EN    EN EN 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 12.11.2008 
SEC(2008) 2745 
  
COMMISSION STAFF WORKING DOCUMENT 
 
accompanying the 
Proposal for a 
 
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 
 
on Credit Rating Agencies 
  
IMPACT ASSESSMENT  
{COM(2008) 704 final} 
{SEC(2008) 2746} 
EN 2   EN 1. I NTRODUCTION  
Credit rating agencies (CRAs) play  a vital role in global securi ties and banking markets: they 
issue creditworthiness opinions that help to ov ercome the information asymmetry that exists 
between those issuing debt instruments and t hose investing in these instruments. It is 
essential, therefore, that they consistently  provide ratings which are independent, objective 
and of the highest possible qua lity. The Commission will pres ent in autumn 2008 its policy 
response in relation to the role that CRAs have played in the recent financial turmoil. This 
document reflects the impact assessment carried out by the Commission services to determine 
this policy response. 
1.1. Role of CRAs and importance of ratings.  
CRAs are companies recognised in the markets as  independent providers of credit opinions 
(ratings). For the most part of the last century the main business of these companies was to perform analyses and issue opinions on the probabi lity of default or expected losses of other 
companies ("corporate") and governments ("sovere ign"). However, over the last few decades 
these companies have engaged in providing ra tings for a wide range of more complex 
financial instruments, known as structured finance products.  
CRAs have a major impact on the financial ma rkets, with their ratings actions closely 
followed by investors, borrowers, issuers and govern ments. Investors refer to ratings as a key 
piece of information to determine their invest ment decisions, depending on the risk they are 
willing to assume. The rating given to issuers a nd securities will affect the cost of raising 
capital. Very often deterioration of a debtor 's creditworthiness concluded in a rating may 
trigger particular contractual obligations (e.g. immediate debt repayment). Finally, there are 
references to credit ratings in financial regulation: the most prominent example is the Capital Requirements Directive
1, under which credit institutions are entitled to use the ratings as one 
of the references for the calcu lation of their capital  requirements for solvency purposes.  
Over the last decade CRAs have attracted th e attention of policymakers on a number of 
occasions, coinciding with the times of tensi on in financial markets. Regulators worldwide 
turned their attention to the role of CRAs followi ng their failure to weather the difficulties of 
Asian economies in July 1997 and the corporate co llapses at the beginning of this century 
notably in the EU and the US (Enron, Worldcom, Parmalat). 
Against this background and following the re solution on CRAs adopted by the European 
Parliament in February 20042, the Commission considered very  carefully whether legislative 
measures would be necessary to regulate the activities of CRAs. In line with the advice 
received from the Committee of European Securities Regulators (CESR) in March 20053, the 
                                                 
1 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 institu tions (recast). OJ L 177, 30.6.2006, p. 1–200. An 
explanation on the Directive could be found in annex 9.1. 
2 European Parliament resolution on Role and Methods of Rating Agencies (2003/2081(INI)). 
3 CESR's technical advice to the European Commission on possible measures concerning credit rating 
agencies, CESR/05/139b, March 2005. CESR is an independent advisory group to the European 
Commission composed by the national supervisors of  the EU securities markets. The Committee was 
established by the European Commission's Decision of 6 June 2001 (Commission Decision of 6 June 
2001, establishing the Committee of European Securities Regulators, 2001/527/EC, OJ L191, 
13.7.2001, p.43). The role of CESR is to improve co-ordination among securities regulators, act as an 
EN 3   EN Commission decided not to pres ent new legislative proposals in  the area of CRAs considering 
that the existing financial services directives ap plicable to CRAs would provide an answer to 
all the major issues of concern raised by the Eu ropean Parliament (for an overview of the EU 
regulatory framework fo r CRAs see annex 9.1).  
In this context, the Commission adopt ed in 2006 a Communication on Credit Rating 
Agencies4; in this Communication the Commission conc luded that various financial services 
directives, combined with self regulation by th e CRAs themselves on the basis of the Code of 
Conduct Fundamentals for CRAs of the Internat ional Organisation of Securities Commissions 
(IOSCO)5, could provide a satisfactory answer to the major issues of concern in relation to 
CRAs. It was stated that this approach would require continuous mon itoring of developments 
in this area by the Commission. In addition, the Commission asked CESR to monitor compliance with the IOSCO Code and report back on an annual basis.  
The Commission indicated in th e Communication that it might  consider putting forward 
legislative action if it became clear that compliance with EU  rules or IOSCO's code was 
unsatisfactory or if new circumstances were to  arise – including serious problems of market 
failure or significant changes in the way CRA s are regulated in othe r parts of the world. 
1.2. The financial crisis, the role of CRAs and the ECOFIN Roadmap 
Since August 2007 financial markets worldwide ar e suffering from a major confidence crisis. 
The crisis originated in the US residential subprime mortga ge market and subsequently 
developed into other sectors of the financial markets.  
This financial crisis is a complex phenomen on that involved multiple actors. Subprime 
mortgages were offered to homebuyers with su boptimal credit situation (and thus higher risk 
of payment defaults) and made subject to less demanding underwriting standards. A large 
number of these mortgages were then normally grouped in pools of assets and transformed in 
a securitisation process into new fina ncial instruments (s tructured products)
6 that were sold in 
the financial markets worldwide. Often these instruments were rearranged in new complex 
innovative financial structures and sold to investors like banks, investment funds, pension 
funds, insurance companies and other professi onal investors. Over 80% of these subprime 
structured products were rated with the high est ratings by the CRA s. (For an extended 
explanation on the financia l crisis see Annex 9.2.).  
                                                                                                                                                         
advisory group to assist the EU Commission and to ensure more consistent and timely day-to-day 
implementation of community legislation in the Member States. 
4 Communication by the Commission on Credit Rating Agencies, 11.3.2006 (2006/C 59/02), OJ C59, 
11.3.2006, p.2. 
5 The International Organisation of Securities Commi ssions (IOSCO) is an international non mandatory 
standard setting organisation composed of secu rities markets supervisors. Securities markets 
supervisors cooperate within IOSCO in order to promote high standards of regulation aiming at 
maintaining just, efficient and sound securities markets. 
6 The original lenders of sub-prime loans bundled the mortgage loans together and sold them to investors 
as mortgage backed securities – in essence these investors bought securities that would entitle them to a 
return from these mortgages in return for taking on a ll or part of the risk. These securities were rated by 
credit rating agencies and then sold to other fina ncial institutions and investors. The process of 
packaging and pooling assets like mortgage loans, and selling them to investors as securities is referred 
to as 'securitisation'. Banks transferred most of th ese mortgage assets to off-balance sheet entities (so-
called structured investment vehicles or SIVs), whic h financed themselves via short-term loans. This 
made them vulnerable to a sudden financing disruption if those providing the loans were to lose 
confidence, which is exactly what happened in August 2007. 
EN 4   EN This turmoil has 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, e.g. through 
credit lines on special purpose vehicles that  had bought US sub-prime securities (In 
accordance with data from Bloomberg in mid May, since the beginning of 2007 the biggest 
banks and securities firms have faced $379 billi on in asset write downs and credit losses. 
More information can be found in the anne x 9.10). Secondly, the US sub-prime problems 
have considerably slowed down US growth prospects. Given gl obal trade inter-linkages this 
affects the EU economic growth as well. Thirdly, the general market uncertainty has eroded equity market prices also in Europe as we ll as reduced consumer and business confidence. 
Illustrative data on the trend of  issuance of structured fina nce products could be found in 
annex 9.11. 
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 characte ristics of these instruments, pe rformance of underlying assets 
and general market outlook.  
The amount of securitised products
7 outstanding (before matu rity) in Q1 2008 surpassed 
6,000 billion EUR in the US, while the amount  outstanding in Europe was around 1,200 
billion EUR. Instruments awarde d with the highest rating grade8 amounted to 75% of those 
rated by the rating agencies. Most investors, who were less familiar with the structured products and merely sought to ta ke advantage of superior returns in these markets, normally 
did not look at instruments rated below that grade.  
In response to worsening market  outlook, faltering confidence in th e financial viability of the 
subprime structured products and internal re assessments, over the past months CRAs have 
decided on downgrading of these instruments on a massive scale. Recent figures show (see 
Chart 1 below) that CRAs have seriously and systematically failed to assess correctly the 
creditworthiness of structured finance instrume nts, as opposed to traditional ones (corporate, 
sovereign). In the period between 1 July 2007 and 24 June 2008, CRAs downgraded 145,899 
structured ratings compared whereas only 1,445 corporate rati ngs were downgraded in the 
same period
9. Hence, the problem has affected most se verely the structured finance segment. 
                                                 
7 These figures cover asset backed securities (ABS),  commercial mortgage backed securities (CMBS), 
residential mortgaged-backed securities (RMBS) and co llateralized debt obligations (CDO). In the case 
of CDOs tailor-made (typically non-public) issues and issues with a significant element of derivatives 
in the underlying assets are not included due to data limitations (see also Annex 9.3).  
8 So called AAA, or triple A, i.e. top of the rating scale which is used by the CRAs to present in relative 
terms creditworthiness of issuers.  
9 Source: Bloomberg. 
EN 5   EN Chart 1. Downgrades and upgrades comparison fo r largest CRAs - start date: July 2007 
S&PMooody's
Fitc hFitc hMooody'sS&P
010000200003000040000500006000070000Downgradings since July 1st 2007
  (---) corporte) ; ( ---) structured
S&P Mooody'sFitch
FitchMooody'sS&P
0200040006000Upgradings since July 1st 2007
  (---) corporte) ; ( ---) structured
 
(Source: Bloomberg) 
As the financial crisis evolved, a considerab le increase in the ratings' changes could be 
observed. Table 1 below shows upgrades and dow ngrades for European and US structured 
products respectively. In the first half of 2007 the three major credit rating agencies active in 
this field (Fitch, Standard & Poor's and Moody' s – see point 1.3) genera lly upgraded slightly 
more times than they downgraded. In the second  half of 2007 as well as the first half of 2008 
this changes dramatically. The overall number of  rating changes increases as well as the 
relationship between the number  of upgrades and downgrades, a lthough the change in Europe 
is not as strong as in the US. In the second quarter of 2008 the total number of upgrades for 
European and US securitised products was 659, wh ile the number of downgrades amounted to 
28700.  
Table 1. Upgrades/Downgrades in structured  products in the 3 largest agencies 
  2007:Q1 2007:Q2 2007:Q3 2007:Q4 2008:Q1 2008:Q2 
Fitch  116 /19  78 / 12 124 / 44 163 / 139 36 / 61 33 / 159 
Moody's 101 / 38 62 / 42 38 / 76 81 / 94 22 / 257 67 / 655 
S&P 126 / 65 81 / 72 92 / 77 83 / 145 50 / 512 65 / 657 EU 
Total  343 / 122 221 / 126 254 / 197 327 / 378 108 / 830 165 / 1471 
Fitch  654 / 221 637 / 643 335 / 2053 132 / 3099 335 / 4901 165 / 5763 
Moody's 447 / 158 279 / 380 562 / 1619 315 / 7498 111 / 4751 223 / 16563 
S&P 418 / 194 414 / 372 407 / 1230 292 / 4741 216 / 8895 106 / 4903 US 
Total 1519 / 573 1330 / 1395 1304 / 4902 739 / 15338 662 / 18547 494 / 27229 
Source: European Securitisation Forum. Securitisation Data Report Q2:2008, p. 10  
EN 6   EN The massive downgrading of securitised products further undermined the market's confidence 
in the ratings produced by CRAs. This massive downgrading would also s uggest that the rated 
products have been construed in such a way th at they have narrowly met the criteria for a 
certain rating at the time of issuance and/or th e assessment of the probability of default or 
expected loss was unrealistic. 
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. 
As indicated above, CRAs cannot be blamed al one for the current financial turmoil; other 
actors and special circumstances concurred in the events that led the financial markets to the crisis. As a consequence, in close coopera tion with the European  Commission, the EU 
Finance Ministers in October 2007 unanimously agreed to a set of co nclusions to respond 
comprehensively to the main weaknesses identifie d in the financial system. These initiatives, 
which are consistent with the agenda set at global level, are grouped into the so-called 
"ECOFIN roadmap". The Spring Council of March 2008 endorsed the policy areas of the roadmap and stated that au thorities in the EU should "stand ready to ta ke regulatory and 
supervisory action were necessary "
10. The roadmap combines differe nt actions of a regulatory 
and non-regulatory nature which are st ructured around four main objectives:  
• Improve transparency in the market, notably with respect to banks' exposures relating to 
securitisation and off-balance sheet items;  
• upgrade valuation standards to respond in particular to th e problems arising from the 
valuation of illiquid assets;  
• strengthen the prudential framework for the banking sector, including the treatment of 
large exposures, banks' capital requirements for securitisation, an d liquidity risk 
management; 
• investigate structural market issues, such as  the role played by CRAs and the "originate 
and distribute" model.  
Therefore, this Impact Assessment focuses onl y on the last of the C ouncil requests where the 
Commission has to examine the role of CRAs and the uses of credit ratings, in particular as 
regards structured finance instruments, conflicts  of interest, transpar ency of rating methods, 
time-lags in rating reassessments a nd regulatory approval processes.  
1.3. Overview of CRAs market 
The credit rating market is oligopolistic and is  effectively dominated by three big entities 
operating globally: Standard & Poor's, M oody’s Investors Service and Fitch Ratings. 
Moody’s and Standard & Poor's have a combin ed market share in excess of 80%, while 
Fitch’s market share is approximately 14%. Thes e entities have their head office and main 
                                                 
10 Presidency Conclusions of the Brussels European Council (13/14 March 2008). 
EN 7   EN management, administrative and supervisory bodi es in the US. They operate in the EU 
through subsidiaries established in several countries11. Their activity does not have a 
territorial character.  
Moody's Investor Services is owned by Moody' s Corporation (listed in New York Stock 
Exchange - NYSE). Standard & Poor's is ow ned by the American publisher Mc Graw-Hill 
(which is a listed entity at  NYSE). Fitch is dual-headquarter ed in New York and London and 
is a subsidiary of the French financial company Fimalac (listed in Euronext Paris)12. (For 
more precise information about the three big CRAs please see the first part of Annex 9.4.) 
Beyond these three big organisations, the CRA la ndscape is occupied by a number of smaller 
players, often catering to ve ry specific market needs. Am ong them, Dominion Bond Rating 
Service (DBRS) 13, Japan Credit Rating Agency, Ltd. and Rating and Investment Information, 
Inc. are well established regional players (i n Canada/US and Japan respectively) with 
ambitions to develop their international market presence. Finally, there are a number of local 
rating agencies active in different countries, i ssuing rating opinions bot h for general purposes 
and for specialized uses; their impact on the gl obal financial markets is nonetheless marginal 
(for a comprehensive list of CRAs, s ee the second part of Annex 9.4).  
Over the past years, there has been a major shif t in the revenue structure of the leading CRAs. 
Until the mid-nineties CRAs specialised in and derived most of their revenues from the rating of corporate or sovereign debt. However, w ith the growth of structured markets they 
increasingly engaged in the hi ghly lucrative rating activity  of new structured finance 
transactions. As a consequence CRAs currently  earn approximately 50% of their revenue 
from structured finance ratings.
14  
1.4. The legal framework for CRAs 
At present, Community law addresses only specifi c aspects relevant to the activity of the 
rating businesses (basically measures included in the Market Abuse Directive15 and the 
Capital Requirements Directive16). CRAs are not required to seek authorisation or to register 
                                                 
11 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. 
12 Fitch merged in 1997 with the British IBCA ratin g company, which is specialised in rating banks. 
Fitch-IBCA then bought the fourth-largest American ra ting agency, Duff & Phelps, in June 2000 and, in 
December 2000, Thomson BankWa tch, another agency spec ialised in rating banks. 
13 DBRS has its headquarters and main offices in Toronto. DBRS opened offices in Paris (in early 2006), 
in London (September  2005) and Frankfurt (Decembe r 2005) and sought to compete for market share in 
Europe on offering research and ratings on banks and securitisation. Due to adverse economic 
conditions, in January 2008 DBRS announced that  they were closing all their EU offices.  
14 In accordance with a Report on rating agencies published by the French Autorité des Marchés 
Financiers for 2006 the ratings income of the agenci es 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 busin ess represented between 35 % and 45% of European 
earnings. 
15 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider 
dealing and market manipulation OJ L 96, 12.4.2003, p. 16 
16 Article 80 et seq  of 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 busi ness of credit institutions OJ L 177, 30.6.2006, p. 
33 
EN 8   EN and they are not subject to any form of official (public or se lf-regulatory) oversight at EU 
level. For more details on the le gal approach on CRAs, see Annex 9.1.  
As mentioned in section 1.1, the European Co mmission issued a Communication on CRAs in 
2006 where it concluded that various financial se rvices directives, combined with self 
regulation by the CRAs themselves on the basis of the IOSCO Code, could provide an answer 
to the major issues of concern in relation to CRAs. The Communication stated that this 
approach would require continuou s monitoring of developments in  this area by  the European 
Commission and additionally asked CESR to m onitor compliance with the IOSCO Code and 
report back on an annual basis.  
The Commission Communication concluded that CRAs had to incorporate all the provisions 
of the IOSCO Code into their own internal Codes of Conduct on a voluntary basis; CRAs are 
free not to respect certain obligations stemming fr om the Code, as long as they disclose them 
("comply or explain" principle). The annual monitoring report produced by CESR is the only 
mechanism available in order to contro l the CRAs' compliance with the Code. 
Conversely, CRAs operating in the US are regulated entities. They have to be registered and 
supervised by the US securities markets supervisor (the Securities and Exchange 
Commission, SEC). A description of the main el ements of the US legal framework for CRAs 
can be found in the second part of  annex 9.1. The US Act on CRAs of 200617 is relatively 
recent and its effectiveness has not been tested yet; it entered into force in June 2007, just 
weeks before the beginning of the subprime tu rmoil. The SEC announced last September its 
intention to reinforce this framework. On 11 June and 1 July 2008 the SEC proposed 
important changes in the legal framework for CRAs18. These proposals are presented in more 
detail in the Annex 9.5 of this Impact Assessment. 
2. P ROCEDURE  
2.1. Consultation 
The European Commission decided to mandate CESR in September 2007, and the European 
Securities Markets Expert Group (ESME)19, in November 2007, to provide advice on the 
various aspects of CRAs' activity and role in the financial ma rkets and especially in structured 
finance. The Commission services followed th e work of both groups throughout the entire 
process. Both groups have carried out an extens ive consultation with stakeholders notably on 
the role of structured finance in the context of  the subprime turmoil. CE SR delivered its report 
on 13 May 2008 and ESME delivered its report on 4 June 2008. 
In addition, the Commission services have held discussions with major rating agencies and 
other stakeholders (industry asso ciations from the insurance, securities and banking sectors, 
information providers, etc). The Commission services have also received written inputs from 
                                                 
17 US Credit Rating Agency Reform Act of 2006. 
18 More information can be found at www.sec.gov/rules/proposed.shtml . 
19 The European Securities Markets Experts Group (ESME) is an advisory body to the Commission, 
composed of securities markets practitioners and expe rts. It was established by the Commission in April 
2006 and operates on the basis of the Commission Decision 2006/288/EC of 30 March 2006 setting up 
a European Securities Markets Expert Group to provid e legal and economic advice on the application of 
the EU securities Directives (O J L 106, 19.4.2006, p. 14–17). 
EN 9   EN a wide range of associations, ma rket practitioners and stakeholde rs. On the international side, 
the Commission services have followed closely th e developments like the revision of the code 
of conduct for CRAs approved by IOSCO on May 26 and the report of the Financial Stability 
Forum (FSF)20 published on April 7, 2008. The Commi ssion services have been also 
following the consultations carried out by bot h IOSCO and the FSF. Finally, the Commission 
took into consideration the va rious initiatives proposed and / or implemented by the CRAs 
either individually or on an industry-wide ba sis (among them the industry White Paper, they 
prepared in response to the wo rk on the IOSCO Code revision21) and benefited from an 
intensive informal dialogue with the interest ed rating agencies. An overview of the main 
elements of these initiatives can be found in Annex 9.5. 
Taking into account the global dimension of the rating bu siness, the Commission services 
have thoroughly scrutinised th e current legal framework fo r CRAs in the US, and have 
followed closely the evolution of the pr oposals for changes in the US Act on CRAs 
implementing measures presented by the US Securities and Exchange Commission (SEC) on 
11 June and 1 July 2008. This issue has also been  part of the ongoing regulatory dialogue with 
the US. A comparative table of the US regime, IOSCO code standards and the proposal of the 
Commission can be found in annex 9.12.  
Additionally, the Commission has encouraged comm ents from interested stakeholders in a 
public consultation starting on 31 July and la sting till the beginning of September 2008.  
The Commission services received 82 contribu tions: 13 from credit rating agencies, 52 from 
organizations of stakeholders (banks, associa tions, investment funds, savings banks etc) and 
17 from securities regulators and minist ries of finance of Member States. 
The non-confidential contributions can be  consulted in the Commission website 
(http://ec.europa.eu/inte rnal_market/securities/agencies/index_en.htm ). 
2.2. Steering Group 
The 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 Ge neral Enterprise and th e Secretariat General 
and met four times, on 27 June and 8, 11 and 16 July 2008. The contributions of the members of the Steering Group have been taken into account in the conten t and shape of this impact 
assessment.  
                                                
