intermediary triggers transmissi on when it defaults on interbank 
 
 189/193  Term Explanation 
liabilities and sells assets in a fire sale, thereby undermining 
confidence in similar banks. 
CRD (Capital Requirements 
Directive) Directives 2006/48/EC and 2006/49/EC . These Directives establishe 
the authorisation and pursuit of busin ess of credit institutions along 
with the principle of single passport and home country control and further sets out the applicable pr udential requirements: supervision 
and disclosure by competent authoritie s, consolidated supervision, 
capital requirements, reporting of and limits to large exposures and 
non-financial holdings, suitability of managers and shareholders, 
standards for the internal risk management and public disclosure to 
achieve market discipline. It introduced Basel II accord in the EU legislation. 
CRD IV CRD IV is an amendment to the CRD that introduces the Basel III 
accord in EU legislation, creates a single rule book for banks and 
transfers certain part of the CRD to a Regulation.  
Credit risk Credit risk is the risk that a borro wer will default on a debt, i.e. not 
repay the debt. This can also be called default risk. 
Credit write down A credit write down is where the value of a debt is reduced and the 
new, lower value is recognised (See write down). 
Dodd-Frank Wall Street 
Reform and Consumer 
Protection Act An Act in 2010 was introduced to promote the financial stability of the 
United States by improving acc ountability and transparency in the 
financial system, to end "too big to fail", to protect the American taxpayer by ending bailouts, to protect consumers from abusive 
financial services practices, and for other purposes. 
Due diligence Due diligence in this impact assessment generally refers to a 
process of investigation and verification before making an investment. 
EBA (European Banking 
Authority) The EBA is the successor org anisation to the Committee of 
European Banking Supe rvisors (CEBS), and was established by 
Regulation (EC) No. 1093/2010 of the European Parliament and of the Council of 24 November 2010.  It is one of the three European 
Supervisory Authorities (ESAs); see also ESMA and EIOPA. 
ECAF (Eurosystem Credit 
Assessment Framework) The Eurosystem credit assessment framework (ECAF) defines the 
procedures, rules and techniques wh ich ensure that the Eurosystem 
requirement of high credit standards for all eligible assets is met.  
The framework takes into accoun t credit information assessments 
from four sources 
ECAI  (External Credit 
Assessment Institution) CRAs recognised by national supervisors to determine the risk-
weights on their rated credit exposures (including securitisation 
exposures) under the Basel II Framework, the standardised 
approach to credit risk requires banks to use credit assessments 
provided by External Credit Asse ssment Institutions (ECAIs) 
recognised by national supervisors to determine the risk-weights on their rated credit exposures (inc luding securitisation exposures). 
National supervisors are responsible for determining whether an 
ECAI meets the eligibility criteria se t out in the Framework, so that 
banks incorporated in their jurisdictions can use the ECAI’s risk 
assessment for the calculation of the capital requirement under 
Basel II. 
ECB (European Central Bank) The European Central Bank is the central bank of the Euro currency, 
based in Frankfurt in Germany.  The ECB's primary role is to 
maintain price stability in the EU. 
 
