4.

The proposed regulation is expected to apply to ‘credit ratings that are intended for use for regulatory purposes or otherwise’ by regulated financial sector institutions (credit institutions, investment firms; insurance, assurance and reinsurance undertakings; undertakings for collective investment in transferable securities (UCITS) and institutions for occupational retirement provision) and are disclosed publicly or distributed by subscription (6). Moreover, these regulated institutions will only be allowed to use, for regulatory purposes, credit ratings which are issued by credit rating agencies established in the EU and registered in accordance with the proposed regulation (7). While the ECB supports the wide scope of the proposed regulation, it has the following observations. First, the expression ‘for use for regulatory purposes or otherwise’ indicates a preference for a wide scope, but both the explanatory memorandum accompanying the proposed regulation and the Commission’s impact assessment advocate a narrower approach, under which the proposed regulation would only cover credit ratings used for regulatory purposes (8). The Commission argues that the proposed approach would be ‘proportionate’ since it ‘targets not all credit rating agencies but only those whose ratings are used for regulatory purposes by financial institutions, i.e. those with a potentially high impact on the financial system’ (9). However, the proposed regulation alternates between, on the one hand, the objective of introducing ‘a common approach to ensuring the high quality of credit ratings to be used in the Community’ (10) and ‘all ratings used by financial institutions governed by Community legislation are of high quality and issued by credit rating agencies subject to stringent requirements’ (11) and, on the other hand, the more limited objective of requiring registration only for the credit rating agencies established in the Community and seeking to ensure that their credit ratings are used for regulatory purposes by financial institutions in the EU (12). Furthermore, the proposed regulation does not clarify the rules applicable to securities for which a prospectus has been published under Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (13) and which are rated under the proposed regulation. Second, in its statement of scope, the proposed regulation defines ‘regulatory purposes’ mainly by reference to the most prominent example of recourse to credit ratings in financial regulation, i.e. 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 institutions (recast) (14), under which credit institutions are entitled to use the ratings as one of the references for the calculation of their capital requirements for solvency purposes (15). The ECB understands that such an approach would cover credit ratings which have ‘a potentially high impact on the financial system’ (16). In this respect, on 14 March 2009, the G20 finance ministers and central bank governors agreed on regulatory oversight, including registration of all credit rating agencies whose ratings are used for regulatory purposes (17). However, as ‘regulatory purposes’ is not specifically defined, and as it is not specified whether it covers references to recourse to ratings in Community legislation (as implemented in national legislation) and in national laws, the ECB suggests that further clarification is needed. Finally, some provisions of the proposed regulation, such as the general obligation for credit rating agencies to disclose ‘any credit rating’ (18), might conflict with the scope of the proposed regulation if it were limited to credit ratings used for regulatory purposes. Third, the proposed regulation only applies to credit ratings that are distributed by subscription or disclosed publicly. Consistently with the rules applicable to External Credit Assessment Institutions (ECAIs) in Directive 2006/48/EC (19), it is suggested clarifying that credit ratings are considered as publicly disclosed if they enable access at equivalent terms to potential users and allow for proper assessment by the public. Fourth, credit ratings should be based on methodologies combining qualitative and quantitative approaches (20). It is noted in this respect that the rating tools operated by third-party providers (21) are usually solely based on quantitative approaches and do not take into account qualitative information such as the information obtained through contacts with the assessed entities senior management and operational staff. In the context of the policy framework for monetary policy operations of the Eurosystem (which comprises the ECB and the national central banks of Member States that have adopted the euro (NCBs)), this type of credit assessment system is treated distinctly from the other sources of credit assessment such as ECAIs. Therefore, it should be considered whether the proposed regulation should specify that ratings produced by third-party providers operating rating tools do not fall within its scope.