 
20 The Financial Stability Forum was convened in April 1999 to promote international financial stability 
through information exchange and international co-operation in financial supervision and surveillance. 
The Forum brings together on a regular basis national authorities responsible for financial stability in 
significant international financial centres, inte rnational financial institutions, sector-specific 
international groupings of regulators and supervisors, and committees of central bank experts. The FSF 
seeks to co-ordinate the efforts of these various bodies in order to promote international financial stability, improve the functioning of markets, and reduce systemic risk. 
21 Discussion Paper about Measures to Enhance the Independence, Quality and Transparency of Credit 
Ratings, endorsed by 5 rating agencies (A.M. Best, Moody's, Standard & Poor's, Fitch, DBRS). 
December 2007.  
EN 10   EN 2.3. Impact Assessment Board 
DG MARKT services met the Impact Assess ment Board the 3 September. The Board 
analysed this Impact Assessment and deliver ed its opinion on 9 September 2008. 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 th is final draft. These 
are the most relevant ones: 
– Clarifications in sections 1.2 and 3 about the financial cr isis and the role of CRAs, 
explaining that the financial crisis is a phenomenon caused by multiple factors, and presenting the Commission proposal  on CRAs as a part of a wider exercise (the ECOFIN 
roadmap). 
– In order to highlight the synergies and diffe rences of the proposal with US regulatory 
framework the section 2.1 was amended and a co mparative table was incorporated to this 
Impact Assessment (annex 9.12). 
– A summary of the main elements of the c onsultation was added in section 2.1, and the 
Impact Assessment has been  consistently revised. 
– More evidence for some of the elements of the problem definition was added in chapter 3. 
– In order to highlight the a dded value of the proposal of the Commission tacking into 
account the revised IOSCO code of conduct an d the voluntary initiatives implemented by 
CRAs, the structure and content of se ctions 5.2, 6.2.1 and 6.3 were revised. 
– The substance and the two options for the supe rvisory architecture of the legislative option 
were further elaborated in section 5.2. 
– Further clarifications about the assumptions used in the analysis of impacts in chapter 6 
were added, in particular in relation to th e convergence of the substantive policy options 
with the rules in the US a nd the standards of the IOSCO code of conduct for CRAs.  
– The analysis of the legislative proposal  was further elaborated in section 6.2.4. 
– Some clarifications concerni ng the costs of the proposal we re added in chapter 7, in 
particular in relation to the co st of the prohibition of the pr ovision of consulting activities. 
– Finally, the monitoring and ev aluation strategy was further elaborated in chapter 8. 
3. P
ROBLEM DEFINITION  
The measure proposed by the Commission on CRAs doe s not intend to tack le all issues linked 
to the financial turmoil but only focuses on  CRAs. Evidence shows that CRAs have had a 
markedly worse performance when assigning rati ngs to innovative, structured products than 
when issuing traditional ones. The analysis of the Commission therefore focuses on the issues that have arisen in the contex ts of rating structured  finance products. Howe ver, it has to be 
borne in mind that as financial innovation pr ogresses, similar problems may occur in the 
future in other areas where CRAs have lim ited or no experience. Moreover, certain 
deficiencies that became evident with respect to structured finance ratings relate to the 
structure, business model and internal processes of the entities. Bearing this in mind, they may 
EN 11   EN also have a harmful effect on the more tr aditional areas of CRAs' activity. The major 
problems that the Commission services have id entified with respect to rating agencies are 
grouped in three broad areas:  
– Failures in the integrity of the CRAs (mainl y in relation to conflicts of interest); 
– unsatisfactory quality of methodologies and ratings; 
– lack of transparency of the CRAs. 
Moreover, the lack of effective supervision and enforcement can accentuate these problems. 
Contrary to the US, in the EU CRA s are not subject to di rect supervision. Public authorities in 
the Member States are not entitled to sancti on a rating agency when it breaches the current 
IOSCO standards of integrity, quality and transparency.  
Further issues have been highlighted by stakeholders, notably the limited scope of 
competition among CRAs and the unfair practices, like the so called "notching practice"22. 
While the Commission services acknowledge the relevance of these problems, competition rules developed under the articles 81 and 82 of the EC Treaty are best placed to address these 
concerns. Therefore, any measure proposed will fully take into account its impact on the competition among CRAs. 
Another issue out of the scope of this Impact  Assessment is the ques tion of the over-reliance 
on ratings by investors. A number  of stakeholders have noted th at many investors relied solely 
on the rating of a pr oduct to make up their investment decisions and did not carry out any 
further analysis about the ri sks of their investment. The Commission launched a parallel 
consultation about this issue on 31 July 2008. Furthe r action may be envisaged at a later stage. 
3.1. Failures in the integrity of CRAs; confli cts of interest in the rating business  
All contributors, institutions and stakeholders consulted have unanimously expressed the view 
that the conflicts of interest that could arise when CRAs rate  structured products have not 
been avoided or managed in a satisfactory way. The lack of independence of the agency, the 
influence of the remuneration aspects over the i ndependence of the analys ts, the conflicts of 
interest that arise from the pe rformance of services  other than rating, the influence of the 
analyst's relations with potential future empl oyer and the possible "shopping" for ratings are 
the most relevant topics which need to be addressed.  
3.1.1. Conflicts of interest originat ed by the "issuer-pays" model  
The task of evaluating th e creditworthiness of an issuer undertaken by an ag ency is – as a rule 
- paid by the same issuer who is being rated or  the originator of the issue. This situation 
                                                
 
22 "Notching refers to the practice whereby one ratin g agency reduces the ratings from another rating 
agency on structured finance collateral it has not rate d itself. Notching can arise when structured finance 
collateral such as commercial mortgage backed securities (CMBS), residential mortgaged-backed securities (RMBS) and asset backed securities (ABS) are included in ra ted investment vehicles such as 
collateralized debt obligations (CDO), structured investment vehicles (SIV) or asset-backed commercial 
paper programs (ABCP)." (From Greenberg Quinlan Rosner Research Inc – www.greenbergresearch.com) 
EN 12   EN creates conflicts of interest for the agency23. As ratings effectively translate into borrowing 
costs, issuers and originators woul d always strive to have their instruments rated at the highest 
possible grade. On the other side, the accuracy of the rating is under pressure as the agency makes efforts to attract business and maximise pr ofits. Another source of conflicts of interest 
is the lack of indepe ndence of the CRA in relation to th e issuer/originator whose financial 
instruments are to be rated. In a survey carried out in June 2008 the CFA Institute
24 asked its 
members (investment professionals worldwide)  whether they had ever witnessed a CRA 
changing a rating as consequence of pressure or influence from an investor, issuer or 
underwriter. 211 of the 1.956 respondents said they  have indeed witnes sed a CRA changing 
ratings in response to external pressures. Wh en asked to specify how this pressure was 
accomplished, 51% mentioned the threat to take future rating business to other CRAs and 17% mentioned the offer to deliver more business to the agency. When an agency is not independent its rating opinions may not be accurate. Corporat e or economic links, business 
interests or other kind of links between the i ssuer/originator and the agency jeopardise the 
agency's independence. 
There are two alternatives to the "issuer-p ays" model: a "subscriber-pays" model and a 
"public utility" model. The "subscriber-pays"  model was used by the agencies until the 1970s. 
There were two main reasons why the agencies abandoned such a model: firstly, the dissemination of ratings created an unlevel play ing field as they did not reach all market 
participants (such a piece of information would only be limite d to the subscribers); secondly, 
the model did not provide enough funding for the analysis of increasin gly complex products 
(which required the agencies to devote more re sources). On the other ha nd, the "public utility" 
model requires transforming the CRAs into a pu blic utility and funding them with government 
revenues. This model has its own disadvantages: it is not free from own conflicts of interest 
(governments are rated entities too) ; it is also consider ed that it could se verely hamper the 
innovation within the financial markets and it is a costly proposition involving taxpayers' 
money. 
3.1.2. Conflicts of interest that emerge from the agency's activ ities: advisory and ancillary 
services; the dialogue of the anal ysts with the rated entity  
3.1.2.1. Conflicts of interest arising from the pr ovision of advisory se rvices and ancillary 
services 
One source of conflicts of interest for CRAs is the provision of services different from the 
rating to the issuer/originator, like advisory  services. Should these non-rating services give 
rise to significant, high-margi n revenues from a rated client, a CRA has a clear incentive to 
continue this lucrative relati onship and look more favourably at  the client's creditworthiness 
for rating purposes. The provision of advisory serv ices also creates a clea r conflict of interest 
for the CRAs, where their analysts formulat e proposals or recommen dations regarding the 
                                                
 
23 "Many observers cite the conflicts of interest inhe rent in the credit rating industry as a source of 
concern. The most common conflict noted is that m any of the CRAs receive most of their revenue from 
the issuers that they rate. The fear is that where a CRA receives revenue from an issuer, the CRA may 
be inclined to downplay the credit risk the issuer poses in order to retain the issuer’s business" . 
IOSCO, The Role of Credit Rating Agencies in Structured Finance Markets – Final Report. 
24 CFA Institute (Chartered Financial Analysts Ins titute) is a global, not-for-profit association of 
investment professionals that manages educational programs for investment professionals and analysts 
and promotes ethical standards and professional excellence within the global investment community 
(more information in www.cfainstitute.org ). 
EN 13   EN design of a structured finance instrument. In th is case, impartiality of the agency and its 
independence become questionable: it both advise s the issuer/arranger on how to structure a 
product and rates the probability of  default of such a product.  
Ancillary services are activities other than the rating process, like pricing analysis  for 
structured finance securities that  do not have a liquid market or rating assessment services,  
where CRAs provide issuers with the likely im pact on a rating of hypot hetical events (for 
instance a merger between two corporations), or several hypothetical struct ures in relation to a 
structured product (for in stance when it comes to how different  tranches of debt are set up, or 
when it comes to levels of cred it enhancement). Provision of anci llary services may give rise 
to similar situations as in the case of advisory services (i.e. when ancillary service relationship 
prevails over the rigour and indepe ndence of the rating process).  
On the one hand CRAs have not properly separated operationally and legally their analysts 
and credit rating business from any other busines s of the CRA that may represent a conflict of 
interest to their rating services. On the other hand, there is a lack of clarity in this regard as 
CRAs do not have a precise and common definition of the concepts of ancillary and advisory 
services25.  
3.1.2.2. Conflict of interest and the dialogue of the analysts with the rated entity 
CRAs have been criticised for being too involve d in the structuring process of securitisation 
products. Both CESR and ESME express concerns in this respect in their reports26. They point 
out that the dialogue between the CRAs and the i ssuers in the structuring process is often very 
close and happen on a continuous ba sis. This may raise concerns that the relationship between 
CRAs and the issuers of struct ured financial products is so metimes becoming too close and 
advisory in nature which could cr eate conflicts of interests particularly given the fact that the 
profitability of a CRA is heavily  dependent on the flow of its new structured finance ratings. 
Moreover, CESR points out that there are case s were the analysts take part in the fee 
negotiation with the originator of the rated pro duct. This is particularly the case in complex 
structured finance deals where rating staff may be involved in discussing the amount of work 
that has to be done as it also has an impact on fees.27 
3.1.3. "Shopping for ratings" practice  
The practice of shopping for ratings  takes place when issuers/arra ngers of a structured product 
inquire several CRAs for their preliminary rating assessment of the potential structures before 
they finally decide on an issue. On the ba sis of the "best rating offer" received, the 
issuer/arranger will determine the choice of the rating agency that will prepare the official 
                                                 
25 Paragraph 190 and 195 of CESR’s Second Report to the European Commission on the compliance of 
credit rating agencies with the IOSCO Code and the role of credit rating agencies in structured finance. 
May 2008. (CESR/08-277). 
26 Paragraph 180 of CESR’s Second Report to the European Commission on the compliance of credit 
rating agencies with the IOSCO Code and the role of  credit rating agencies in structured finance. May 
2008. (CESR/08-277); First paragraph of the answer to Question 12. ESME Report to the European 
Commission on the Role of Credit Rating Agencies. 4 June 2008. 
27 Paragraph 100 of CESR’s Second Report to the European Commission on the compliance of credit 
rating agencies with the IOSCO Code and the role of  credit rating agencies in structured finance. May 
2008. (CESR/08-277). 
EN 14   EN rating. This is likely to  lead to ratings inflation and l ack of applied methodological rigour. 
This practice is mentioned in IOSCO report a nd CESR has received evidence on this issue 
from stakeholders28.  
3.1.4. Analyst's independence when  joining a rated entity  
Rating analysts are an attractive recruitmen t target for investment banks and other 
originators/issuers. More recently, concerns have been raised that  prior to their departure from 
the CRA they may be prone to look more favour ably at issues origin ated by their future 
employer, and therefore such ra tings would lack accuracy.  
3.2. Lack of quality in methodology and ratings  
As explained in Section 1.2 there was a signifi cant number of downgrades in the second half 
of 2007 and first quarter of this year as compar ed to figures of the first half of 2007. These 
ratings failed to reflect market conditions in  the underlying assets. One cause of this bad 
performance is most probably the lack of quality in the me thodologies used by the CRAs to 
issue a rating29. The main criticisms identified in  this respect are the following: 
– lack of a regular review of the methodologies and rating criteria; 
– insufficient macroeconomic an alysis in the ratings; 
– inadequacy of the information on which th e agencies base their rating opinion; 
– lack of statistical checking; 
– inadequacy of the staff involved in  the rating of complex products.  
3.2.1. Lack of adequacy of methodologies and rating criteria 
The methodologies and models employed by the rating agencies appeared unable to properly 
reflect the worsening conditions in the underlyi ng asset markets. Agencies were not keen to 
review their methodologies because they preferred as much stability of the ratings as possible. 
Among other sources, the FSF report indicated that  the ratings performance may also have 
been damaged by flaws in the rating methodol ogies. These flaws in methodology include the 
impact of having only limited historical data in  the area of subprime lending which led to the 
inability to assess how a pool of assets would respond to given economic scenarios. The FSF 
report points out that, in particular, the ag encies underestimated th e correlations in the 
defaults that could occur in the event of a wide market downturn. CESR considers that the 
delay in the downgradi ng process of structured finan ce securities b acked by subprime 
mortgage assets raises questi ons on the efficiency of CRAs’ methodologies, the robustness of 
their historical default models  in a relatively new market and their rating surveillance 
                                                 
28 Paragraphs 203 and 204 of CESR’s Second Report to the European Commission on the compliance of 
credit rating agencies with the IOSCO Code and the role of credit rating agencies in structured finance. 
May 2008. (CESR/08-277).  
29 Paragraph 106 of CESR’s Second Report to the European Commission on the compliance of credit 
rating agencies with the IOSCO Code and the role of  credit rating agencies in structured finance. May 
2008. (CESR/08-277). See annex 9.5. 
EN 15   EN procedures30. It was recently published that technical errors in CRAs models could have also 
had a major distorting effect on the conclusions produced in the course of the rating process31. 
3.2.2. Lack of diligent monitoring of ratings ; inconsistent application of changes to 
methodology; inadequate staffing. 
A critical part of the rating process is the su rveillance or monitoring of the rating through the 
life of the product to which it refers. Survei llance should determine whether the agency 
should upgrade, downgrade or keep the rating un changed. CRAs not only have issued a great 
number of ratings that assured investors of t op credit quality of s ubprime products, but also 
they were not vigilant enough and did not downgra de such ratings in a timely way when the 
first signs of deterioratio n of the situation started to become apparent.  
The difficulties experienced with structured finance ratings have demonstrated that CRA's 
were not attaching sufficient im portance to monitoring the perfor mance of the ratings issued 
in the past. Understaffing and low qualificati ons of the surveillance teams on the one hand 
and questionable frequency of the actual monito ring reviews of the ratings, and superficial 
character of such reviews on the other, have significantly aff ected the quality of ratings.  
The lack of sufficient, high qual ity and skilled resources to d eal with the rating of complex 
structured products has – in general – been cons idered as one of the po ssible explanations for 
the failures of the agencies. As mentioned above, this failure might have been even more severe in relation to the surveillance function.
32 CESR has gathered evidence supporting this 
assumption during the consu ltation with stakeholders33. 
CRAs  have  also been found to be inconsis tent in how they deal with ratings issued in the past, 
if the methodology or key assumptions they were based on have been a ltered. In particular, 
anecdotal evidence suggests that  when an agency upgraded or downgraded rating of a specific 
issue as a result of a change in its methodology, the agency would not c oncurrently review or 
adjust the ratings given to similar products on the basis of such a methodology. Therefore, 
users often find it difficult to es tablish whether uncha nged ratings have been  maintained in the 
light of methodology change or whether th ey simply have not been reviewed.34 Finally, 
recently concluded examinations by the US S ecurities and Exchange Commission revealed 
that some rating agencies we re effectively using different  methodologies and models for 
producing initial ratings and for ensuing surveillance activity.  
                                                 
30 Paragraph 106 of CESR’s Second Report to the European Commission on the compliance of credit 
rating agencies with the IOSCO Code and the role of  credit rating agencies in structured finance. May 
2008. (CESR/08-277). 
31 The Financial Times revealed in May that a computer bug distorted Moody's ratings for a complex 
instrument known as constant proportion debt obligation (CPDOs). However, Moody’s maintained the top-notch ratings on these products until 2008, when they were downgraded amid general market 
declines. The agency never denied this event. 
32 ESME echoes this concern: "For structured finance, the resources of the CRAs have been stretched 
following the rapid growth in new ratings and the exponential growth in deteriorating structured 
finance securities. This has contributed to  a delay in the re-rating decisions."  
33 Paragraphs 159 and 160 of CESR’s Second Report to the European Commission on the compliance of 
credit rating agencies with the IOSCO Code and the role of credit rating agencies in structured finance. 
May 2008. (CESR/08-277). 
34 Paragraphs 136 and 137 of CESR's Second Report to the European Commission on the compliance of 
credit rating agencies with the IOSCO Code and the role of credit rating agencies in structured finance. 
May 2008. (CESR/08-277) See annex 9.6. 
EN 16   EN 3.2.3. Lack of quality in the information used by the CRAs  
It is widely accepted that there is insufficient in formation available for market participants on 
the evolution of the underlying asse ts for specific structured products35. In more mature 
market segments, the Prospectus36 and Transparency37 Directives require issuers to provide 
periodical and ongoing information to the public  on the performance of the issuer and the 
financial instruments traded in a regulated mark et or offered to the pub lic. Investors could not 
easily find similar information on the performan ce and evolution of the underlying assets of 
the structured products allowing them to perform their own risk assessment (e.g. the 
originator of RMBS is not oblig ed to disclose on a monthly or quarterly basis the performance 
of the underlying mortgages: number of fo reclosures, failures, defaults, etc).  
Another significant issue of concern is the inform ation that the agencies use in order to make 
their decision on the ratings, for example, whether a significant level of fraud or 
irresponsibility has been identifi ed with respect to the underlying assets of some structured 
products. This is mainly in rela tion to RMBS (loans given to cr editors with very  poor or false 
creditworthiness; exaggerated valuations of th e underlying assets). Despite the fact that 
originators are obliged to carry out their own due diligence processes concerning the information that they are conveying to the agency, CRAs have not adequately checked the 
quality of the information they  received from the originators
38.  
The lack of disciplined underwriting allows fo r an increase in defaults through the use of 
inaccurate data or fraud. An analysis of a sa mple of loans which underperformed significantly 
compared with expectations based on each loan's disclosed risk attributes, showed a 
significant number of irregularit ies. Among other issues, 66 % of the mortgage files contained 
occupancy fraud, 51 % contained irregularities related to property value or other loan 
conditions, 44 % stated a questionable income or employment, 16 % indicated identity theft 
and 10 % indicated signature fraud. Less than  5000 cases of mortgage loan fraud were 
reported before 2002, while 2004 and 2005 showed 18,391 and 25,989 cases of fraud, 
                                                 