 190/193  Term Explanation 
EEA (European Economic 
Area) The Agreement creating the Eu ropean Economic Area (EEA) 
entered into force on 1 January 1994. It allows the EEA European 
Free Trade Association (EFTA) States Norway, Iceland and 
Liechtenstein (Switzerland has not joined) to participate in the Internal Market on the basis that they adopt all EU single market 
legislation except that relating to agriculture and fisheries. 
ESM (European Stability 
Mechanism) [51] The European Stability Mechanism (ESM) is a permanent rescue 
funding programme to succeed the temporary European Financial 
Stability Facility and European Financial Stabilisation Mechanism. 
The European Stability Mechanism ( ESM) is due to be launched in 
mid-2013. 
EIOPA (European Insurance 
and Occupational Pensions 
Authority) The European Insurance and Occupational Pensions Authority 
replaced the Committee of European Insurance and Occupational 
Pensions Supervisors (CEIOPS) . It is established under EU 
Regulation 1094/2010. 
EMEA (Europe, Middle East 
and Africa) The abbreviation EMEA designates the geographic region of Europe, 
the Middle East and Africa. 
ESMA (European Securities 
Markets Authority) ESMA is an independent EU Authority that contributes to 
safeguarding the stability of the Eu ropean Union's financial system 
by ensuring the integrity, transparency, efficiency and orderly 
functioning of securities markets, as well as enhancing investor protection. In particular, ESMA fosters supervisory convergence both 
amongst securities regulators, and across financial sectors by 
working closely with the other European Supervisory Authorities 
competent in the field of banking (EBA), and insurance and 
occupational pensions (EIOPA). More information on ESMA can be 
found at www.esma.europa.eu
. 
Euro Debt Crisis This refers to the budgetary and funding difficulties facing parts of 
the EU following the first part of the financial crisis. 
EUROSTAT Eurostat is a Luxembourg-based Directorate-General of the 
European Commission with the main task of providing the European 
Union with Europe-wide statistical information. 
FSB (Financial Stability 
Board) The Financial Stability Board (FSB) is an international body that 
monitors and makes recommendations about the global financial 
system. It was established after the 2009 G-20 London summit in April 2009 as a succes sor to the Financial Stability Forum. The 
Board includes all G-20 major economies, FSF members, and the 
European Commission. It is based in Basel, Switzerland. 
G20 The Group of Twenty Finance Ministers and Central Bank Governors  
is a group of finance ministers and central bank governors from 20 
major economies: 19 countries plus the European Union. 
Herd behaviour A tendency of market participants to conform in their behaviour with 
that of their peers 
IMF (International Monetary Fund) The International Monetary Fund (IMF) is an intergovernmental 
organization that oversees the global  financial system by taking part 
in the macroeconomic policies of its established members, in 
particular those with an impact on exchange rate and the balance of payments. 
Investor-pays model The investor-pays model is a model which was formerly used by 
CRAs and which is no longer in widespread use.  Under this model, 
investors (often in groups) paid for credit ratings rather than the currently prevalent issuer-pays model (see separate entry). 
IORP (Institutions for 
Occupational Retirement 
Provision) Institutions for Occupational Re tirement Provision Directive 
2003/41/EC is a European Union Directive designed to create an 
internal market for occupational retirement provision. It lays down minimum standards on funding pension schemes, the types of 
investments pensions may make  and permits cross-border 
management of pension plans. 
IRB (Internal Ratings Based) Advanced approach by which a bank can use its own credit 
 
 191/193  Term Explanation 
model assessments to calculate its regulatory capital requirements for 
credit risk. Depending on the risk factors the bank is allowed to 
estimate, a distinction is made between a foundation IRB and an 
advanced IRB approach 
Issuer-pays model The currently prevalent model under  which issuers pay CRAs directly 
to be rated or for their issuances to be rated. 
Junk status Junk status refers to a level of credit rating at which an instrument is 
no longer considered to be 'investment grade'. 
Liquidity Liquidity is a complex concept that is used to qualify market and 
instruments traded on these markets. It aims at reflecting how easy 
or difficult it is to buy or sell an asset, usually without affecting the 
price significantly. Liquidity is a f unction of both volume and volatility. 
Liquidity is positively correlated to volume and negatively correlated 
to volatility. A stock is said to be liquid if an investor can move a high volume in or out of the market wi thout materially moving the price of 
that stock. If the stock price moves in response to investment or 
disinvestments, the stock becomes more volatile. 
Lock-in effect The lock-in effect refers to the difficulty for issuers to change the 
CRA they are using for a rating. 
Market concentration Market concentration is a term, referring to a way of measuring the 
relationship between the number of firms in a market and their 
respective share of it.  In a mo re concentrated market, fewer firms 
will have a larger market  share; in a less concentrated market, a 
greater number of firms will have smaller market share. 
Market risk Market risk is the risk of losses d ue to price fluctuations of financial 
instruments in the trading book 
MiFID (Markets in Financial 
Instruments Directive) Directive 2004/39/EC that lays do wn rules for the authorisation and 
organisation of investment firms, t he structure of markets and trading 
venues, and the investor protection regarding financial securities. 
NCB (National Central Bank) A national central bank is a public institution that is normally tasked 
with issuing currency, controlling supply of money and setting 
interest rates. 
NRSRO (Nationally Recognized Statistical 
Ratings Organisation) NRSRO is a designation by the United States Securities and 
Exchange Commission that enables a CRA's ratings to be used for 
regulatory purposes. 
Oligopoly An oligopoly is a market which is dominated by only a few large and 
dominant players.  Oligopolies can be characterised by low differentiation between market participants, high barriers to entry and 
high profits over a long period. 
Procyclicality Procyclicality refers to the tende ncy to increase the effect of 
variations in the economic cycle.  This is often applied to something that increases the effect of a negative economic impact, such as 
"cliff" effects. 
Prospectus Directive Directive 2003/71/EC of the Europ ean parliament and of the Council, 
which lays down rules for information to be made publicly available when offering financial instruments to the public. 
Public utility model The model which would require transforming the credit rating agency 
into a public utility and funding it with government revenues. 
QIS5 (Five Quantitative 
Impact Studies)  In order to assess its impact the development of "Solvency II" was 
accompanied by five Quantitative Impact Studies. In these studies 
insurance and reinsurance undertakings as well as insurance groups 
under the scope of "Solvency II" determine their eligible own funds and capital requirements according to preliminary specifications of 
the new rules. 
Rating downgrade A rating downgrade refers to a credit rating being revised by a CRA 
to a lower rating. 
 