35 The first of the four areas of action of the ECOFIN Roadmap of October 2007 relates to the 
transparency in the market s. The absence of accurate and timely in formation on exposu res to credit risk 
has been a key factor in the generalised loss of investor confidence in financial markets since August 
2007. Questions about the adequacy of  transparency have been raised in several respects, including: (i) 
information provided to individual investors and the broader market by special purpose vehicles 
(SPVs), i.e. conduits and Structured Investment Vehi cles (SIVs) involved in the securitisation process; 
(ii) bank disclosure of securitisation operations and exposures to SIVs, (iii) complexity in the 
structuring and measurement of risk in structured finance products as well as difficulties in valuating 
these products; and (iv) opacity in the functioning of markets for complex financial instruments. 
Supervisors, regulators and industry associations are examining how and where progress can be made in improving transparency, includin g in arrangements for informa tion exchange among themselves. 
36 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 (OJ L 345, 31.12.2003, p. 64–89) 
37 Directive 2004/109/EC of the Eu ropean Parliament and of the Co uncil of 15 December 2004 on the 
harmonisation of transparency requirements in relati on to information about issuers whose securities are 
admitted to trading on a regulated market and amending Directive 2001/34/EC (OJ L 390, 31.12.2004, p. 38–57) 
38 Fitch Ratings has analysed this issue and conclude d that poor underwriting practices and fraud may be 
widespread and account for as mu ch as one-quarter of the underp erformance of recently issued 
subprime RMBS. See: The Impact of Poor Underwriting Practices and Fraud in Subprime RMBS 
Performance, Fitch Ratings, 28 November 2007 (research report available on website of Fitch).  
EN 17   EN respectively39. Considering the real impact and the extent of poor underwriting standards and 
fraud in the class of subprime RMBS a thorough analysis of the actual quality of the loans 
seems warranted.  
3.2.4. Lack of analytical information in the ratings on the impact of market developments 
and macro economic expectations  and price volatility 
It appears that the monitoring of the structured pr oducts ratings was very much limited to 
mere data monitoring, whereas the analysis of the impact on ratings of possible future 
macroeconomic expectations was left aside40. Investors maintain that they were not able to 
ensure due diligence in their in vestment decisions based on ratings, as it was not clear how 
various market developments that move the pa rameters built-in the model may influence the 
rating change. Besides, currently the agencies  do not include in their rating opinion any 
indication about the volatility of the ratings. 
3.3. Lack of transparency of CRAs 
CRAs do not communicate with sufficient precisi on the characteristics and limitation of the 
ratings of structured finance products and they  do not provide either sufficient information on 
critical model assumptions. The lack of this  information hinders the understanding of the 
ratings significance by ma rket participants. CRAs do de liver information on rating 
performance, but such information does not f acilitate comparison among CRAs' performance. 
3.3.1. Structured and traditional ratings are not differentiated 
CRAs use the same rating scale for structured and traditional ratings. Many investors, 
typically less familiar with securitisation products, were confused as to the risk profile of the 
instruments involved: as they dr ew simple comparisons with tr aditional debt, rated according 
to the same scales, they were convinced th at AAA-rated securitisati on products (e.g. CDOs) 
were as safe as sovereign debt. As for the rating  agencies, most of them have been reluctant to 
consider separate rating scales for different asset classes. They argued that in quantitative 
terms the probabilities of defaults can be comp ared across diverse asse t classes, although the 
instruments themselves have very different market characteristics. Nevertheless, more 
recently some agencies started seeking commen ts from market participants on the use of 
distinctive grades for different asset classes (see initiatives by Moody's and S&P's described 
in Annex 9.7). A survey from the CFA Institute41 dated on June 2008 posed the following 
question to its members (investment professionals): "do you believe that CRAs ought to be 
compelled to use different rating symbols for structured products?"  There were 1.956 
respondents, 47% answered yes, 42% answered no and 11% had no opinion.  
3.3.2. No comparable information on CRAs performance available 
CRAs occasionally furnish users of ratings w ith rating transition and default studies – 
analyses that track ra ting activity for debt instruments ove r a certain period. Such reports – 
done separately for stru ctured finance and trad itional debt – usually include a review of 
                                                 
39 Fitch Rating also notes that such reports are only  filed by federally charte red or federally insured 
institutions and the true number of cases coul d easily be two or three times higher. See: The Impact of 
Poor Underwriting Practices…  
40 ESME report, page 14 (see annex 9.6).  
41 www.cfainstitute.org  
EN 18   EN upgrades/downgrades and defaults by rating cate gory for each of the main sub sectors – e.g. 
for structured finance it could be ABS, RMBS, CMBS and CDOs42. As a result, these reports 
are potentially a good basis for assessing CRAs' sound judgment in attributing ratings over the 
years. There are two major caveats: firstly, ma rket practitioners i ndicate that the data 
presented in these reports have not always b een complete; secondly, ra ting agencies differ in 
their approaches to collec ting relevant data and pres enting them to the public.  
4. O BJECTIVES  
Accurate and independent ratings  are essential for the proper  functioning of the financial 
markets. Therefore the main objective of the Co mmission proposal is to en sure that ratings are 
reliable and accurate pieces of information. Cons equently, it is of the utmost importance to 
mitigate any negative influence in the ratings that might result from conflicts of interest in CRAs, low standards of quality in  the ratings and lack  of transparency of the agencies. The 
objective of the European Commission is to achiev e a solution for each of the elements of the 
three problematic areas that have been men tioned above under the problem definition section. 
Thus, the objectives of the proposal from the European Commission are the following:  
1) Ensure that CRAs avoid and manage a ppropriately any conflict of interest.  
2) Ensure that CRAs remain vigilant on the quality of the rating methodology and the 
ratings.  
3) Increase the transparency of CRAs.  In addition there is an overall objective which is to enhance the compliance of CRAs with the 
measures responding to the three specific objec tives listed above throughout the territory of 
the European Union.  
4.1. Objectives in relation to CRAs' insufficien cies in their intern al organisation and 
controls in relation to conflicts of interest 
Conflicts of interest are inherent in any business. They relate not only to business 
relationships but also to ot her type of relationships, such as personal or economic 
relationships the staff and senior managers may have. Therefore, CRAs should be in a 
position to avoid conflicts of intere st or, when they are unavoidable
43, manage them and 
mitigate their effects. This general objective can be specified in the following concrete 
objectives: 
                                                 
42 Please see Annex 9.3, where these acronyms are being explained.  
43 Following the example of other pieces of legislation there are situations where it is not possible to avoid 
all of the conflicts of interest. One example is Directive 2004/39/EC on markets in financial instruments (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 L 145, 30.4.2004, p. 1–44). Article 18 of this Directive provides investment firms are to maintain 
and operate effective organisational and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of in terest from adversely affecting the interests of its 
clients; in case those arrangements ar e not sufficient to ensure that risks of damage to client interests 
will be prevented, the investment firm shall clearly di sclose to the client the general nature and sources 
of conflicts. 
EN 19   EN – Ensure that the provision of advisory or anci llary services do not pose a conflict of interest 
to CRAs; 
– ensure that the dialogue of  the analysts with the rate d entity remains unbiased and 
objective; 
– arrange remuneration policies and structures in a way to elimin ate or manage conflicts of 
interest; 
– mitigate "shopping for ratings" practice; 
– ensure the independence of the anal ysts when joining a rated entity. 
4.2. Objectives in relation to the lack of  quality of the methodology and the ratings 
CRAs should improve the quality of the rating methodology and the ratings. The intention of 
the proposal from the European Commission in this regard should not be to prescribe a 
specific rating methodology, but to ensure the qual ity and due diligence of the CRAs in their 
activities. In particular, the following specific objectives should be fulfilled:  
– Ensure that the methodologies, models and ke y rating assumptions ar e appropriate for the 
rated instruments; 
– ensure that existing ratings are diligently monitored; 
– ensure that changes in methodology are consiste ntly applied to all ratings concerned;  
– ensure that the information used by the CRAs to issue a specific rating is statistically 
sound; 
– ensure that CRAs devote adequate staff (in terms of quantity and quality) to the rating 
process (initial rating and monitoring); 
– ensure that the analysis of an  issuer or a product takes into  account the impact of market 
developments and macro economic expectations.  
4.3. Objectives in relation to transparency of the CRAs 
CRAs should improve transparency in relation to their internal policies and the presentation of 
the ratings. The purpose of enhan ced transparency with regard to disclosures and record-
keeping is two-fold: on the one hand, it will fac ilitate investor's awareness of the purpose and 
limitation of the ratings and it will allow comp arison among CRAs performance. On the other 
hand, it will help to restore the confiden ce of the public on the rating business. 
In particular, the following specific objectives should be fulfilled:  – Ensure sufficient transparency with respect to the functioning of internal processes and 
procedures; 
– ensure that the information included in the rati ngs is relevant and sufficient in order to 
efficiently assess the probability of default of an instrument; 
EN 20   EN – avoid investors' confusion originated by the fact  that the ratings for structured products and 
the ratings for traditional products (corporate, sovereig n) are not distinguished; 
– ensure that relevant data on CRAs performan ce in a standardised manner is available for 
market participants to allow for industry-wide comparisons. 
4.4. Horizontal objective: Enhancing th e CRAs' compliance with the measures 
responding to the three specific objectives 
There should be a mechanism in place to ensure  the effective compliance of the substantive 
requirements to be respected by CRAs. This mechanism should create the least possible 
burdens for CRAs while ensuring optimum obser vance of all substantive requirements. 
5. I DENTIFICATION OF POLICY OPTIONS  
The policy options that are going to be presente d under this section have been developed in 
due consideration of the following sources: CE SR Report, ESME Report, IOSCO Report on 
the Role of CRAs in Structured Finance Market s, the Report of the Financial Stability Forum 
on Enhancing Market and Institutional Resilie nce, the US Act on CRAs of 2006, the recent 
SEC regulatory proposals on CRAs and collectiv e and individual initiatives presented by 
CRAs. 
In the first section (5.1) we name the main policy options that have been discussed and 
proposed in relation to the subs tantive requirements that could be fulfilled by the CRAs in 
order to meet each of the objec tives set out in section 4. The options presented under each of 
the objectives are not necessarily exclusive or  substitutive among themselves. A more detailed 
description of each policy option that also indicates its source is found in annex 9.8.  
In the next section (5.2) we s hortly present the instruments that  could be used to implement 
such requirements. The assessment of each of the different policy options – on material requirements and on instruments for implementa tion – is presented in sections 6.1 and 6.2 
respectively. 
5.1. Policy options on the substantive requirements  
5.1.1. Policy options to remedy CRAs' insufficien cies in their inter nal organisation and 
controls in relation to conflicts of interest 
The general policy in this regard is that CRA s have to ensure that existing and potential 
conflicts of interest wi ll not affect ratings.  
1. There should be some limitations for CRAs in order to avoid conflicts of interest.  
Options: 
a) CRAs shall identify conflicts  of interest and either eliminate or properly manage and 
disclose them. 
b) Impose  concrete limitations on CRAs activities : CRAs shall not be en titled to issue a 
rating in certain situations that  can impair their independence. 
EN 21   EN c) Impose  high internal governance standards including an independent review 
function and fit and proper requirem ents for non-executive directors.  
2. To eliminate conflicts of interest in the provision of advisory services CRAs 
should avoid human or technical link betw een the rating and advisory activities. 
Options: 
a) Obligation to separate business: A CRA shall separate, opera tionally and legally, its 
credit rating business and CRA analysts  from any other businesses including 
consulting businesses.  
b) Separation with additional caveats:  CRAs are required to publish a transparency 
report which discloses potential conflicts of interest.  
c) Limited  prohibition:  CRAs shall not provide consulting or advisory services to 
issuers that they are rating.  
d) Complete prohibition:  CRAs shall not provide any consulting or advisory services. 
3. CRAs should ensure that the dialogue of  the analysts with the rated entity 
remains unbiased and objective. 
Options: 
a) Clearly defined role of the analysts:  Analysts shall be prohibited from making 
proposals or recommendations regarding the creation or design of structured finance 
products.  
b) Transparency:  CRAs shall ensure that they are fully  transparent in terms of the exact 
nature of their interaction with issuers/ar rangers of structured  finance products.  
c) Record keeping:  CRAs shall record the event and s ubstance of the dialogue between 
the analyst and the issuer.  
d) Additional safeguards:  the analysts and any other employees directly involved in the 
credit rating process shall not be allowed to  participate in discussions regarding fees 
or payments with any rated entity. The ra ting agencies should envisage compulsory 
periodic rotation of analysts. 
4. CRAs should avoid the negative impact of conflicts of in terest in relation to the 
remuneration prospects and other economic incen tives of persons involved in the rating 
process. 
Options: 
a) Reporting lines  for the rating staff and their co mpensation arrangements shall be 
structured  in a way to eliminate or effectively manage actual and potential conflicts 
of interest.  
b) Additional organisational requirements: the agency shall ensure the independence of 
the analysts and persons approving the ra tings in the design of the reporting and 
EN 22   EN communication channels between them and the part of the agency responsible for the 
commercial interests of the entity;  
c) Increase the fixed element of  the salary for the top managers .  
5. The "shopping for ratings" practice should be mitigated. 
Options: 
a) Disclosure to the market: an agency shall disclose on a periodic basis a list of all 
cases where it comes across a "s hopping for rating" practice.  
b) CRAs clients should refrain from shopping for ratings.  
c) Require  issuers to disclose all necessary information to allow all interested CRAs to 
provide unsolicited ratings. 
6. The independence of the analysts should  be granted even when he/she joins a 
rated entity.  
Options: 
a) Cooling off period: During a certain period after leaving the agency the analyst shall 
not be able to accept key management posit ions from the previously rated entity.  
b) Look back reviews: The agency shall review the past work of an analyst in the event 
that he or she leaves the agency to work  for a client that he or she has rated. 
5.1.2. Policy options for improving the qualit y of rating methodologies and the ratings 
1. Methodologies, models and key rating a ssumptions should be appropriate and up 
to date for the rated instruments. 
Options: 
a) CRAs shall put in place an independent  rigorous and formal review function  
responsible for periodically reviewing the methodologies and models it uses.  
b) CRAs shall review its methodologie s in case of significant changes  and on a regular 
basis, e.g. once a year. 
c) Methodologies and models should be  validated by a public authority . 
2. CRAs should diligently monitor the existing ratings. 
Options: 
a) Require CRAs to have separate teams for the initial rating and the ongoing 
surveillance, both with adequa te resources and expertise.  
b) Require CRAs to regularly monitor and update ratings  
c) Envisage expiry of ratings after a certain time period  
EN 23   EN 3. CRAs should apply changes in methodology consistently to all ratings concerned.  
Options:  
a) Impose disclosure obligation: CRAs shall disclose whether they apply retroactively 
model changes to existing ratings.  
b) Re-rate regularly: Require CRAs to apply the changes to past ratings due to the new 
methodology in the course of the re gular review cycle of ratings  
c) Require CRAs to  promptly re-rate existing ratings according to the new 
methodology. 
4. CRAs should use sound information for the issuance of ratings. 
Options:  
a) Ensure good quality of information  in order to support a credible rating   
b) CRAs or a suitable third party (e.g. accoun ting firm) shall undertake due diligence of 
the underlying information:  
c) Quality warranties:  CRAs shall require underwriters to provide representations about 
the level and scope of due diligence that they have performed and disclose the limits of their own due diligence.  
d) CRAs shall abstain from issuing ra tings if no sound data is available or if the 
structure of the rated instrument is too complex to understand   
e) CRAs shall warn the users of ratings if the underlying data is not sufficiently sound.   
5. CRAs shall allocate adequate staff to the rating process. 
Options: 
a) CRAs shall ensure that employees dire ctly involved in the rating process have 
appropriate knowledge and experience.  
b) Additional transparency requirement  with respect to the employees:  CRAs shall 
disclose staff numbers and quali fications as allocated to th e different functions of the 
rating agency and keep record of the identity of credit analysts. 
c) Require a formal qualific ation for rating analysts defining a minimum level of 
knowledge and experience.  
6. The analysis of an issuer or a product by the CRA should take into account the 
impact of market developments an d macro economic expectations.  
Options:  
a) CRAs shall provide sufficient informa tion about loss and cash-flow analysis related 
to the structured finance instrument . 
EN 24   EN b) CRAs shall expand the initial and ongoing in formation that they provide on the risks 
characteristics of structured products a nd model assumptions by including additional 
information on e.g. the rating stability, the assumptions underlying a structured 
product rating, the sensitivity of the rati ng to changes in these assumptions, 
weightings of key parameters and correlations.  
c) Public authorities shall validate the models and assumptions applied by CRAs 
5.1.3. Policy options in relation to transpare ncy of the CRAs 
A number of options may be considered in order to trigger improvements in the CRAs' 
transparency as regards their internal policies,  their performance and the presentation of the 
ratings. In particular, the following sp ecific objectives should be fulfilled:  
1. The agency has to be transparent with res pect to the functioning of internal 
processes and procedures.  
Options:  
a) CRAs shall publish sufficient informati on about their procedures, methodologies, 
models and assumptions.  
b) Require CRAs to disclose a periodic report  containing information such as legal 
structure and ownership of the CRA, desc ription of the internal quality control 
system and indicators of staff allocation.  
2. The information included in the ratings ha s to be relevant and sufficient in order 
to efficiently assess the probability of default of an instrument.  
Options:  
a) Require CRAs to inform investors on loss and cash-flow analysis and about 
sensitiveness to changes in rating assumptions  
b) Require CRAs to be committed to investors' education by clearly explaining 
attributes and limitations of credit rating opinions  
c) Require additional technical information in the ratings: including, e.g. ‘expected loss‘ 
‘worst case/best case scenarios ratings‘ a nd ‘break-even‘ credit loss for different 
tranches as well as 'what if' scenarios.  
3. Avoid investors' confusion triggered by  the use of the same symbols for the 
ratings for structured products and the ratings for traditional debt (corporate, 
sovereign).  
Options:  
a) Use different symbols or a different ra ting scale for traditional ratings and 
structured finance ratings.   
b) Use the same scale but aggregate additional information to the ratings (highlighted 
by a label/rating suffix):  CRAs shall also inform users of the greater potential 
volatility associated with stru ctured finance instruments.  
EN 25   EN c) Educate investors in the par ticularities of th e ratings for structured products and 
traditional debt respectively  
4. CRAs should make available to market pa rticipants the relevan t data about their 
performance in a standardised manner to allow for industry-wide comparisons.  
Options:  
a) CRA industry shall establis h a centralized repo sitory for ratings performance studies 
to allow easier market comparisons am ong the CRAs and make available ratings 
performance data to regulatory authorities.  
b) Obligation to publish historical default rates of CRA rating categories and whether 
the default rates of these categ ories have changed over time.  
c) Obligation to disclose standardised perfor mance information and create a repository 
of ratings at EU level preferably by CESR.   
5.2. Instruments to put in place the policy option 
In response to Objective 4.4 identified in Sec tion 4 of this report (e nsure that CRAs indeed 
comply with a given set of rules), several opt ions may be considered, ranging from simple 
reliance on the CRAs’ internal efforts to the es tablishment of a comprehensive surveillance 
framework administered by public authorities. It should be borne in  mind that specific 
supervisory arrangements may imply prior use of  a particular instrument introducing them as 
well as accompanying substantive requirements. For example, if a public authority were to be 
vested with the task of supervising CRAs, its  competence would need to be anchored in 
binding legislation that would envisage clear obligations for the CRAs. Similarly, self-
regulatory oversight mechanisms cannot be manda ted by legislators or proclaimed by a single 
market player, but will normally require an industry wide commitment to succeed (e.g. 
expressed in a code of conduct).  
EN 26   EN Policy options chart 
Supervision by 
public body  OPTION 4 
Legislation at EU 
level 
Oversight Body 
(private sector) OPTION 2 
European Code of Conduct 
No supervision OPTION 1A 
IOSCO Code of 
Conduct OPTION 1B 
Industry-wide 
efforts White Paper OPTION 1C 
Additional 
initiatives by 
individual CRAs OPTION 3 
Commission 
Recommendation 
 Self regulation Rules at EU level 
 
The above scheme identifies a number of polic y approaches that could be considered to 
address the CRA issues. Each of them is eff ectively determined by two parameters: (i) how 
the CRAs are regulated [horizontal axis] (ii) ho w the CRAs are supervis ed [Vertical axis]. 
Those two parameters are clos ely interrelated. We may broa dly distinguish the following 
approaches: 
1. Proposing no action – existing solution rema ins satisfactory (self regulation based on 
IOSCO code and CRAs initiatives); 
2. proposing a European code of conduct; 3. proposing a recommendati on by the Commission;  
4. proposing legislative measures;  As an essential element of these different pol icy alternatives, superv isory arrangements will 
be presented in the next subparagraphs. Each of these modalities for a supervisory framework 
is evaluated in section 6.  
5.2.1. Self regulation (No policy change) 
5.2.1.1. IOSCO code 
This option implies that the Eur opean Commission would consider that the current situation in 
relation to CRAs is satisfactory and appropriate in order to fulfil the objectives described in 
section 4. In this case, the framework de scribed in the Commi ssion Communication in 
relation to CRAs in 2006
44 would be considered still ade quate: CRAs should just adapt their 
internal codes of conduct to the revised IOSCO code45. CESR would keep its monitoring role 
                                                 
44 See section 1.4. 
45 In May 2008 the Members of IOSCO approved a revision of the code of conduct for CRAs. The 
relevant changes introduced in the code are mentioned in point 2.3.1 of this Impact Assessment. 
EN 27   EN and publish once a year an annual report to th e European Commission on the compliance of 
CRAs with the IOSCO Code (for a more compre hensive explanation of the current framework 
in the EU, see annex 9.1). Additionally, this option would consider that the agencies 
themselves have come forward with appropria te solutions to the problems and concerns 
mentioned above. It should be noticed that CRAs  have recently presen ted several initiatives, 
in the form of self-regulat ory proposals (see 5.2.1.1 and 5.2.1.2). Initially the big CRAs put 
forward collectively a joint initiative. At a la ter stage, some of th em presented additional 
initiatives on an individual basis. 
5.2.1.2. Industry-wide efforts – White Paper In January 2008 the five main CRAs
46 jointly addressed a White Paper to regulators with 12 
proposals to improve the IOSCO code of conduct in relation to the independence, quality and 
transparency of the credit ratings:47  
• The independence of the credit rating process (prohibit analys ts to make proposals or 
recommendations on the securitiz ation products; advisory serv ices should not be provided 
by CRA; "look back" reviews when analysts  leave the agency should be imposed; 
periodical review of remuneration policies and practices fo r analysts should be in place). 
• The quality of the ratings (introduce revi ews of criteria and methodology of ratings; 
introduce improvements in the monitoring pro cess; enhance staff training; encourage 
issuers for a full disclosure to the market  of information on structured products). 
• The transparency of credit ratings (set up of  a centralised depository of ratings; give 
regulators access to data on rating performance to allow them to conduct their own controls 
on rating performance; investor education on the meaning of a rating, the rating process 
and CRAs' role in the market). 
Almost all of the above mentioned proposals co incided with the reform  plans of the IOSCO 
code48. 
5.2.1.3. Additional initiatives by individual CRAs Apart from the joint proposal, each of th e big CRAs put in place several improvements: 
• On February 2008 Standards and Poor's presente d an ambitious reform plan that included 
measures like the appointment of an Ombudsma n for stakeholders, a public annual review 
of governance processes by an independent firm  or the client rota tion for analysts.  
• In September 2007 Moody's proposed a set of  practical requirements to enhance the 
control of the quality of the information about the underl ying assets of a structured 
product. Later in March 2008 the agency presente d other initiatives to  better address the 
issue of the quality of the data used in the rating process. In February 2008 Moody's 
                                                
 
46 Standard & Poor's rating Services, Moody's Investors Services, Fitch, Inc., DBRS Limited and AM Best 
Company, Inc. 
47 A detailed summary of the proposals can be found in Annex 9.9. 
48 See point 2.3.1 
EN 28   EN carried out a public consultation on whether th e rating scales for structured finance 
products should be differentiated from traditional ratings.  
• Fitch has separated its non-rating businesses in to a separate division (Fitch Solutions) and 
has implemented internal changes in its stru ctured finance operations to support objectivity 
and consistency in the rating review process.  Fitch presented further improvements, like 
increased analyst and manager rotation, enha ncements to the formal internal training 
programs for analysts, greater external invest or education efforts and is considering a 
broad range of feedback on ot her aspects of the current agency business model. The CRA 
also worked on the development of additiona l rating scales and in dicators that would 
complement its opinions on structured finance transactions.  
For a more detailed summary of these initiatives of the CRAs, see Annex 9.7. 
5.2.2. European Code of conduct for CRAs 
Another form of self-regulation but with some sort of external monitoring would be one 
inspired by CESR and ESME report: a co de of conduct that  encompasses IOSCO 
requirements (plus the recommendations made  by CESR and ESME) and monitored by an 
external oversight body composed of e.g. representatives of inve stors, issuers and investment 
firms. 
This self-regulatory solution could follow anothe r precedent in the EU financial sector, the 
European Code of Conduct for Clearing a nd Settlement of November 2006. This is a 
voluntary solution and needs the previous common agreement of the CRA industry. The 
members of the industry would commit themselves in writing to respect a range of standards – 
listed in the code – and to accept and respect the recommendations of  a monitoring body that 
would check the level of complia nce of the code by the signatories. Nevertheless, this body 
would not be invested with enforcement powers. 
This option is inspired by the CESR and ESME advice49. Both bodies welcomed the revision 
of IOSCO code and made additional recommenda tions. Both bodies – explicitly or implicitly 
– recommended the Commission to promote a ne w voluntary European code of conduct (the 
revised IOSCO code supplemented by CESR/E SME recommendations). The role of the 
Commission in this case would be to invite t hose CRAs having relevant presence in the EU to 
adhere to such a code. ESME and CESR differed in relation to the overs ight body that should 
monitor the compliance of CRAs w ith the standards of the code.  
a) CESR encouraged the Commi ssion to form an international "CRAs standard setting 
and monitoring body"50 that would develop international standards for the rating 
industry and would monitor the compliance of CRAs with those standards, using full 
transparency as the method for enforcem ent and having "name and shame" capacity. 
CESR also provided for a fall-back option in case this international oversight scheme 
                                                 
49 See point 2.2. 
50 Paragraph 269 of CESR’s Second Report to the European Commission on the compliance of credit 
rating agencies with the IOSCO Code and the role of  credit rating agencies in structured finance. May 
2008. (CESR/08-277). 
EN 29   EN can not be achieved: In that case CESR recommends the formation of such a body at 
EU level.51 
b) ESME recommended that CESR should k eep its monitoring role concerning the 
CRAs' adherence to the IOSCO code as set out in the Commission Communication 
on CRAs of 2006, but such a task shoul d be bolstered by commissioning, in 
conjunction with the CRAs, an external a nnual review and report on the adequacy of 
corporate governance in each CRA and form ing an advisory group to advise CESR 
of: (a) significant developments, trends and issues in the credit markets which are relevant to the activities of the CRAs; and (b) any rating tre nds/issues which are 
prompting concerns.
52 
In this context, the Commission would have to invite CRAs to accept that such an 
international/European b ody is entitled to mon itor their compliance with  the code of conduct. 
To make it operative, CRAs should commit themselves to fully collaborate with the 
monitoring body. 
5.2.3. Recommendation 
Under this option the Commissi on would outline the standard s that CRAs would have to 
comply with when they operate in the EU. These standards would be aligned with those 
mentioned in the fourth option (below). The standards would be built upon the revised IOSCO code and CESR and ESME recommendations, a nd would include those additional standards 
considered by the Commission rele vant in order to achieve the objectives set out  in section 4 
of this Impact Assessment. 
In accordance with Article 249 of the Treat y establishing the European Community, 
recommendations do not have binding force. It  would therefore be up to the CRAs whether 
they comply with the standards set out in the Recommendation. This option of a voluntary 
nature would have similar effects to a code of conduct. 
5.2.4. Legislation 
A fourth policy option would consist in a le gislative proposal to be presented by the 
Commission providing for a comprehensive regula tory framework for CRAs. The addressees 
of the rules would be all exis ting and prospective CRA s (with business operations in Europe) 
whose ratings are intended for use for regulatory purposes like the Capital Requirements Directive
53, by financial institutions in the EU.  
The main objective of the legislative proposal would be to ensure that ratings are more 
reliable and accurate. Therefore it is of utmo st importance to mitigate any negative influence 
on the ratings resulting from conflic ts of interest within CRAs, low standards of quality in the 
ratings and lack of transparency of the agencies . The objective is to address systematically the 
                                                 
51 Paragraph 271 of CESR’s Second Report to the European Commission on the compliance of credit 
rating agencies with the IOSCO Code and the role of  credit rating agencies in structured finance. May 
2008. (CESR/08-277). 
52 ESME's Report to the European Commission. Role of Credit Rating Agencies. June 2008. 
53 See section 1.4 and annex 9.1. 
EN 30   EN risks arising from these three areas. Thus, the ob jectives of the legisl ative proposal would be 
the following: 
– Ensure that CRAs avoid and manage appr opriately any conflict of interest. 
– Ensure that CRAs apply a high standard for the quality of the rating methodology and the 
ratings. 
– Increase the transparency of the CRAs. 
On the one hand, the legislative proposal would contain a set of  rules introducing a number of 
substantive requirements that CRAs will need to respect in the issuance of ratings. These 
substantive requirements would cover issues related to the organisational structure and 
internal governance of credit rating agencies, the avoidance and management of conflicts of 
interest, the quality of ratings and transparency obligations. These requirements would not interfere with the result of the rating process, (the content of the ratings) for which the CRAs 
retain full responsibility. 
On the other hand, the legislative proposal will need to provide for a registration and 
surveillance system which is adapted to the sp ecificities of the rating activity. There are two 
possible options regarding th e supervisory architecture: 
– In a first option public author ities in the Member States would be entrusted with the 
registration and surveillance of  the rating activity. CESR woul d play a strong coordination 
role. Competent authorities w ould have legal powers to as sess the compliance of the CRAs 
with the new legal requirements and would be  entitled to impose sanctions on CRAs in 
case of non-compliance. In this framework the competent authority of the home Member 
State could decide on the re gistration request of an appl icant CRA and would have the 
main responsibility in supervising this CRA  and apply sanctions, where necessary. Other 
competent authorities would be strongly invol ved in the surveillance process and would 
retain competence notably in case of lack  of or ineffective action by the competent 
authority of the home Member State. The convergence of supervisory and enforcement 
practices could be ensured by CESR 
– A second option would be to set up a Community Agency (this could be either CESR or a 
new Agency) that would carry out the registration at central level. The daily surveillance of 
CRAs would remain with national regulator s. The Agency would designate the home 
Member State competent authority for the surv eillance and would coor dinate the action of 
the competent authorities. It would also give advice to competent national authorities in 
supervisory issues. Further, the Agency would ha ve the power to intervene in the event that 
national competent authorities fail to coope rate effectively. The mandate of the new 
Agency would be restricted to CRA issues. It would have its own staff and could also have 
technical committees. The Agency would be financed from the EU budget. 
6. A
NALYSIS OF IMPACTS  
6.1. Analysis of the policy options on the substantive requirements 
This section discusses the main issues to be addressed by each particular instrument among 
those described in section 5.2. Summary tables measure the comparative advantages and 
disadvantages of the different possible solutions against the following criteria: 
EN 31   EN a) Effectiveness : The extent to which the option fulfils the objectives formulated in 
section 4. 
b) Certainty : There should be highest possible conf idence of the releva nt stakeholders 
as to the content of the rules to be respected and that the rules followed in practice are closely aligned with the objectives of the framework.  
c) Convergence:
 The framework for operation of CRAs should be governed by the 
same requirements in all Member States. A level playing fiel d should be created. 
Furthermore, given the global dimension of th is industry, it is necessary to take into 
account the global context, in ternational standards and le gal requirements in third 
countries (particularly US rules).  
d) Flexibility and efficiency : An environment should be es tablished to f acilitate the 
operation of CRAs across the Member States. CRAs should have a le vel of flexibility 
to shape their internal organisation, but without hampering the achievement of the 
objectives of the EU policy in this area. Fl exibility, which captures simplicity, also is 
a cost indicator and therefore indicates effi ciency: the greater the flexibility left to 
CRAs, the more CRAs can make choices ad apted to their needs and control their 
costs. 
In the tables, the options are measured agains t the above-mentioned pre-defined criteria. Each 
scenario is rated between “---” (very negativ e impact) and “+++” (very positive impact). 
At the end of each assessment of the different policy options, it is highlighted which policy 
option(s) is/are best placed to reach the objectives outlined in section 4 with regard to the assessment criteria and are th erefore the preferred policy op tions. The policy options do not 
necessarily exclude each other. Thus, th e preferred policy response will often be a 
combination of the different policy options.  
6.1.1. Analysis of the options to remedy CRAs' in sufficiencies in their internal organisation 
and controls in relation to  conflicts of interest 
1. Limitations for CRAs in order to avoid conflicts of interest. 
The existing general approach in the IOSCO Code has not been sufficiently effective to 
manage the CRAs' conflicts of interest. It doe s not guarantee certainty for stakeholders and 
CRAs. It essentially leaves to the CRAs to d ecide what is effectively prohibited and what 
safeguards are necessary in their inte rnal structures and procedures.  
The use of specific limitations, situations in wh ich CRAs would not be allowed to issue credit 
ratings, would not be effective enough to manage all possible conflicts of interest in a CRA. 
Whilst for CRAs this solution would be easier than the introduction of changes in their 
internal structure, only the latter would o ffer strong structural underpinning to overcome the 
weaknesses of the current conflicts of intere st management in the agencies and would 
ultimately help restore their credibility in the markets.  
To impose certain limitations for CRAs in this fi eld would be consistent with the US Act on 
CRAs, where CRAs have strict limitations for situations where there are links between the 
analysts or person approving ratings and the rated entity (a rating agency is not allowed to issue ratings when he or she has direct ow nership or is a member of supervisory or 
EN 32   EN management board of the rated entity, or the CRA is associated with the rated entity) and 
where CRAs cannot receive more than the 10% of their annual revenue from the same client.  
However, to impose a concrete limitation in the annual revenue that  a CRA could receive 
from the same client could be disproportionate  for small or newcomer CRAs. Therefore, an 
alternative solution could be not to impose such a limit but to require the agency to disclose to 
the public the cases where it has received more than the 5% of its annual revenue from the 
same client. The solution of disclosure when reaching certain limits would be consistent with the IOSCO code of conduct for CRAs. 
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
Identification of 
conflicts  - - + + 
Concrete 
limitations + + ++ - 
High internal 
governance standards ++ ++ + - 
 
The preferred solution would thus be a comb ination of the three policy options proposed. 
Although a general principle may be  offering too much flexibility on a standalone basis, it is 
important to keep it in order to cover any kind of conflict of interest which may emerge and 
which is not covered by express limitations. In addition appropriate internal governance 
requirements should also be part of the policy response. 
2. Elimination of conflicts of interest in the provision of advisory services. 
In order to ensure that CRAs are sufficiently insulated from the resulting conflicts of interest 
it is necessary to have an express prohibition of  combining rating and advisory activity in the 
same rating agency. In few cases only would the disclosure be enough to manage these conflicts. On the whole, however, the range and magnitude of negative incentives to which a 
CRA would be exposed justifies th at it is necessary to introduce a clear obligation to avoid all 
these conflicts, a prohibition of providing consu lting or advisory services should be ensured. 
CRAs would need to revisit thei r business structure to ensure the complete elimination of 
consulting and advisory services from the pro duct portfolio and strict  focus on their core 
activity. The prohibition to provide  advisory services is consistent with the US rules and 
IOSCO code provisions. In any event, most of  the parent undertakings of the CRAs have 
already separated legally and operationally the consultancy part of the business form the 
rating activity. Therefore such requirement would not create any costs to the CRAs.
 
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
Obligation to 
separate business + + - + 
Separation with 
additional caveats + + + + 
Limited 
prohibition + ++ + - 
EN 33   EN Complete 
prohibition ++ ++ ++ - 
 
The preferred solution is a combination of the obligation to separate business and the 
complete prohibition of providing co nsulting or advisory services. 
3. CRAs should ensure that the dialogue of  the analysts with the rated entity 
remains unbiased and objective. 
In line with IOSCO we consider that it is essential to increase the transparency of the rating 
process within CRAs. Thus, there is merit in  monitoring analysts' activities and keeping 
records of any communication related to the credit rating activity. For some CRAs this may 
imply additional costs; however it will assist these CRAs which are already introducing some 
closer internal controls on the activity of anal ysts. Such measures would help to restore the 
credibility of CRAs' rating activity. Such an  option would be consistent with the US 
requirements, where CRAs have extensive record keeping obligations. 
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
Clearly defined role - - - + 
Transparency ++ ++ ++ + 
Record-keeping ++ ++ ++ + 
Additional 
safeguards ++ ++ ++ + 
As all these measures are complementary and safeguard the integrity and independence of 
analysts vis-à-vis the issuers, the preferred policy response woul d be a combination of all the 
options outlined above. 
4. CRAs should avoid negative impact of co nflict of interest in relation to the 
remuneration prospects and other economic in centives of persons involved in rating 
process. 
Compensation policies are extremely important to ensure the objectivity of the credit rating 
process. It should be avoided that the analysts  are compensated by reference to the amount of 
revenue that their work generates to the agency. It is necessary to ensure that the analysts are 
entirely independent from the commercial interests of the CRA (e.g. they are not involved in 
discussing impacts of methodology change s on CRAs' revenue prospects).  
EN 34   EN  
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
Structure reporting 
lines  + + -- + 
Additional 
organisational 
requirements ++ ++ + + 
Increased fixed 
element of 
managers' salary ++ ++ ++ + 
The preferred policy response would be inspired  by the second and third policy option, i.e. in 
addition to structured reporti ng lines (status quo) compensa tion of rating analysts and 
managers should be de-linked form the amount of revenue generated by the analyst and other 
additional safeguards ensuring the independence of analysts from commercial interests of the 
CRA should be undertaken. 
5. Elimination of the "shopping for ratings" practice. 
The solution could consist in making the CRA s disclose information about cases of non-
publication of credit ratings prepared and about  cases where after a preliminary rating an 
originator of a structured fina nce instrument did not contract for a final rating. This measure 
would allow for closer market scrutiny of th ose engaging in the shopping for ratings and 
would take off some pressure from the CRAs to compete by way of offering more favourable 
ratings. By encouraging issuers to disclose al l relevant information concerning structured 
finance products, CRAs would have the possibili ty to issue unsolicited ratings that might 
counter the rating opinion issued by another agency on the issuer 's request; however, none of 
these measures would in itself eliminate the s hopping for ratings. CRAs s hould not be entirely 
responsible for the elimination of  such a practice; rather the c lients of the CRAs should refrain 
from engaging in the "shopping for ratings". 
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
Disclosure to the 
market + + ++ - 
Issuers to disclose 
information  + - - + 
Issuers should 
avoid the practice ++ - + ++ 
The preferred policy option would be the third option mentioned above, i.e. to encourage 
issuers to avoid such a practice. This solution  would be more effective and flexible, as it 
would not impose CRAs an obligation th at is not up to them to meet. 
EN 35   EN 6. The independence of the analysts should  be granted even when he/she joins a 
rated entity. 
A "cooling off" period54 would effectively fulfil the obj ective of managing conflicts of 
interest. The "look back" review would reinfo rce the fulfilment of that objective.  
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
Cooling off period ++ ++ + + 
Look back reviews  ++ ++ ++ ++ 
The preferred policy response is a combination of a proportionate coolin g off period together 
with look-back reviews. 
6.1.2. Policy options for improving the qua lity of the methodology and the ratings 
1. Methodologies, models and key rating a ssumptions should be appropriate and up 
to date for the rated instruments. 
The need for an internal review function fo r the methodologies, models and key rating 
assumptions is now broadly accepted by CRAs. Moreover, it is largely accepted that CRAs 
should review their methodologies in case of si gnificant developments to ensure the validity 
of their ratings; in  addition, these reviews should also be  undertaken on a pe riodic basis. The 
validation of the methodologies by the public aut horities would not be effective enough given 
that public authorities may not always have the expertise and knowledge required to validate 
models for complex financial products. Such a so lution would not be consistent with US rules 
or IOSCO code. Moreover, it would reduce the necessary flexibility that CRAs need to 
perform their activity and adapt to  financial innovative products.  
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
Review function  + + + + 
Review when 
significant 
changes ++ ++ ++ + 
Validation of 
models by public 
authorities - + - - 
Options 1 and 2 should be applied whereas opt ion 3 (validation of methodologies by public 
authorities) does not appear  to be proportionate.  
2. CRAs should diligently monitor the existing ratings. 
On-going monitoring of ratings by CRAs would be an effective measure to ensure the quality 
of the ratings. This would encourage timely adjustments of the ratings to the developments in 
                                                 
54 See point 6 in section 5.1.1 
EN 36   EN the markets (as opposed to more cyclical revi ews). This on-going monitoring of ratings is 
largely practised by the CRAs, and it may be further reinforced by some transparency 
obligations (e.g. disclosures on the scope and frequency of m onitoring activity). While there 
may be some merit in introducing a periodic revi ew to ensure more in-depth analysis of the 
validity of existing ratings, e nough flexibility should be given to  CRAs to perform this work. 
In the same vein, while it may be desirable to have separate teams in the CRAs for initial ratings and their subsequent reviews, it shoul d not be translated – especially beyond the 
structured ratings field – into  a firm requirement on CRAs.  
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
Separate teams ++ ++ + - 
Ongoing update of 
ratings  ++ ++ + + 
Expiry date for 
ratings - ++ -- -- 
The preferred policy option is  to require the ongoing update  of ratings (Option 2). 
3. CRAs should apply changes in methodology consistently to all ratings concerned.  
In order to avoid confusion among users of ra tings, changes in methodology should be applied 
not only to new ratings, but  also to the existing ones. Whilst a regular review of ratings would 
allow CRAs to manage their workflow in a steady manner, prompt re-ratings according 
following changes to methodology would allow investors to refer to the more accurate creditworthiness assessments (i.e. more valu able for investment purposes). A simple 
obligation to disclose whether CRAs apply retroactively methodology changes to existing 
ratings would not appear sufficient. 
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
Disclosure 
obligation + + - ++ 
Re-rate regularly + + + + 
Promptly re-rate ++ ++ ++ + 
 
Option 3 requiring the CRAs to re -rate credit ratings promptly  in case of a change of 
methodology is therefore the preferred policy option. 
4. CRAs should use sound informatio n to issue a specific rating. 
Mere reliance on a general standard requiring CRA s to use data of sufficient quality may be 
insufficient. Measures imposing due diligence duties directly on CRAs (or suitable third parties working on their behalf) w ith regard to the information us ed in the ratings would likely 
lead to significant improvements in the quality  of ratings, but at the same time create 
substantial additional burden for CRAs. A more proportionate solution would be an 
expectation that CRAs assess and factor in th e rating process underwriters’ representations 
about the level and scope of due diligence th at has been performed on the underlying assets. 
EN 37   EN In addition, high certai nty would be brought to the markets,  if CRAs abstained from issuing 
ratings when the data they have is not suffici ently sound. This late option would be consistent 
with US rules. More flexibility would be give n to CRAs if an obligati on of warning about the 
lack of sound information is imposed on them.  
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
General 
obligation to 
ensure quality of 
information - - + ++ 
Due diligence 
requirement ++ ++ ++ -- 
Quality 
warranties ++ ++ ++ + 
Abstain from 
issuing ratings 
without sound data ++ ++ ++ - 
Warn if data not 
sufficiently sound + + + + 
The preferred policy option would be a comb ination of all the options presented.  
 