 192/193  Term Explanation 
Rating upgrade A rating upgrade refers to a credit rating being revised by a CRA to a 
higher rating. 
Ratings action A ratings action means a review of a credit rating leading to a 
change.  This might be a rating upgrade or downgrade (see separate entries) or another action such as placing on positive or negative 
watch (a status of review while the CRA is deciding whether or not to 
upgrade or downgrade), or even affirming the current rating. 
Ratings and Securitisation 
working group A working group established by the Basel Committee to review the 
Basel framework’s reliance on ratings  
RMBS (Retail Mortgage 
Backed Security) A retail mortgage backed security is a type of ABS (see separate 
entry) in which the assets are retail mortgages. 
SEC (Securities and 
Exchange Commission) The US regulatory body responsible fo r the regulation of securities 
and protection of investors. 
SME (Small to Medium Enterprise) On 6 May 2003 the Commission adopted Recommendation 
2003/361/EC regarding the Small and medium sized enterprise definition. While 'micro' siz ed enterprises have fewer than 10 
employees, small have less than 50, and medium have less than 
250. There are also other criteria relating to turnover or balance sheet total that can be applied more flexibly. 
Solicited rating A rating requested by the issuer or another party. 
Solvency II The Solvency II Directive 2009/13 8/EC is an EU Directive that 
codifies and harmonises the EU insurance regulation. Primary this 
concerns the amount of capital that EU insurance companies must 
hold to reduce the risk of insolvency. 
Sovereign debt Sovereign debt (also known as government debt or public debt) 
refers in this impact assessment to money that a central government 
borrows.  The debt is usually ra ised by the government issuing 
bonds by auction. 
Spill-over effects Spillover effects are externalities of  economic activi ty or processes 
those who are not directly involved in it. 
Spread (bond spread, CDS spread, yield spread) The difference between the bid and t he ask price of a security or 
asset. 
SPV (Special Purpose 
Vehicle) A special purpose vehicle (also called special purpose entity) is a 
legal entity that is set up to fulfil a specific purpose.  SPVs are widely 
used in the creation of ABS, in wh ich the assets will be held by an 
SPV set up with the purpose of ow ning those assets and receiving 
and distributing income streams from them.  In this sense, SPVs are 
usually distinct from the legal entit ies that create them (so that its 
creditors have no claim over the assets of the SPV). 
Standardised approach The standardised approach to credit risk and the standardised 
approach to market risk are methods of assigning credit risk 
weightings to assets for regulatory capital calculation purposes, proposed by the Basel Committee on Banking Supervision. 
Structured finance product A structured finance product, also known as a market-linked product, 
is generally a pre-packaged in vestment strategy based on 
derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuance and/or foreign currencies, and 
to a lesser extent, swaps. 
Subprime mortgage Subprime mortgages are those lent to parties who have limited or 
impaired credit history or a lower ability to repay the loan.  They usually carry a higher interest rate to reflect the increased risk. 
Subsriber pays model A model under which payment for ratings is made by investors 
subscribing to a service, rather th an the issuer (see entry for issuer 
pays model). 
Systemic Systemic, in this impact assessm ent, describes the quality of having 
an significant impact across the whole financial system. 
TFEU (Treaty on the Functioning of the European Primary source of EU law, together with the TEU (Treaty on the 
European Union), as modified by the "Treaty of Lisbon amending the 
 
 193/193  Term Explanation 
Union) Treaty on European Union and the Treaty establishing the European 
Community", signed at Lisbon, 13 December 2007. 
UCITS (Undertakings for 
Collective Investments in 
Transferable Securities) Undertakings for Collective Invest ment in Transferable Securities 
Directives, a standardised and r egulated type of asset pooling. 
Unsolicited rating A rating issued without being requested by an issuer. 
Volatility Volatility refers to the change in va lue of an instrument in a period of 
time. This includes rises and falls in value, and shows how far away from the current price the value co uld change, usually expressed as 
a percentage. 
WBS (Whole Business Securitisation) A whole business securitisation is a type of ABS in which the assets 
are a business.  This is typi cally used by a parent company 
transferring a portion of its reve nue-generating assets to an SPV 
(see separate entry), which in turn uses the revenue to loan funds to 
the parent company. 
Working Group on Liquidity The Working Group on Liquidity is a working group that reports to the 
Policy Development Group of the Bank for International Settlement's 
Basel Committee on Banking Supervision (see 
http://www.bis.org/bcbs/).  The Policy Development Group is one of the Committee's four main sub-committees.  The Working Group on 
Liquidity has published a set of standards for liquidity management 
and supervision (see http://www .bis.org/publ/bcbs144.htm). 
Yield spread The yield spread is the difference between the quoted rates of return 
on two different investments, usually of different credit quality.