5. CRAs shall allocate adequate staff to the rating process. 
CRAs will need to ensure that  employees involved in the rating process are sufficiently 
qualified. CRAs should deliver on their commi tments of increasing staff numbers and 
strengthening their expertise, as necessary. To  this end, an obligation for CRAs to inform 
users of ratings on the rating and monitoring sta ff numbers – at least on a periodic basis – 
would seem appropriate to achie ve the effect of increased ma rket scrutiny and it would be 
consistent with US rules. Introducing a specif ic professional qualifica tion for rating analysts 
would not appear particularly effective as a measure triggeri ng higher quality of the rating 
staff. 
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
General obligation to 
employ appropriate 
staff  - - + ++ 
Transparency 
requirement ++ ++ ++ ++ 
Formal Qualification 
for analysts + ++ + - 
 
The preferred policy option is a combination of Options 1 and 2. 
6. The analysis of an issuer or a product by  the agency should take into account the 
impact of market developments an d macro economic expectations.  
EN 38   EN Requiring additional information on risks characteristics, assumptions and stress testing 
would meet the expectations of investors and re gulators and would help to restore confidence 
in the market. It would imply some additi onal efforts for CRAs. CRAs’ assumptions and 
scenario analysis about economic  and other systemic factors ar e an important part of the 
information that investors need if they are to use ratings prop erly. Investors should therefore 
have access to the assumptions and scenarios unde rlying the rating of structured finance 
products. On the other hand, although it could pr ovide for a common framework of reference, 
the validation by public au thorities of models and methodologi es would be an extremely rigid 
solution. The shaping of the methodologies, mo dels and assumptions that CRAs actually use 
should stay in the remit of the agencies themselves. 
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
Additional information on loss and cash-
flow analysis  + + + - 
Additional information on risk 
characteristics, model assumptions and stress testing ++ ++ ++ - 
Validation by public authorities of 
models and assumptions  -- + + -- 
The preferred option would therefore be to have additional information on loss and cash-flow 
analysis and on risk characteristics model assu mptions and stress testing (Options 1 and 2). 
6.1.3. Analysis of the policy options in relation to transpar ency of the CRAs 
1. Transparency of the agency with respect to the functioning of internal processes 
and procedures. 
In principle, CRAs should take primary res ponsibility for setting the minimum standards of 
transparency with the markets in order to ensure greater market discipline. However, this approach bears the risk of being ineffective, if not subject  to some exacting adjustments. In 
particular, a more formal disclosure in a periodic report (taking into account justified confidentiality concerns) would facilitate the monitoring of CRAs activities by the markets as 
well as comparisons of competing CRAs. Such an  option would be consistent with US rules.
 
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
General 
transparency 
obligation + + + ++ 
Periodic report ++ ++ + - 
The preferred policy options in this respect are to have a general principle on transparency in 
place (Option 1) coupled with the obligation to  publish on a regular basis a transparency 
report. Given the benefits of a transparency report in terms of effectiveness and certainty the moderate limitations of the CRA's flexibility seem to be proportionate. 
2. The information included in the ratings ha s to be relevant and sufficient in order 
to efficiently assess the probabilit y of default of an instrument. 
EN 39   EN The disclosure of information relating to the credit rating is important to restore the 
confidence of the public on the cr edit ratings. It is broadly ac cepted that CRAs should provide 
sufficient information to allow investors to  understand the basis for the credit ratings. 
However, it is also important to educate the investors so that they understand better the 
information released. More certa inty would be introduced in th e markets if CRAs would also 
share information on their key assumptions for the determination of the ratings.  
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
General 
obligation to inform investors  + + + ++ 
Investors' 
education + + ++ + 
Additional 
technical 
information ++ ++ + + 
All the three options are important and could be applied in parallel. 
3. Avoid investors' confusion that has been  created because of the use of the same 
symbols for the ratings for structured produc ts and the ratings for traditional products 
(corporate, sovereign).  
The problem of differentiating stru ctured finance ratings from traditional ratings is among the 
most controversial issues in th e current debate on CRAs. The us e of different rating categories 
for structured finance ratings and the traditional pr oducts could enhance the market awareness 
of the specific risks implied by these instruments. A more flexible solution would be to provide additional information to the ratings for the structured finance products, although the 
result could be less comprehensible to market participants. A combination of these two later 
solutions would be consistent with US SEC recent proposal. The most flexible option would 
be to maintain the same scales and inform the investors about the particularities of specific ratings; however, this solution could not be sufficiently effective.  
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
Differentiate 
symbols ++ ++ ++ - 
Same scale but 
adding 
information ++ ++ ++ + 
Educate investors - + - ++ 
The preferred option is to leave at the choi ce of each CRA whether to have differentiated 
rating categories (symbols) for structured products and traditional products or the same scale with additional information. 
EN 40   EN 4. CRAs should make available for market  participants the relevant data about 
their performance in a standardised mann er to allow for industry-wide comparisons . 
CRAs should provide data about their performance; however, th e data should be  provided in 
such a way that it is understandable and suitable for comparisons by all interested parties. Thus, the most effective measure would be the disclosure of information in a standardised 
format and the creation of a repository of rati ngs. Such a solution would create the necessary 
certainty and level playing fiel d as all the agencies would report according to the same 
standards; CRAs would thus be expected to adjust their exis ting reporting metrics. Such a 
solution would be consistent with US SEC proposal. 
Criteria 
Option Effectiveness Certainty Convergence Flexibility/ 
Efficiency 
Self-initiative - - - ++ 
Obligation to 
publish individual 
data - - - + 
Disclosure of 
standardised performance 
information ++ ++ ++ - 
The preferred option is to require CRAs the disclosure of standardised information. 
6.2. Analysis of instruments  
To a certain degree, the same set of effects will  b e  o b s e r v e d  i n  e a c h  of the policy options 
identified, but their intensity may vary depend ing on the solution pursued. Analysis in this 
area will address only the most significant and di stinctive impacts to assist the choice of the 
most adequate policy option. The four policy op tions identified in s ection 5.2 are discussed 
and measured against the follo wing pre-defined criteria:  
a) Effectiveness : The extent to which the measure fu lfils the objectives formulated in 
section 4. 
b) Certainty : There should be highest possible conf idence of the releva nt stakeholders 
as to the content of the rules to be respected and that the rules followed in practice 
are closely aligned with the objectives of the framework.  
c) Common framework:  The framework for operation of CRAs should be governed by 
the same requirements in all Member States. Such approach represents a series of clear advantages. Firstly, it would be  a necessary pre-condition for making CRAs 
subject to any form of external scrutiny (public supervision, accountability vis-à-vis 
the markets). Secondly, as all operating CRAs would respect certain entry conditions, it would create th e necessary basis for the industry to rebuild its 
credibility after the subprime crisis. Furthermore, unnecessary obstacles to intra-Community activity of the agencies would be avoided (as a uniform set of rules 
would apply).  
d) Flexibility
: A system should be established to f acilitate the operat ion of CRAs across 
the Member States. CRAs should have a level of flexibility to shape their internal 
EN 41   EN organisation, but without hampering the ach ievement of objectives  of the EU policy 
in this area. Flexibility, which captures simp licity, also is a cost indicator: the greater 
the flexibility left to CRAs, the more CRA s can make choices adapted to their needs 
and control their costs. 
In the tables, the options are measured agains t the above-mentioned pre-defined criteria. Each 
scenario is rated between “---” (very negativ e impact) and “+++” (very positive impact). 
6.2.1. Self-regulation (no policy change) 
6.2.1.1. IOSCO code 
In an effort to follow the reforms of the IOSCO Code, CRAs would voluntarily provide for 
ensuing changes in their internal organisati on, processes and mechanis ms. As the scope and 
depth of these necessary adjustments would be largely decided at the level of the individual 
entity, we would expect that the implement ation and on-going compliance costs would be 
reasonable – from the point of view of the addr essees of the rules. At the same time this 
option would demonstrate a number of serious weaknesses:  
First, the IOSCO Code of C onduct would remain as the only set of rules governing the CRA 
industry in the EU. The manifest  deficiencies of this non-bi nding charter as well as its 
influence on the actual conduct of the CRAs in the context of the subprime have been 
described in Section 3 of this Report. As a result of continuing the use of the IOSCO Code as 
the benchmark for CRAs' conduct the fo llowing problems would be observed: 
– Compliance with the Code would not be a pr erequisite for operating as a credit rating 
agency and competing for market share.  
– The Code, based on 'comply or explain' princi ple, makes it possible for CRAs not to follow 
some of its requirements. There are exampl es, where some of the leading CRAs have 
decided to diverge from the duties mandated by Code55.  
– The rules to be followed by the CRAs are of ten formulated in a very broad or non-
committing way leaving much room for in terpretation and discretion to the CRAs.56  
– As there is no mechanism of external oversig ht of the CRA's actual compliance with the 
Code, CRAs would be only subject to internal oversight structures.  
– As there is no mechanism of external en forcement and sanctioning CRAs would remain 
subject only to market discipline. Essentiall y, the latter could be triggered by negative 
developments that have damaged a CRA's re putation (e.g. consistently overoptimistic 
forecasts, incidents of collusion with the rate d entities). However, given the oligopolistic 
structure of the CRAs' market, it is highly unlik ely that market pressure alone is sufficient 
to discipline the CRAs to change their conduct.57  
                                                 
55 CESR report, paragraphs 211 to 225. See paragraph 225 in annex 9.6. 
56 For instance, under Point 1.7 of the revised IOSCO Code CRAs are required to "adopt reasonable 
measures so that the information it uses in assigning a rating is of sufficient quality to support a 
credible rating", but does not specify what those measures could be. 
57 At this stage there is no evidence of shifts of clients from one agency to other or from the big CRAs to 
new agencies. 
EN 42   EN Assessment  
The continued reliance on the IOSCO Code doe s not give sufficient assurance that the 
objectives formulated in Section 4 of this  report will be effectively achieved. The 
management of conflicts of interest by CRA would remain inappropriate; CRAs would not be 
obliged to improve the quality of the rating methodology and the ratings; the transparency of 
the CRAs would remain insufficient; and, ther e would be no supervision and enforcement 
mechanism by competent authorities. Therefore the existing framework does not ensure certainty and is not sufficiently effective. Nor does it ensure the le vel of common framework 
which would enable CRAs to rebuild their cred ibility and restore the confidence in the 
markets. However, it ensures flexibility to CRAs for the organisation and operation of their business, although the current environment, main ly based on reputation considerations makes 
it very difficult for new CRAs to enter the business.  
It is crucial to ascertain that any framework proposed for the activity of the CRAs will be duly 
implemented, diligently supervised and robustly enforced. These premises cannot be met if the IOSCO Code continues to be the central element of the regulatory policy approach to 
CRAs' activity in Europe. Self regulation has been tested since 2006 and the outcome is not 
acceptable. 
6.2.1.2. Industry-wide efforts – White Paper The Industry White Paper envisaged a series of  quite significant and helpful commitments. 
The advantages of this solution are that it comes from the industry (see Annex 9.9). However 
the White Paper does not give a satisfactory answer to all concerns related to the conflicts of interest; it does not propose diffe rentiation of structured fina nce ratings from traditional 
ratings; it does not mention the need for compar ability of CRA performance statistics; it does 
not solve the problems related to  the poor quality in the inform ation used by the CRAs, as it 
does not envisage any relevant measures applicab le to the reliance on external data for rating 
purposes; and it does not provide for a satisfactor y solution in relation to the proper treatment 
of existing ratings. In addition, the main weakne ss of this option is that  it does not envisage 
any oversight and enforcement mechanism. It is important to notice that in practical terms the 
majority of the proposals from the White Pape r have been included in the IOSCO code after 
its revision. Therefore there is no added value in th is policy option. The cr iticisms mentioned 
in the previous point dealing wi th the assessment of the "no po licy change" scenario are also 
valid for this solution. 
Assessment
 
Such a solution would present a high level of flexibility for CRAs because they would be free 
to adapt to the new voluntary requirements. Ho wever, it would not be effective since it does 
not envisage any enforcement mechanism. Despite the fact of being a joint initiative by industry, it would ensure a common framewor k only at the level of the commitments put 
forward in the Joint White Paper. Thus, no cer tainty would be ensured by this solution. The 
same arguments expressed in the precedent point would be valid. 
6.2.1.3. Individual self-regulatory  solutions proposed by CRAs: 
All the individual initiatives from the CRAs referred in point 5.2.2 represent the advantage 
that they are driven by commitments coming from the industry. However, these initiatives 
cannot be considered as a sati sfactory solution as the proposal s by CRAs do not address in a 
EN 43   EN consistent way each of the subs tantial problems that have b een identified in this Impact 
Assessment.  
Moreover, CRAs have failed to propose any credib le system of oversight and enforcement of 
their initiatives. Proposals by the agencies concerning the fact th at they would internalise the 
oversight function are not sufficient and would not guarantee rigorous scrutiny about whether 
CRAs actually observe the requirements impo sed on them. To strengthen the oversight 
framework, there should be sanctioni ng powers in case of non-compliance.  
Assessment  
This option, in spite of being very flexible  (each CRA would implem ent individually its own 
improvements), would not ensure a common fr amework. Limited effectiveness would be 
achieved, only concerning the issues wher e the CRA has committed, although no certainty 
would be ensured. The same arguments expresse d in the point dealin g with the "no policy 
change" scenario would be valid. 
6.2.2. European code of conduct  
The cost of implementation of the code of c onduct for the CRAs would be comparable to the 
costs of the other self-regulatory options: it would arise essentiall y in connection with 
compliance duties and would depend on the concre te requirements of the code. However, this 
solution has the following limitations: 
– The adherence to the code is voluntary. Theref ore a CRA could step out of the agreement 
at any moment or challenge the authority of the oversight body.  
– The monitoring body for CRAs would not be cap able of ensuring vigorous supervision and 
enforcement. Such a body would not be entitl ed to carry out investigations with the 
requirements and guarantees of a procedure carried out by a public authority and should 
only rely on the information provided by the ag encies. Furthermore, the effectiveness of 
the enforcement power of this body will be limited: in case an agency breaches any of the standards of the code, the body would only be  empowered to issue a statement warning 
about this situation, but it would not be empowered to impose the cessation of such 
practice or a sanction.  
The recent events have unveiled that the repu tational risk is not sufficient for CRAs to 
abandon harmful practices. A model of supervis ion where CRAs decide what should be the 
information that the oversi ght body will receive and where naming and shaming  is the most 
severe penalty for their lack of  compliance is not efficient.  
Assessment
 
Such a solution has the advantage of in cluding a monitoring body, although without any 
enforcement power, so its effectiveness woul d be limited. It would ensure certain common 
framework, although no significant certainty co uld be achieved. High flexibility would be 
ensured by this solution, because CRAs would draft the code. 
6.2.3. Recommendation 
In this case the Commission would be in a po sition to drive the proc ess and to align the 
standards with the objecti ves that have been defined in Sect ion 4 of this Impact Assessment. 
EN 44   EN However, this solution has the same limitations that were pointed out in relation to the self-
regulatory option. A recommendation is not le gally binding on CRAs; the agencies could 
choose not to follow it. It cannot  set up a system of supervision and enforcement either.  
Assessment  
Such a solution would help establish a common fra mework to some extent, at least concerning 
the reference criteria that CRAs would have to fulfil; however, it would not include an enforcement mechanism and thus it would ha ve limited effectiveness in achieving the 
objectives set out in Section 4. It would allow for flexibility to CRAs, although no certainty 
would be achieved because CRAs would not be obliged to comply with the Recommendation. 
6.2.4. Legislative proposal 
A legislative proposal would cr eate a framework for supervisors to ensure the consistent 
application of the new set of requirements for th e issuance of credit ratings to be used by 
financial institutions in the EU. CRAs would f ace sanctions by public authorities in the case 
of breach of the legal requirement s (just as banks, investment firms, insurance companies or 
UCITS currently do in the EU). The compliance of  the CRAs would not be at the discretion of 
the CRAs nor would it be subject to in terpretation by inte rested parties. 
The same rules would be applied throughout th e Community. The legislative proposal would 
create legal certainty and transparency. The registration and surveillance system would be 
known by all market players concerned which thus  could have greater confidence that the 
CRAS whose ratings are used for regulatory purposes conform to es tablished regulatory 
standards.  
A legislative proposal could be indirectly be neficial for competition for the small CRAs. 
Smaller entities meeting the requirements laid down  in the legislation w ould be registered and 
be able to issue credit ratings under the same  conditions as big CRAs already established in 
the EU. If they comply with the registration requirements, th e registration w ill act as public 
recognition of their rating capab ility for the whole market, thus facilitating newcomers to 
overcome the barrier to entry of the oligopoli stic rating business. The maintenance of the 
current situation would only preserve the existing oligopolistic market structure.  
Uniformity in the registration process and in  the substantive requirements throughout the EU 
would also allow CRAs to make significant cost savings, both in the case of the creation of a 
new CRA and in the operation of existing CRAs,  if compared to the establishment of 
individual national registration regimes (cost savings on the expert le gal advice on individual 
national regimes).  
As explained in section 5.2.4, there are two possible options regarding the supervisory 
architecture: the first option is that the Member States would be entrusted with the registration and surveillance of the rating activity perfor med by CRAs and CESR would play a strong 
coordination role. The second option is to set up a Community Agency (this could be either a 
new Agency or transforming CESR into one) for the registration of CRAs at central level (but 
supervision would remain with  national regulators).  
The first option appears to be more practical because the securities markets supervisory 
authorities of the Member St ates already have the knowledge , expertise and resources to 
oversee different entities and activities in the EU securities markets (like, for example, 
regulated securities markets, investment fi rms or UCITS managers). The option of the 
EN 45   EN Community Agency has gathered  little support taking into acc ount the input from the public 
consultation. In addition, the European Commission has committed itself to carry out an evaluation of the functioning of  the existing Community Agencies before it will envisage 
creation of a new one (Communication CO M(2008)135 of 11.3.2008 "European agencies – 
The way forward"). 
CRAs could face higher compliance costs derived from the registration regime and the on-
going surveillance by competent authorities. Re quirements necessary to verify compliance 
with the legal provisions, such as reporting requirements, record keeping and transparency obligations could add new admini strative costs to the operation of the CRAs. However, these 
additional costs would be mitigated by the fa ct that CRAs already comply with similar 
requirements in other jurisdictions (like the US ) and some of them have already started a 
process of improving their internal procedures a nd transparency in order to respond to current 
criticisms.  
All CRAs established in the EU issuing credit ratings intended for use for regulatory purposes 
by financial institutions in the EU will have to apply for the registration. This is essential in order to ensure a high level of investor conf idence and consumer protection. As the rules in 
the legislative proposal would be to a cons iderable extent based on IOSCO rules and 
convergent with US requirements , the adaptation costs for the established CRAs should not be 
too high, as CRAs are already subject to re gistration and supervision in the US.  
A legislative proposal could create the impressi on that supervisors endorse the ratings given 
by the CRAs. To avoid such an unintended conse quence, it is essential that the independence 
of a CRA in issuing its credit  ratings is preserved. Rating op inions and rating methodologies 
should not be subject to supervisory scrutiny or any form of regulatory influence. In addition, 
under no circumstances will a competent authority  of a Member State be able to take 
measures against a CRA based on the fact that the CRA issues rating opinions that may be 
contrary to the interests of the Member State or specific issuers. 
A legislative measure is by definition less flexible  than a self-regulatory solution. This lack of 
flexibility could make it more difficult in th e future to adapt the standards to market 
innovation or new situations. However, the use of the Lamfalussy process could allow for a more flexible regulatory regime, by the el aboration of implementing measures through 
comitology (Level 2). Moreover, the legislativ e proposal should be principles based and, to 
the extent possible, avoid unn ecessary technical details. 
Assessment
 
Such a solution would largely ensure a common  framework for the issuance of ratings and 
legal certainty throughout the Community. The system would be flexible enough to allow 
CRAs to be innovative in the way they produce their ratings. Such a solution, including a 
diligent supervisory system and robust enforcem ent mechanism, would ensure a high level of 
effectiveness in assuring compliance with the objectives formulated in Section 4. Finally, a 
legislative solution would be convergent with  the US, where CRAs are regulated entities 
subject to registration and supervision by the US Securi ties and Exchange Commission.  
6.3. Conclusion 
Self regulation has already been tested and has failed to guarantee the fulfilment of the 
objectives set out in section 4. A recommendati on would not achieve the necessary level of 
uniformity and legal certainty a nd therefore would not be suffici ently effective. A legislative 
EN 46   EN solution would be a proportionate measure to fu lfil the objectives of providing for a uniform 
CRA regime across the EU. It would be based on consistently applied high-level principles 
and largely inspired by the IO SCO Code. Thus, there would be only limited additional costs 
for CRA, in particular as th ey are already adapting themselves to the revised IOSCO Code 
requirements. Furthermore, the legislative so lution would not impose on Member States any 
requirement to modify their existing laws, as  nowadays there are very few requirements at 
national level, but merely to introduce the new CRA registration and surveillance regime.  
Scenario 
 
Criteria Effectiveness Certainty Common 
framework Flexibility/ 
Efficiency 
Self-regulation: IOSCO 
White Paper 
Individual solutions  (No policy change)   
- 
- 
- 
  
-- 
-- 
-- 
  
+ 
+ 
-- 
  
++ 
++ 
++ 
 
EU code of conduct - + + + 
Recommendation - - + + 
Legislative measure ++ ++ ++ + 
In order to meet objective 4.1 (insufficiencies  in the internal organisation of CRAs and 
controls in relation to conflicts of interest), CRAs will have to ensure that all existing and potential conflicts of interests are identified and either eliminated or properly managed and 
disclosed. Specific internal governance arrangement s will need to be put in place to assist 
changes to corporate culture and internal polic ies. CRAs shall be prohibited from providing 
consultancy and advisory services. Rating anal ysts will need to be insulated from the 
commercial aspects of the CRAs' activities and they will need to be subject to more demanding rules regarding dialogue with the client. When they decide to leave to work for a 
former client, specific safeguard rules shoul d apply. Finally, CRAs clie nts should eliminate 
the negative 'shopping for ratings' practice.  
In order to meet objective 4.2 (improve qual ity of the methodology and the ratings), CRAs 
will need to use methodologies that are ri gorous, systematic, continuous, and may be 
validated based on historical  experience. These methodologi es, models and key ratings 
assumptions will need to be kept up-to-date and subject to comprehensive regular review. An internal review function will be established to  monitor compliance in this area. Changes to 
rating methodologies shall trigger prompt re -rating of all existing ratings concerned. 
Moreover, CRAs will have to monitor and upda te individual ratings on an ongoing basis. 
Greater transparency will be required to assi st users of ratings in understanding what due 
diligence of the asset level data has been undertak en and factored in the ratings. Staff levels 
will need to be disclosed by CRAs to  trigger closer market scrutiny.  
Enhanced transparency of the CRA s' activities is needed in lin e with objective 4.3 (improve 
the transparency of CRAs). Relevant measures  will have to include a general transparency 
obligation regarding the functioning of the CRA's  internal processes and procedures coupled 
with a duty to publish a yearly transparency report. The information on analyses performed, 
EN 47   EN any limitations and specific risks involved will need to be provided to the users of ratings. 
CRAs should also use different rating categories fo r structured and tradit ional debt or provide 
investors with additional information when rating structured finance product. Finally, 
historical performance statistics will need to be prepared using metrics that ensure 
comparability between market players.  
The legislation will set up a registration proce dure for CRAs issuing credit ratings to be used 
by credit institutions, investment firms, insu rance and assurance undertakings, collective 
investment schemes, pension funds and reinsu rance undertakings within the Community. The 
objective of efficient and effective monito ring of compliance with the requirements 
(overarching objective 4.4) will be ensured thr oughout the EU. The registration will be carried 
out by the competent authority of a Member St ate, but all Member States’ regulators should 
be able to express their opinion through the CESR. Surveillance will be carried out by the 
competent authorities of the Member States . Close cooperation betw een national regulators 
and coordination by CESR is a prerequisite for creating a common supervisory culture and an 
efficient network. National re gulators should be empowered to apply proportionate and 
dissuasive sanctions where CRAs do not comply w ith the rules. Again, CESR should play an 
important role in creating a common enforcement culture. Therefore a legislative measure would be the appropriate instrument to ach ieve the objectives set out in Section 4. 
EN 48   EN 7. A NALYSIS OF IMPACTS OF THE PREFERRED OPTION  
7.1. Impacts on stakeholders 
The following table compares the impact of a legislative measure co mprising the preferred 
policy options (see section 6) w ith the impact of a do nothing scenario (self regulation). 
Impact on Stakeholders Scenario 
CRAs Issuers/ Originators Investors Supervisors 
No policy change 
(self regulation) - 
CRAs find it difficult to prove 
that changes resulting from revised IOSCO code and their 
proposals effectively address all 
concerns identified. Continued lack of trust in their structured 
rating activity. -- 
Issuers continue to 
suffer from the lack of trust in ratings of their 
financial instruments. 
New issues limited as perception of ‘flawed rating risks’ still high 
in structured markets. -- 
Still affected by 
CRAs’ unpredictable 
treatment of 
structured ratings. Increasingly reluctant to rely on 
CRAs’ opinions in 
future investment decisions.  0 
Situation unchanged 
Legislative measure 
comprising preferred 
policy options + 
Though CRAs would have to 
face higher adaptation costs, 
more interest in ratings from the investors will increase CRA 
profits in the long term. Long 
term benefits of legislation may outweigh higher administrative/ 
adaptation costs ++ 
Issuers indirectly 
profit from greater 
investor interest and confidence and more 
competition within the 
rating market.  +++ 
Investors will 
directly profit from 
increase in quality of ratings and 
transparency. This 
will contribute to better investment 
decisions and 
increasing investor confidence. + 
Supervisors able to 
monitor the CRAs 
conduct. Power to enforce legislation. 
In the tables, each scenario is rated between “ ---” (very negative impact) and “+++” (very positive 
impact), being "0" neutral impact.  
It is not expected that the legi slative proposal is going to have any direct impact on the natural 
environment, or on the social, empl oyment or gender pol icy of the EU. 
7.2. Estimation of ad ministrative costs 
The following requirements of the legislative propos al will create admini strative costs for the 
CRAs, especially the compliance costs:  
– Transparency obligations: annual transpar ency report, performance statistics; 
– Disclosure requirements: on going disclosure s on conflicts of interest, methodologies, 
internal procedures, change s in the initial conditions of the registration; 
– Enhanced standards for pr esentation of ratings; 
– Record keeping requirements: recording device s or systems and data archiving system.  
EN 49   EN It is not envisaged that CRAs will have to face any cost or losses from the prohibition to 
provide advisory services. In general, the hol dings owning the big CRAs already have legally 
and operationally separated their rating business from the consulting activities. 
The administrative requirements of the legisla tive proposal are very much aligned with the 
requirements set up in the US Act on CRAs of 2006 and the new changes proposed by the SEC (see Annex 9.5). On a global scale there w ill be few additional administrative burdens 
for the CRAs that are active in both the European Union and the US.  
Since the administrative obligations are compar able with those in the US, they are also 
comparable in terms of administrative cost. Th e estimation below of the administrative costs 
for CRAs is based on the studies carried out by the US Securities and Exchange Commission 
in this regard.
58 
The cost of compliance with these requirement s would depend on its size and the complexity 
of the business activities of a CRA. The size and complexity of CRAs vary significantly. 
Therefore, the cost could vary significantly across agencies. The ma in CRAs already have 
established policies, procedures  and record keeping systems and processes in the US that 
would comply substantially with the requirement s of the legislative pr oposal, and they could 
easily translate the know-how and expertise from the US and apply them to their organisation 
in the EU. The cost estimates below represen t the average cost across all CRAs and do not 
take into account that some fi rms would only need to adjust ex isting policies, procedures and 
recordkeeping systems and processes to comply with the requirements of the legislative proposal. 
It is expected that the employers executi ng the work with the CRAs are highly skilled 
professional staff that would roughly earn th e same in all European countries.  
The wage figures used below ar e taken from the preliminary da ta of the measurement of the 
administrative costs in the Programme for Re ducing Administrative Burdens in the EU.  
One time administrative burdens  
Obligation Wage p/h Hours  Frequency  Number of 
companies Admin cost Overhead 
25% TOTAL 
admin costs 
Adjusting disclosure 
systems, policies and 
procedures 49.11 300 NA 15 220.995 55.248,75 276.243,75 
Record 
keeping 
device One time costs of 2.000 Euro NA 15 30.000 7.500 37.500 
 
Combined one time administrative burdens: 313.743,57 Euro.  
                                                 
58 17 CFR Parts 240 and 249b [Release No. 34-57967; File No. S7-13-08] RIN 3235-AK14 Proposed 
Rules for Nationally Recognized Statistical Rating Organizations, pages 124 to 148. 
EN 50   EN Reoccurring administrative burdens  
Obligation  Wage p/h Hours  Frequency  Number of 
companies Admin cost Overhead 
25% TOTAL 
admin costs 
Additional transparency 
obligations for 
the annual report and 
performance 
statistics 49.11 20 1 15 14.733 3.683,25 18.416,25 
 
Combined reoccurring administrativ e burdens: 18.416,75 Euro per year.  
As set out in point 5.2.4, there were two po ssible options regarding the supervisory 
architecture. The first option would be built upon registration and surveillance by competent authorities of the Member States with coor dination by CESR. Therefore its implementation 
would not create substantial cost s at EU level. The second option was to set up a Community 
Agency that would issue the registration for CRAs and coordinate the national supervisors. 
This would involve additional costs which cannot be estimated at this stage.  
8. M
ONITORING AND EVALUATION  
The Commission is the guardian of the Treaty and therefore will monitor how Member States 
have implemented the legislation on CRAs. Wh ere needed, the Commission services will 
offer assistance to Member States for the implementation of the legislative proposal in the form of transposition workshops with all the Member States or bila teral meetings at the 
request of any of them. When necessary and as  the last resort, 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 of Community Law. 
The evaluation of the consequences of the appl ication of the legislative measure could take 
place three years after the entry into force of  the legislative measur e in the form of a 
Commission report to the Council and the European Parliament.
59 This report should cover 
the issue of over-reliance on ra tings by investors. However, CESR could keep producing the 
annual report on CRAs. In this case, the report should not be focused on the implementation 
of the IOSCO code by the CRAs, but on th e application of the new legislation. 
The main elements that could be used during the evaluation could be the evolution of the 
ratings statistics per product, the trends in the issuance of st ructured finance products, the 
number of CRAs asking for registration in the EU  (in particular whether there have been new 
comers into the rating business), the statistics on ratings volatility (with particular emphasis in sharp downgrades), the comparison of data on CRAs performance and enforcement record of 
the EU national authorities supervising the CRAs. 
                                                
 
59 There are precedents in financial services legislation of such review s. In accordance with Article 31 of 
the Prospectus Directive 2003/71/EC and Article 33 of the Transparency Directive 2004/109/EC, after 
five years of the entry into for ce of these Directives the Commissi on is expected to assess its 
application. 
EN 51   EN 9. A NNEXES  
9.1. The legal framework for CRAs 
The current legal framework for CRAs is very di fferent in the EU and in  the US. While in the 
US CRAs are subject to legislation, there are not directly bindi ng rules governing CRAs 
activities as such in the EU. CR As are affected only indirectly  by sectoral regulation (Market 
Abuse and Capital Requirements Directives). 
1. The regulatory framework in EU: IO SCO code, Market Abuse Directive and 
Capital Requirements Directive 
In its Communication of 2006, setting ou t the regulatory approach to CRAs60, the 
Commission invited the CRAs to subscribe volunt arily to the code of conduct for CRAs that 
was approved by the International Organisation of Securities Commissions (IOSCO) in 2004. 
However, the Commission stated cl early that it would monitor th e developments in this area 
very carefully. At present, Community law addr esses only specific aspects relevant to the 
activity of the rating business, basically measures included in the Market Abuse Directive61 
and the Capital Requirements Directive62.  
1.1. IOSCO code of Fundamental s for CRAs and CESR's role  
Since 2003 there has been a task force in IOSC O studying issues related to the activities of 
CRAs. In September 2003 the task force issued a report describing the role CRAs play in the 
global capital market together with a set of pr inciples on integrity of the rating process and 
high quality of ratings. This se t of principles – addressed to  supervisors, CRAs and other 
market participants – was converted later in to a code of conduct for CRAs in December 2004. 
The IOSCO CRA Principles are high-level and meant to be used by CRAs of all types and 
sizes, using all types of met hodologies, and operating under a wide variety of legal and 
market environments. IOSCO code is composed by more than fifty provisions aimed to avoid 
properly CRAs' conflicts of interest, ensure th e consistent use of th eir rating methodologies, 
provide investors with sufficien t information on the quality of a CRA’s ratings, and help to 
ensure the integrity of the overall process. 
Against the background of various financial scandals in the US  and the EU and following the 
resolution on CRAs adopted by the European Parliament in February 2004, the Commission 
considered very carefully whether or not fres h legislative proposals we re required to regulate 
the activities of CRAs. One of the central principl es of "Better Regulation" is that legislative 
solutions should be applied only where there is  a market failure and where legislation is 
strictly necessary to ad dress that market failure and to achie ve public policy objectives. In line 
with the advice r eceived from the CESR in March 2005, the Commission decided not to 
present new legislative proposals in the area of  CRAs considering that the existing financial 
                                                 
60 Communication from the Commission on Credit Rating Agencies (OJ C 59/2, 11.3.2006) 
61 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider 
dealing and market manipulation OJ L 96, 12.4.2003, p. 16 
62 Article 80 et seq  of 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 busi ness of credit institutions OJ L 177, 30.6.2006, p. 
33 
EN 52   EN services directives applicable to CRAs would provide an answer  to all the major issues of 
concern raised by the European Parliament.  
As a consequence, in 2006 the Commission issued the Communica tion on Credit Rating 
Agencies, in which the Commission concluded th at various financial services directives, 
combined with self regulation by the CRAs them selves on the basis of the IOSCO Code of 
Conduct Fundamentals for CRAs (IOSCO Code), coul d provide an answer to the major issues 
of concern in relation to CRAs. It was stated  that this approach would require continuous 
monitoring of developments in this area by the Commission. In a ddition, the Commission 
asked CESR to monitor compliance with the IOSC O Code and report back on an annual basis.  
It was concluded that CRAs had to incorporat e all the provisions of the IOSCO Code into 
their own internal Codes of Conduct. Where they  choose not to do so, they had to explain how 
their Code nevertheless gives e ffect to the provisi ons of the IOSCO Code . It was considered 
imperative that CRAs not only incorporate the IOSCO Code in their own Code of Conduct 
but fully comply with the IOSCO Code by enforc ing their Code of Conduc t in daily practice. 
Therefore, it was concluded that CESR's annual report should provide a thorough assessment 
of the level of day to day app lication of the IOSCO Code in practice, in cluding consultation of 
all stakeholders.  
The Commission asked CESR to specifically a ddress in its report the following issues of 
concern: transparency of ratings disclosure as re gards the level of participation of the issuer in 
the ratings process; timeliness of ratings disclosure as regards prio r notification of issuer of an 
imminent rating; the procedures for fee arrangements, specifically the involvement of analysts 
in the fee negotiations with the issuer; separati on of CRAs' business activities and handling of 
conflicts of interest; quality of the ratings proc ess as regards structured finance instruments, 
i.e. are sufficient resources devoted to make  proper rating assessments of these complex 
instruments and to monitor on an ongoing basis th e developments in the area of structured 
finance; treatment of confidential informati on within the various departments of CRAs; 
disclosure of income structures; position of compliance officer. A more detailed explanation 
of CESR monitoring role can be found later in this IA. 
The Commission indicated in the Communicati on that it might consider introducing new 
proposals if it became clear that complian ce with EU rules or IOSCO's code was 
unsatisfactory or if new circumstances were to  arise – including serious problems of market 
failure or fresh developments in other parts of the world. 
IOSCO code has been recently revised in depth, as  it is described further in this document.  
1.2. CRAs in Market Abuse Directive  
In accordance with article 6.5 of the Market Abuse Directive (2003/6/EC) the "persons who 
produce or disseminate research concerning fi nancial instruments or issuers of financial 
instruments and persons who produce or disse minate other information recommending or 
suggesting investment strategy, intended fo r distribution channels or for the public,  (should)  
take reasonable care to ensure that such info rmation is fairly presented and disclose their 
interests or indicate conflicts of interest c oncerning the financial inst ruments to which that 
information relates".  The technical arrangements for the fair presentation of research and 
other information recommending investment strategy are developed in the Commission 
Directive 2003/125/EC of 22 December 2003 implementing Directive 2003/6/EC of the 
EN 53   EN European Parliament and of the Council as re gards the fair presentation of investment 
recommendations and the disclosure  of conflicts of interest.  
According to recital 10 of the Directive, "Credit rating agencies issue opinions on the 
creditworthiness of a particular issuer or financial instrument as of a given date. As such, 
these opinions do not constitute a recommendation within the meaning of this Directive". As a 
consequence the ratings issued by the CRAs are not subject to the legal framework set out in this Directive. However, in accordance with the quoted recital, CRAs "should consider 
adopting internal policies and procedures designed  to ensure that credit ratings published by 
them are fairly presented and th at they appropriately disclose any significant interests or 
conflicts of interest concerni ng the financial instruments or th e issuers to which their credit 
ratings relate."  
1.3. CRAs in Capital Requirements Directive
 
Directive 2006/48/EC of the European Parliame nt and of the Council of 14 June 2006 relating 
to the taking up and pursuit of the business of credit institutions (Capital Requirements Directive, CRD) provides for the use of external  credit assessments in the determination of 
risk weights (and consequential capital requiremen ts) applied to a bank or investment firm's 
exposures. Only the use of assessments provi ded by recognised Extern al Credit Assessment 
Institutions (‘ECAIs’), mainly CRAs, will be  acceptable to the competent authorities. A 
recognition mechanism is also outlined in the Directive. 
The CRD sets out a number of requirements wh ich ECAIs should meet before the competent 
authority grant them recogni tion. Article 81.2 of Directiv e 2006/48/EC states that the 
"competent authorities shall rec ognise an ECAI as eligible (…) only if they are satisfied that 
its assessment methodology comp lies with the requirements of  objectivity, independence, 
ongoing review and transparency, and that the resulting credit assessments meet the 
requirements of credib ility and transparency." These technical criteria and requirements are 
listed in the Annex VI, Part 2 of the Directive. The competent authorities should assess 
whether individual credit assessments are recognised in the market as credible and reliable by 
the users of such credit assessments and accessible at  equivalent terms to a ll interested parties. 
Building on the CRD, the Committee of Europ ean Banking Supervisors (‘CEBS’) has been 
working to promote convergence of the recogn ition processes of ECAIs across the EU by 
defining a common understanding on the criteria necessary to  implement the recognition 
requirements laid down in the CRD. In Janua ry 2006 CEBS published th e Guidelines on the 
recognition of ECAIs. 
To date, the majority of the EU banking supe rvisors have recognised as ECAIs the four big 
CRAs (Standard and Poor's, Fitch, Moody's and DBRS). 
2. The legal framework in the US 
The US Credit Rating Agency Reform Act of 20 06 entered into force on 27 June 2007. This 
Act establishes a legal framew ork for a voluntary registrati on and qualification process for 
NRSRO (Nationally Recognized Stat istical Rating Organization).  
The Act establishes a framework for a revise d NRSRO (Nationally R ecognized Statistical 
Rating Organization) registra tion and qualification proce ss. The SEC has exclusive 
supervisory and investigatory pow ers that are necessary for the exercise of its functions. The 
Commission’s rules implementing the Credit Ra ting Agency Reform Act took effect on June 
26, 2007. 
EN 54   EN A CRA will be able to register with the SEC if  the CRA has been in business as a credit rating 
agency for at least the past 3 consecutive years and issues credit ratings certified by at least 10 
qualified institutional buyers. 
The application for registration must contain information on: 
– The credit ratings performa nce measurement statistics; 
– the rating procedures and methodologies; 
– the procedures in place to prevent the misu se of material non-public information;  
– the organisational structure of the credit rating agency; 
– whether or not the applicant has a code of ethics; 
– list of 20 largest issuers and subscr ibers that use the CRA's services 
The SEC must grant registration within 90 days (possible extension to 120) if the 
requirements are satisfied unless the applic ant does not have adequate financial and 
managerial resources to consistently produce cred it ratings with integrity and to materially 
comply with the procedures and methodologies re quired. This indicates th at the oversight of 
CRAs by the SEC does not cover the substance of  the ratings or the procedures by which 
CRAs determine their ratings. Once registered, each NRSRO must certify every year that it 
still complies with the registration criteria. The SEC is authorised by the Act to suspend or revoke the registration in case of non-compliance.  
On 24
th September 2007, the SEC issued orders gran ting the registrations of seven CRAs as 
NRSRO. The firms are the firs t to be registered with th e Commission under the CRA Reform 
Act of 2006. The seven firms registered as NR SROs are: A.M. Best Company, Inc., DBRS 
Ltd., Fitch, Inc., Japan Credit Rating Agency, Ltd., Moody’s Inve stors Service, Inc., Rating 
and Investment Information, Inc. and Standard & Poor’s Ratings Services. 
The US Act on CRAs is relatively recent and ther efore there has not been enough time to test 
its effectiveness; it entered into force just we eks before the burst of the subprime turmoil. 
However, the SEC has recently proposed importa nt changes in the le gal framework for CRAs 
(see Annex 9.5) 
EN 55   EN 9.2. The financial crisis and the ECOFIN Roadmap 
Since August 2007 financial markets worldwide are su ffering a critical crisis of confidence. It 
is generally agreed that the genesis of this cr isis originated in the US subprime residential 
mortgage market63. These mortgages with low underwri ting standards were normally grouped 
in pools of assets and securitised as new products (structured products)64 that were sold in the 
financial markets worldwide. Over 80% of thes e subprime structured products were rated with 
the highest ratings by the CRAs.  
In summer 2007, financial markets experienced a sudden and turbulent re-assessment of risk 
by investors, as the default rate on US mortgage  loans increased significantly. The rising risk 
aversion spread to other financ ial market segments as well, of ten through collateralised debt 
obligations (CDOs)65, which are frequently based on those high-risk mortgages which 
experienced serious downgrades . CDOs have been bought in la rge quantities by financial 
institutions throughout the world in recent years. 
The resulting large losses, and the uncertainty as to who holds the risk, affected inter-bank 
lending in a negative way, which forced the central  banks to provide liqui dity to the banking 
sector in an unprecedented scale. The problems have  spread to other segments of the financial 
system, such as commercial real estate securi ties, bond insurers and highly leveraged private 
equity loans, which banks continue to hold, gi ven the lack of other i nvestors interested in 
buying them. 
The origins of the current turbulence have b een excessive risk taking derived from low 
interest rates and the pursuit of high returns. A specific consequence of these unusual 
favourable financing conditions has been an increase in borrowing for residential housing and a consequent boom in housing markets in many parts of the world. Demand for housing in the US was further fuelled by a generalised rela xation of acceptance criteria for lending, the 
development of "teaser" loans with relativel y low initial reimbursement charges and other 
financial innovations that have made mortgage financing more accessible. In particular, the 
existence of a secondary market for mortgage lo ans (markets where existing loans are sold to 
other investors) in the United States has ma de access to mortgage financing possible for 
borrowers who were not previously deemed credit worthy, either due to a l ack of credit history 
                                                
 
63 The subprime sector provides housing loans to borrowers who due to their credit history do not qualify 
for conventional mortgages. 
64 The original lenders of sub-prime loans bundled the mortgage loans together and sold them to investors 
as mortgage backed securities – in essence these investors bought securities that would entitle them to a 
return from these mortgages in return for taking on a ll or part of the risk. These securities were rated by 
credit rating agencies and then sold to other fina ncial institutions and investors. The process of 
packaging and pooling assets like mortgage loans, and selling them to investors as securities is referred 
to as 'securitisation'. Banks transferred most of th ese mortgage assets to off-balance sheet entities (so-
called structured investment vehicles or SIVs), whic h financed themselves via short-term loans. This 
made them vulnerable to a sudden financing disruption if those providing the loans were to lose 
confidence, which is exactly what happened in August last year. 
65 Collateralised debt obligations (CDOs) represent a portfolio of different de bt receivables. Sub-prime 
loans were bundled together with other securities – e. g. based on prime mortgage loans or loans raised 
by companies – to create CDOs. These CDOs are typically subdivided into different risk categories, ranging from very high (junk) to very low risk (AAA). Each tranche is assessed by a credit rating 
agency and sold on this basis to investors, including hedge funds, pension funds, insurance companies 
and banks. In this way, the credit risk associated with US sub-prime mortgage loans was distributed around the global financial system. 
EN 56   EN or previous loan defaults66. This was because banks and brokers could sell their sub-prime 
housing loans to outside investors, who were often willing to buy those loans with a higher 
interest rate attached in the preva iling low interest rate environment. 
An important downside to this development was the potential for widespread defaults and 
foreclosures among these marginal borrowers in  the event of deteriorating broader economic 
and/or financial conditions which occurred during 2006/2007 as the US housing prices 
weakened and interest rates rose. 
This turmoil has 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, e.g. through 
credit lines on special purpose vehicles  that had bought US sub-prime securities67. Secondly, 
the US sub-prime problems have considerably  slowed down US growth prospects. Given 
global trade inter-linkages this affects the EU economic growth as well. Thirdly, the general market uncertainty has eroded equity market prices also in Europe as well as reduced consumer and business confidence. Data on the trend of issuance of structured finance 
products could be found in annex 9.11. 
CRAs did not create the crisis themselves; howev er they have contri buted to it through the 
ratings they have attached to individual instru ments. CRAs rate a wide variety of instruments, 
but especially in the area of complex secur itised products they conduct analysis that 
sometimes investors do not have the means to  conduct themselves. This creates a strong 
dependence on the rating provided by CRAs . The amount of securitised products
68 
outstanding in Q1 2008 in the US surpassed 6,000 bn EUR, while the amount outstanding in 
Europe was around 1,200 bn EUR. Of the securitised  products issued in Euros in 2007 almost 
                                                 
66 The current financial turmoil started in the US. To bring in more home buyers, lenders in the USA 
began offering mortgages with less scrutiny of the borrower's qualifications  and inquiry into the 
borrower's repayment ability than had been customary in the past. In both 2005 and 2006, lending to 
this so-called 'sub-prime' segment of the market fo r residential mortgages represented about 20% of all 
new US mortgage loans. These sub-prime mortgages provide housing loans to high-risk borrowers with 
weak credit or a bad credit history that do not qualify for conventional mortgages. Some sub-prime 
loans were secured by the ability of borrowers to ro ll-over their debts backed on the value of their 
houses rather than being based on their ability to repay them. Some sub-prime mortgage contracts had 
low starting interest rates that would rise over time. After the initial interest rates were reset to much 
higher interest rates reflecting normal market rates,  a significant number of sub-prime borrowers were 
unable to continue payments. With falling house prices many sub-prime borrowers could not sell or 
refinance their mortgage as they owed more than their house was worth: de linquency and foreclosure 
followed. Sub-prime mortgages are generally only sold in the US and are relatively uncommon in the EU. 
67 Problems in the credit markets have had serious implications for the global banking system. Many of 
the most important international banks are exposed to credit risk from collateralised debt obligations 
(CDOs). As problems in CDO markets have intensified, these banks have incurred significant financial losses through write-downs of their asset valuations . In accordance with data from Bloomberg in mid 
May, since the beginning of 2007 the biggest banks and securities firms have faced $379 billion in asset 
write downs and credit losses (more information in the annex 9.10). While some of the major banks 
have managed to recapitalise, often by attracting inve stments from sovereign wealth funds, they remain 
vulnerable, e.g. to further deteriorations in the CDO markets and existing commitments to finance highly leveraged private-equity deals. Bank profitability  also suffers from the financial turmoil, as the 
outlook for non-interest income deteriorates and loan-l oss provisions are set to rise from historical lows. 
68 These figures cover ABS, CMBS, RMBS and CDO. In the case of CD Os tailor-made (typically non-
public) issues and issues with a significant element of derivatives in the underlying assets are not 
included due to data limitations.  
EN 57   EN 90% were rated and of these more than 75% were rated AAA. In the US approximately 43% 
of the issuance was rated (excluding Agency MBS69) and of this 62% was rated AAA. The 
high proportion of AAA rated securitised products,  which may have given investors a certain 
degree of reassurance and contributed to the buy-decision, clearly demonstrates the 
importance of ratings. The figures show that  CRAs have by far failed more when assigning 
structured ratings than when issuing traditional ones (corpora te, sovereign). During the period 
1 July, 2007 to 24 June, 2008, CRAs have downgr aded 145,899 structured ratings compared 
with 1,445 in corporate ratings in the same period70. Hence, the problem has affected more the 
structured finance segment. 
Downgrades hit historical numbers only from the 3Q 2007 onwards, when financial 
turbulences started. Each CRA reached its bigges t number of downgrades in structured ratings 
in a different month. For instance, S&P registered 13,734 downs in January 2008. The 
maximum in Fitch came in February 2008 with 8,165 downgrades. Finally, the worst month for Moody’s was April when the CRA experienced not only an internal record but also a 
record among the CRAs by downgrading 15,015 issuances
71. 
During the financial crisis there has been a considerable shift in the changes of ratings for 
structured finance products. In the first half  of 2007 Standard & Poor's reported 176 upgrades 
of European issues and 134 downgrades. In th e second half of 2007 they reported 167 
upgrades but 225 downgrades, and in the first quarter alone the number of upgrades was only 
44 while the number of downgrades was 482. In the US downgrades in relation to sub-prime 
has followed a similar but even more severe pattern. Standard & Poor's has reported, in 2007, 
a total of 1532 upgrades and 6535 downgrades. In  the first quarter of 2008 there were 216 
upgrades but 8895 downgrades. The number of upgr ades/downgrades in 2007 and first quarter 
of 2008 for Fitch totalled 516/275  in the EU and 2093/10.917 in the US respectively; for 
Moody's totalled 304/507 in the EU and 1714/ 14.406 in the US, respectively; and for 
Standard and & Poor's totalled 387/841 in the EU and 1748/15.430 in the US, respectively.  
The massive downgrading of securitised products has hampered the market's confidence in 
CRAs. At any given point in time a limited number of upgrades and downgrades would be 
expected, and as general economic conditions deteriorate a moderate increase in the net 
number of downgrades would be expected. However, the massive downgrading that has 
occurred seems to suggest that the rated products have been c onstructed in such a way that 
they have barely met the criteria for a certa in rating at the time of issuance and/or the 
assessment of the probability of defa ult or expected loss was unrealistic. 
More data on the impact of the crisis on the economic activity in terms of asset write-downs 
and credit losses in the credit ent ities can be found in annex 9.10.  
In order to respond to the financ ial turmoil and to address the cau ses of that crisis EU Finance 
Ministers in October 2007 agreed  to a set of conclusions ("Ec ofin Roadmap"). One of the 
main actions proposed is to as sess the role played by CRA in  particular with regard to 
structured financial instruments and to address any relevant deficiencies. More specifically, 
the Commission was asked to examine possible conf licts of interest in the rating process, 
                                                 
69 Mortgage bonds which are guaranteed by a Government agency or Government-sponsored enterprise 
such as Fannie Mae or Freddie Mac. 
70 Source: Bloomberg. 
71 Source: Bloomberg. 
EN 58   EN transparency of rating methods, time-lags in  rating reassessments and regulatory approval 
processes. 
EN 59   EN 9.3. Definitions 
For the purposes of this document, the following typology of products is used. The typology 
is not intended to have any official status.  
There is a great variety of instruments that coul d fall within the broad ca tegory of ‘securitised 
products’. The main categories are:  
• ABS: asset-backed securities . Securities issued  against the revenue s from an underlying 
pool of assets which are used as collateral.  
• ABCP: asset-backed commercial paper. This type of ABS has a maturity of less than one 
year when issued. ABECP refers to asset-backed Eurocommercial paper, and refers to ABCP issued in the EU. In the rest of this paper, the terms ‘ABS’ and ‘ABCP’ are used in 
a mutually exclusive sense;  
• CDS: credit default swaps. These are cash -settled derivative instruments whose payout 
function depends on the performa nce in ratings terms of a reference credit (often an 
investment-grade issuer).  
The various types of collat eral underlying ABS include:  
– residential mortgages, underl ying residential mortgage-bac ked securities (RMBS);  
– commercial mortgages, underl ying commercial mortgage-b acked securities (CMBS): 
– auto loans;  
– credit card receivables;  
– leases: including equipment and other leases; 
– loans: including leveraged, commercial, consumer, corporate and other loans;  
– receivables: including account, he alth care, insurance, oil, ut ility and other receivables;  
– mixed underlying assets, where the ABS is refe rred to as a collatera lised debt obligation 
(CDO). One important type of CDO is collater alised loan obligations (CLOs), a specific 
type of CDO whose underlying assets are le veraged loans or middle market loans only. 
Synthetic CDOs achieve credit exposures to debt instruments thr ough credit derivatives. 
EN 60   EN 9.4. Overview of the organization and stru cture of the big CRAs. List of CRAs 
Standards and Poor's 
1. Structure of S&P in the EU  
Standard & Poor's Ratings Services is not a lega l entity. It is a separate ly identifiable division 
of Standard & Poor's, itself a division of The McGraw-Hill Companies, Inc. ("McGraw-
Hill"), a U.S. publicly listed publis hing and information services group. 
Outside the U.S., Ratings Services does busines s through a number of local subsidiaries of 
McGraw-Hill reflecting differences in loca l requirements, including legal and fiscal 
requirements. Provided below is a list of McGr aw-Hill entities in the European Union through 
which Ratings Services operates, including br anches, divisions and subsidiaries that are 
wholly owned by 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) 
2. Number of people working for S&P in the EU and in each subsidiary  
As of the end of June 2008, St andard & Poor's staff total in the European Union was 
approximately 1,000. This number included appr oximately 535 staff in Ratings Services, 
including analysts, managers and analytical sup port staff operating out of offices in France 
(Paris), Germany (Frankfurt), Spain (Madrid), Italy (Milan), Sweden (Stockholm) and the UK 
(London). The numbers of Ratings Services sta ff within those offices are the following: 
France approximately 70; Germany approximate ly 70; Italy approx imately 25; Sweden 
approximately 20; Spain approximately 25 a nd the UK approximately 325. These figures for 
staffing levels represent actual staff and do not include open positions. 
3. Presence in EU markets:  
Standard & Poor’s 2007 market penetrati on was 79% for all rated European debt. 
EN 61   EN 4. Number of new ratings per product in  the EU on a quarter ly basis since 2006.  
EU New Issue and Issuer Ratings 
 Corporates Sovereigns & Public 
Finance Structured Finance 
Q1 2006 
Q2 2006 Q3 2006 
Q4 2006 
Q1 2007 Q2 2007 
Q3 2007 
Q4 2007 
Q1 2008 34 
10 30 
26 
24 26 
35 
30 
30 0 
0 1 
1 
0 0 
0 
3 
0 618 
381 568 
676 
965 578 
908 
551 
338 
 
Moody’s Investors Service (“MIS”)72 
1. Moody's Investors Service Offices (excluding a ffiliates) in the European Union as at of 11 
July 2008 :  
• Moody's Investors Service Cyprus Limited (Limassol, Cyprus) 
• Moody's Investors Service Ltd (London, United Kingdom) 
• Moody's Investors Service Ltd (Madrid, Spain) 
• Moody's Italia S.r.l (Milan, Italy) 
• Moody's France SAS (Paris, France) 
• Moody's Deutschland GmbH (Frankfurt am Main, Germany) 
• Moody's Central Europe a.s.  (Prague, Czech Republic) 
2.1 Number of people working for Moody's (global staffing as at 31 December 2007):  
 United States International Total 
Moody’s Investors Service 1,869 1,284 3,153 
 
2.2 Number of people working for MIS in the EU and in each subsidiary  
MIS has some 550 staff employed in the EU of  which 65% are employe d in the UK, 12% in 
Germany, 10% in France and the remaining 13% across other EU offices. 
                                                 
72 Moody’s has reorganised its operating businesses to formalise the separation of the ratings-related and 
non-rating activities into two different business units – Moody’s Investors Service, the ratings related 
business, and Moody’s Analytics, the non-rating activ ities business. The information in this document 
refers only to MIS 
EN 62   EN 3. Revenue for MIS for year ended 31 December (U.S. $millions):73 
 2007 
United States 1,119 
EU 451 
Other 210 
Global Total 1,780 
4.1. Number and issuance volume of selected ne w public structured finance ratings in the 
EU in 200774 
  Total Number Volume 
ABS, RMBS, 
CMBS deals 246 € 489.16 billion 
CDO deals 128 €46.21 billion 
Covered Bond 
Programmes 23 - 
4.2 ABCP data as at 31 December 200775 
  Total Asset Split in 
EU(US$bn)76 
ABCP 200.57 
 
4.3 Number of MIS public bank ratings  in the EU as at 4 March 2008 
  Total 
EU Bank Ratings 52977 
                                                 
73 The global nature of capital markets makes it difficu lt to assign ratings/underlying assets to a particular 
jurisdiction and many deals have exposure to numerous jurisdictions globally thus affecting the 
accurateness of European Union-specific data. The EU information is not audited and has been 
provided for this Impact Assessment on a best effo rts basis. Moody's does not segment EU revenue and 
does not report it externally. 
74 Includes all MIS rated public deals in the EU. Excludes EU deals with global assets. 
75 ABCP figure includes ABCP issu ed by conduits administered by banks operating through their EU 
branches and rated by MIS. Excludes EU deals with global assets. 
76 The asset amount represents the actual amount of assets funded via ABCP and other sources (not 
including cash and short-term investments). 
77 This figure constitutes the total number of MIS public  rated issuers domiciled in the European Union. 
The total number should be considered in the context of: 
- Including EU-domiciled legal entities in the form of, for example, finance vehicles, where the 
ultimate exposure may rest with an associate company in another jurisdiction or with an associate 
EN 63   EN 4.4 Number of MIS public ratings  in the EU as at 31 Decem ber 2007 for selected business 
lines 
  Total 
Corporate Finance 95578 
Financial 
Institutions (Excl. Banks) 306
79 
Sub-sovereign 
(Excl. Sovereign) 17380 
Managed Funds 248 
 
5. Revenue for Moody’s Corporation (incor porating Moody’s Investors Service and 
Moody’s Analytics) for year ended 31 December ($ millions): 
 2007 2006 2005 
United States 1,361.8 1,277.8 1,085.4 
Europe 659.3 543.9 456.0 
Other 237.9 215.4 190.2 
Total 2,259.0 2,037.1 1,731.6 
 
6. Global revenue for Moody’s Investors Service for the year ended 31 December ($ millions): 
 
2007 2006 2005 
Structured Finance 885.9 883.6 708.7 
Corporate Finance 411.5 335.9 277.4 
Financial 
Institutions 261.7 222.1 214.0 
                                                                                                                                                         
company in another EU jurisdiction; 
- Including ratings assigned to subsidiary compan ies of a parent company that also maintains a 
credit rating and where the ultimate exposure may rest with the parent company in another jurisdiction 
or with a parent company in another EU jurisdiction; 
- Certain ratings may be inextricably linked to the rating of the parent but since they have separately assigned ratings, are counted as two or more separate ratings. 
78 See previous footnote. 
79 Includes Insurance, Finance & Other non-bank. See previous footnote. 
80 As at 9 May 2008. 
EN 64   EN Public, Project and 
Infrastructure Finance 220.8 198.2 184.8 
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) 
2. Number of people working for Fitch Ratings in the EU  
The European staff of Fitch comprised 678 employees at September 2007, from a worldwide 
total of 2.361. This includes offi ces in Istanbul, Moscow and Tunisia which are outside the 
EU but where the staff is engaged on pan-European rating assignments.  
3. Revenues in the EU  
Fitch does not publish geographical breakdowns fo r the EU. In 2007 the revenues of Fitch in 
Europe, the Middle East and Af rica were $332.5m (40% of globa l Fitch Ratings revenue of 
US$ 827.4m. In the first half of 2008 the Eur opean revenues of Fitch totalled US$145.6m, or 
43% of global Fitch Ratings revenue (US$ 335.5m). 
4. New ratings in the EU, 2006-07  
 Public Finance Structured Finance* Corporate Finance 
Q1 2 71 23 
Q2 4 164 29 
Q3 7 155 27 2006 
Q4 12 174 106** 
Q1 4 87 30 2007 
Q2 8 150 23 
EN 65   EN Q3 5 136 17 
Q4 7 61 28 
* 998 transactions, contai ning 4.279 tranche ratings 
** Includes 64 ratings assigned simultaneously to Volkbank-Verbund system banks within 
Austria. 
EN 66   EN Global List of CRAs in April 2008 
(Source: www.defaultrisk.com) (1) A.M. Best Company, Inc.
 
US -- NRSRO 
(2) Agusto & Co. Ltd.  
Nigeria 
(3) Ahbor Rating  
Uzbekistan 
(4) Apoyo & Asociados Internacionales S.A.C.  
Peru -- Fitch Associate 
(5) Bank Watch Ratings S.A.  
Ecuador -- Fitch Affiliate 
(6) BRC Investor Services S.A.  
Columbia 
(7) Calificadora de Riesgo, PCA  
Uruguay 
(8) Capital Intelligence, Ltd.  
Cyprus 
(9) Caribbean Information & Credit Rating Services Ltd. (CariCRIS)  
Caribbean 
(10) Central European Rating Agency (CERA)  
a/k/a: Fitch Polska, S.A. Poland 
(11) Chengxin International Credit Rating Co., Ltd.
 
China -- Fitch Affiliate 
(12) China Lianhe Credit Rating, Co. Ltd.  
China 
(13) Clasificadora de Ries go Humphreys, Ltda.  
Chile -- Moody's Affiliate 
(14) Class y Asociados S.A. Clasificadora de Riesgo  
Peru 
(15) CMC International, Ltd.  
Nigeria 
(16) Companhia Portuguesa de Rating, SA (CPR)  
Portugal 
EN 67   EN (17) Credit Analysis & Research Ltd (CARE)  
India 
(18) Credit Rating Agency of Bangladesh, Ltd. (CRAB)  
Bangladesh 
(19) Credit Rating Information and Services, Ltd. (CRISL)  
Bangladesh 
(20) CRISIL, Ltd.  
f/k/a: Credit Rating Inform ation Services of India 
India -- S&P Affiliate 
(21) Dagong Global Credit Rating Co., Ltd.  
China 
(22) Dominion Bond Rating Service (DBRS)  
Canada -- NRSRO 
(23) Duff & Phelps de Colombia, S.A., S.C.V  
Columbia -- Fitch Affiliate 
(24) Ecuability, SA  
Ecuador 
(25) Egan-Jones Rating Company  
US -- NRSRO 
(26) Equilibrium Clasificadora de Riesgo  
Peru -- Moody's Affiliate 
(27) European Rating Agency (ERA)  
UK 
(28) Feller Rate Clasificadora de Riesgo  
Chile -- S&P Affiliate 
(29) Fitch Ratings, Ltd.  
US/UK -- NRSRO 
(30) Global Credit Rating Co.  
S.Africa 
(31) Interfax Rating Agency (IRA)  
Russia 
(32) Investment Information and Credit Rating Agency (ICRA) 
India 
(33) Islamic International Rating Agency, B.S.C. (IIRA)  
Bahrain 
EN 68   EN (34) Japan Credit Rating Agency, Ltd. (JCR)  
Japan -- NRSRO 
(35) JCR-VIS Credit Rating Co. Ltd.  
Pakistan -- JCR Affiliate 
(36) Korea Investors Service, Inc. (KIS)  
Korea -- Moody's Affiliate 
(37) Korea Ratings Corporation  
f/k/a: Korea Management Consulti ng and Credit Rating Corp. (KMCC) 
Korea -- Fitch Affiliate 
(38) Lanka Rating Agency, Ltd. (LRA)  
Sri Lanka -- Subsidiary of RAM 
(39) Malaysian Rating Corporation Berhad (MARC)  
Malaysia -- Fitch Affiliate 
(40) Mikuni & Co., Ltd.  
Japan 
(41) Moody's Investors Service  
US -- NRSRO 
(42) National Information & Credit Evaluation, Inc. (NICE)  
Korea 
(43) ONICRA Credit Rating Agency of India, Ltd.  
India 
(44) P.T. Kasnic Credit Rating Indonesia -- Indonesia  
Indonesia -- Moody's Affiliate 
(45) P.T. PEFINDO Credit Rating Indonesia  
a/k/a: PT Pemeringkat Efek Indonesia Indonesia 
(46) Pacific Credit Rating (PCR)
 
a/k/a: Clasificadora de Ries go Pacific Credit Rating S.A.C. 
Peru 
(47) Pakistan Credit Rating Agency, Ltd. (PACRA)  
Pakistan -- Fitch former affiliate 
(48) Philippine Rating Services, Corp. (PhilRatings)  
Philippines 
(49) RAM Rating Services Berhad (RAM)  
f/k/a: Rating Agency Malaysia Berhad Malaysia -- S&P Affiliate 
EN 69   EN (50) Rapid Ratings International, Inc.  
Australia/NZ 
(51) Rating and Investment Information, Inc. (R&I)  
Japan -- NRSRO 
(52) Rus Ratings  
Russia 
(53) Seoul Credit Rating & Information, Inc.  
Korea -- JCR Affiliate 
(54) Shanghai Credit Information Services Co., Ltd.  
China 
(55) Shanghai Far East Credit Rating Co., Ltd.  
a/k/a: Xinhua Far East Credit Ratings China 
(56) Slovak Rating Agency, a.s. (SRA)
 
a/k/a: Slovenská ratingová agentúra, a.s. Balkans -- ERA Affiliate 
(57) SME Rating Agency of India Limited (SMERA)
 
India 
(58) Sociedad Calificadora de Riesgo Centroamericana, S.A. (SCRiesgo)  
Costa Rica 
(59) Standard and Poors (S&P)  
US -- NRSRO 
(60) Taiwan Ratings, Corp. (TCR)  
Taiwan -- S&P Affiliate 
(61) Thai Rating and Information Services Co., Ltd. (TRIS)  
Thailand 
(62) TheStreet.com Ratings, Inc.  
f/k/a: Weiss Ratings, Inc. US 
(63) Türk KrediRating (TCRating)
 
Turkey 
(64) Veribanc, Inc.  
US 
EN 70   EN 9.5.  Consultation: CESR, ESME, IOSCO, FSF, SEC 
The European Commission decided to manda te CESR in September 2007 and ESME in 
November 2007, to provide advice on the various aspects of CRAs' activity and role in the 
financial markets and especially in structured  finance. The Commission services followed the 
work of both groups throughout the entire process.  Both groups have carried out an extensive 
consultation with stakeholders not ably on the role of structured finance in the context of the 
subprime turmoil. CESR delivered its report on 13 May 2008 and ESME delivered its report 
on 4 June 2008. 
Apart from closely following the progress of work at CESR and ESME, the Commission 
services have held discussions with major ra ting agencies and other stakeholders (industry 
associations from the insurance, securities a nd banking sectors, inform ation providers, etc). 
The Commission services have also received wri tten inputs from a wide range of associations, 
market practitioners and stakeholders. On th e international side, the Commission services 
have followed closely the developments like the revision of the code of conduct for CRAs 
approved by IOSCO on 26 May 2008, the report  of the Financial Stability Forum (FSF)81 
published on 7 April 2008 and the proposal for changes in the US Act on CRAs presented on 
11 June 2008. The Commission services have been  also following the consultations carried 
out by both IOSCO and the FSF. 
In the following a summary of the content of th e different reports and initiatives is given: 
9.5.1. CESR report  
In the Communication from the Commission on CRAs of 2006 CESR was asked to monitor 
CRAs' compliance with the IO SCO Code and report back to the Commission on an annual 
basis. CESR published the first annual report in December 200682. The conclusion of this first 
report was that – despite some non-essential de viations – the main CRAs had implemented 
the IOSCO code. 
In May 2007, the European Commission aske d CESR to monitor again the voluntary 
compliance of CRAs with the IOSCO Code and to prepare a second re port on the topic. In 
September 2007 the Commission requested CESR to e xpand this report to review the role of 
CRAs in structured finance and re-evaluate regu latory options in this area. In February 2008 
CESR published a consultation paper83 ahead of preparing the report mandated by the COM. 
CESR has also held a public  hearing on 26 March 2008. The public  consultation on the draft 
findings was concluded with a significant number of contributions from market participants. 
                                                 
81 The Financial Stability Forum was convened in April 1999 to promote international financial stability 
through information exchange and international co-operation in financial supervision and surveillance. The Forum brings together on a regular basis national authorities responsible for financial stability in 
significant international financial centres, inte rnational financial institutions, sector-specific 
international groupings of regulators and supervisors, and committees of central bank experts. The FSF seeks to co-ordinate the efforts of these various bodies in order to promote international financial 
stability, improve the functioning of markets, and reduce systemic risk. 
82 CESR’s Report to the European Commission on th e compliance of credit rating agencies with the 
IOSCO Code. December 2006 (CESR/06-545) 
83 The role of credit rating agencies in structured  finance. Consultation Paper. 13 February 2008 
EN 71   EN CESR Chairmen approved the final advice for th e Commission in the plen ary of Ljubljana (13 
May 2008)84.  
CESR's report is divided in four sections: 1. Summary of the main initiatives in the international market in relation to the role of 
CRAs in the structured finance sector  (EU countries, Capital Requirements 
Directive, US, FSF, IOSCO, CR As initiatives, ESME, CGFS) 
2. Recommendations to CRAs in relation to the areas of: 
• Transparency:  CRAs should communicate the characteri stics and limitation of the ratings; 
should give information on critical model assumptions; ratings should label the 
methodology used; information on rating pe rformance should be provided in a 
standardised, publicly available format to the market. 
• Human Resources:  CRAs should disclose selective human resources indicators; CRAs 
should ensure that remuneration structures are appropriate to promote independence and 
avoid conflicts of interest. 
• Monitoring of Ratings:  CRAs should ensure that the monitoring of their ratings remains 
effective. 
• Conflicts of Interest:  CRAs should ensure full transparency  with regard to the exact nature 
of their interaction with  issuers/arrangers of structured fi nance products as this interaction 
can give rise to conflicts of interest; CRAs should have strong policies and procedures in 
place to monitor and control this interaction ; there should be a common definition on what 
constitutes advisory pr actice and a definition of what c onstitutes ancillary business; CRAs 
should be transparent in the disclosure of  the fees they receive from issuers. 
3. Monitoring of compliance of the CRA’s code s of conduct on those provisions of the 
CRAs' codes that CESR identified in its first report (January 2007) as areas of non-
compliance with the IOSCO Code: CESR  conclude that the four big CRAs’
85 
internal codes of conduct comply to a larg e extent with the IO SCO Code, but there 
are still areas where the CRAs' internal codes of conduct could be improved; thus, 
the initiatives unde rtaken by the CRAs are insufficient. 
4. CESR’s proposal to the European Comm ission: CESR considers that IOSCO (as 
revised) should be regarded as the mi nimum upon which an enhanced framework 
should be built. However, CESR makes several additional recommendations (see above point 2). CESR recomme nds the Commission "to form, as an immediate step, 
a CRAs standard setting and monitoring body with the following objectives: 
a) to develop international st andards for the rating industry in line with the steps taken 
by IOSCO;  
                                                
 
84 CESR’s Second Report to the European Commissi on on the compliance of credit rating agencies with 
the IOSCO Code and the role of credit rating agenci es in structured finance. May 2008 (CESR/08-277) 
85 CESR report analysed the codes of conduct of Standard and Poor's, Moody's, Fitch and DBRS (see 
section 1.3) 
EN 72   EN b) to monitor the compliance of CRAs to those standards, using full transparency as the 
method for enforcement and having “name and shame” capacity. 
The members of the body should be senior repres entatives of investors, issuers, investment 
firms and CRAs (the latter only for the standard  setting function). They would be appointed in 
their majority by the international regula tory community to ensure independence. 
9.5.2. ESME report 
In November 2007 the Commission requested ESME 's advice on certain issues concerning the 
role of CRAs and the importance of ratings in th e financial markets, and in particular in the 
field of structured finance. The report of ESME was approved on 4 June. It covers CRAs' 
operations and role on the markets, business ince ntives, internal organisation implications and 
market dynamics.  
ESME's report discourages a regulatory approach for CRAs by the EU institutions. While 
they are concerned with the l ack of CRAs' accountability toward s the market, they are equally 
concerned by possible adverse results of a ti ghter regulatory regime . The self-regulatory 
regime already in place could st ill work but, in any event, the IOSCO code should be revised. 
Nevertheless, there is a need of further develo pments or requirements in certain areas going 
beyond the revision of the IOSCO code. Therefor e, implicitly the report is advocating for a 
European code of c onduct built upon IOSCO's. 
The report contains very detailed recomm endations on methodology and analytics:  
• CRAs should agree with market pa rticipants on the information that should be disclosed on 
a pool of assets being securi tized; CRAs should disclose the fee structure for rating the 
security.  
• The report makes a strong point on corporate governance; notably, each CRA should have 
an independent policy functi on accountable for policy, cr iteria, models and quality 
assurance; this policy function should re port to a policy sub-committee of the Board, 
composed by a majority of non executive dire ctors whose compensati on would be a fixed 
fee; the chief executive officer and the chairman of the board should be different persons. 
• Concerning the oversight, the repo rt considers that CESR shoul d keep its monitoring role 
in relation to CRAs; nevertheless, this role should be reinforced by an annual external 
auditory on corporate governance in each CRA a nd by an advisory group that would advise 
CESR on:  
a) significant developments, trends and issues  in the credit markets which are relevant 
to the activities of the CRAs, and;  
b) any rating trends/issues wh ich are prompting concerns.  
• Membership of this group would comprise i nvestors/users, issuers, originating banks, 
sponsoring banks, credit experts, academic ri sk experts and the Securities and Exchange 
Commission (SEC). 
EN 73   EN 9.5.3. Revision of the IOSCO code on CRAs 
On 26 March 2008 the Technical Committee of th e International Organisation of Securities 
Commissions (IOSCO) published a consultation paper on the role of CRAs in structured 
finance markets. After collecting evidence from market participants, the revision of the Code 
of Conduct Fundamentals for CRAs of 2004 wa s approved by the IOSCO Chairmen in 
IOSCO's Annual Conference, held in Paris on 26-29 May. 
The IOSCO report describes the actual role played  by the rating agencies in the credit markets 
(and structured finance markets in  particular). It looks  at the areas where deficiencies in the 
CRAs' practices were observed (transparency, conflicts of interest and integrity and 
competition issues). The paper does not presen t particularly strong criticisms against the 
CRAs (in the context of the subprime crisis) but rather identifies the need to make 
adjustments to the IOSCO Code of Conduct in order to better a ddress the legitimate concerns 
related to the activity of the agencies (quali ty and integrity of th e rating process; CRA 
independence and avoidance of conflicts of in terest; CRA responsibilit ies to the investing 
public and issuers; and disclosure of the CRA’s code of conduct and communication with 
market participants).  
The report first offers a descript ive presentation of the CRAs' role in the structured finance 
markets. It notes the overwhelming reliance of  market participants  on the ratings (even 
sophisticated institutions with capability to doub le-check the CRA analysis do not do it, as it 
is time consuming). The fact that the CRA anal ysis is model-based and largely quantitative 
has also strengthened the common perception of objectivity of th eir opinion. The ratings have 
consequently become a seal of approval (rather than merely a third party opinion of the loss 
characteristics of the security). In this contex t the report notes that agencies rely entirely on 
the data provided by the issuers or even 3rd parties and that their methodologies do not take 
into consideration changes that may have an impact on the quality of the information they 
receive. Moreover, CRAs' analytical capacity is weakened in this area because of some 
specific difficulties with assessing structured finance instruments:  
– difficulty to analyse correlation risk within  a portfolio of similar loans (further 
compounded in the case of CDOs),  
– lack of secondary market data,  
– limited historical performance data, 
– no universal valuation method and price disc overy mechanism for structured finance 
instruments.  
The IOSCO report recognises that the prom inence of the CRAs' opinions was further 
strengthened as a result of Basel II86.  
                                                 
86 The Basel II Framework describes a more comprehensive measure and minimum standard for capital 
adequacy that national supervisory authorities are now working to implement through domestic rule-
making and adoption procedures (In the EU is mandatory since January 2008). It seeks to improve on 
the existing rules by aligning regulatory capital requirements more closely to the underlying risks that banks face. In addition, the Basel II Framework is intended to promote a more forward-looking 
approach to capital superv ision, one that encourages banks to id entify the risks they may face, today and 
in the future, and to develop or improve their ability to manage those risks. As a result, it is intended to 
EN 74   EN The IOSCO report identifies a number of defi ciencies in the operations of CRAs which 
should be considered from a regulatory perspective: 
• Transparency issues: (i) historical performa nce data are not sufficiently transparent and 
comparable; (ii) there are major differences  between corporate and structured finance 
ratings (in terms of methodology, da ta series available, and liqui dity considera tions); (iii) 
there is a lack of clarity in terms of CRAs' policies regarding the re views of past ratings 
and methodologies.  
• As for independence and measures to avoid c onflicts of interest, the report reminds the 
ever-present concerns related to the issuer -pays model (becoming even more acute in the 
case of structured finance) and the advisory services that could be inadvertently offered by 
the CRAs, but does not go beyond proposing co mplementing measures to the existing 
Code of Conduct provisions.  
• When addressing competition issues, the IOSC O report reiterates the view that reputation, 
which needs to be earned from users of rati ngs, may be a more difficult to overcome as a 
barrier of entry than (potential) regulatory disc iplines. It recognises that the inherently less 
transparent structured finance markets and limited competition among CRAs may combine to undermine the integrity of the cred it rating process of these products.  
The amendments to the IOSCO Code may be grouped as follows: a) Conflicts of interest, integrity and governance: 
– CRAs should prohibit analysts from making proposals or recommendations regarding the 
design of structured finance products rated by the agency; 
– CRAs should have "look back" policies (when an  analyst leave the ag ency and joins an 
issuer that he was rating, the agency would review his last year activity); 
– CRAs should periodically review the re muneration policies and practices for the 
employees, so that they do not comp romise the CRA’s rating process; 
– CRAs should disclose whether any client make up more than 10 percent of the CRA’s 
annual revenue; 
– CRAs should define what it considers and does not  consider to be an ancillary business and 
give the reasons therefore. 
b) Transparency of CRA methodologies and ratings: 
– CRAs should use a separate set of rating sym bols for rating structured finance products; 
– CRAs should disclose the rating methodology that they use for each product. 
c) Quality of ratings: 
                                                                                                                                                        
 
be more flexible and better able to evolve with advances in markets and risk management practices. 
(Excerpt from the Bank of International Settlements website). 
EN 75   EN – The decision-making process for reviewing a rating (and potentially downgrading it) 
should be objective; 
– CRAs should have an independent function fo r the periodic review of the methodologies 
and models; 
– CRAs should ensure that the in formation they use is of su fficient quality to support a 
credible rating; ratings invol ving products with limited historical data (like subprime 
mortgages) should have these limitations made clear; 
– CRAs should refrain from rating a product if the complexity or structure of a new type of 
rating makes the rating not feasible. 
d) Investor education: – CRAs should give investors more information about  what a credit rating  is, its attributes 
and limitations, and should inform to what extent it verifies the information provided to it by the issuer; 
– CRAs should provide investors/su bscribers with all necessary information for them to 
understand the basis for the CRA’s rating wh en rating a structured finance product. 
9.5.4. Financial Stability Forum 
In its report of 7 April 2008 the FSF examines the causes and weaknesses that have produced 
the current financial turmoil and sets out r ecommendations for increasing the resilience of 
markets and institutions going forward. The FSF recommendations in the area of CRAs have 
been based substantially on th e inputs of IOSCO and Committee on the Global Financial 
System (Bank of International Settlements). They suggest improvements in the following 
areas: 
– CRAs should implement the revised IOSCO Co de to manage conflicts of interest 
– CRAs should improve the quality of the rating process with periodic reviews of 
methodologies and models undertaken  by an independent function;  
– CRAs should separate consulting and rating activities;  
– CRAs should have adequate resources in the initial rating and in the review function 
– CRAs should differentiate ratings on structur ed products from traditional ones (different 
scales or additional symbols). 
– CRAs should expand the initia l and ongoing information (assu mptions, volatility of the 
rating, and limitation of analysis due to insufficient data or untested models). 
– CRAs should enhance their review of the quality of the data i nput and of the due diligence 
performed on underlying assets by originators, arrangers and issuers i nvolved in structured 
products. 
– Investors should address their over-relian ce on ratings (investors’ due diligence). 
EN 76   EN – Regulators should review their use of ratings in the regulatory and supervisory framework 
(in order to avoid inducement to  uncritical reliance on ratings). 
The FSF report welcomes the steps that have be en made, individually and collectively, by the 
CRAs87 to address some of the problems but suggests that 'more is needed'.  
9.5.5. US Securities and Exchange Commission (SEC) proposal  
The U.S. Credit Rating Agency Reform Act of  2006 entered into for ce on 27 June 2007. This 
new Act establishes a legal framework fo r a revised voluntary NRSRO (Nationally 
Recognized Statistical Rating Or ganization) registration and qua lification process. The SEC 
has exclusive supervisory and investigatory powers for the exercise of its functions.  
On 13 March 2008 the U.S. President's Worki ng Group (PWG) announced a set of measures 
involving CRAs in order to enhance integrit y and transparency on the rating process for 
structured credit products. The SEC presented th e broad lines of its proposal on CRAs on 11 
June 2008. The SEC intends to implement the US Act on CRAs to better address conflicts of 
interest, quality of ratings and transparency: 
– Rating analysts should not be involved  in the structuring of a product;  
– CRAs shall improve their transp arency (public disc losure of rating ac tions, publication of 
periodical performance stat istics) in a way to allow users to compare among rating 
agencies;  
– CRAs shall disclose the frequenc y of the revision of ratings and shall be more transparent 
in the event of a revi sion of a rating;  
– CRAs shall use adequate information about the underlying assets of a product that they are 
rating; they shall refrain from issuing a rati ng if the information on the underlying assets is 
not available and they shall disclose the due diligence performed to verify the information 
on the underlying assets;  
– CRAs shall disclose all the information th at they use to produce a rating (including 
information on the underlying a ssets), so as to allow broa d market scrutiny, as well as 
competitive analysis by other rating agencies th at are not paid by the issuer to rate the 
product;  
– Analysts participating in determining a credit  rating should refrain from negotiating the fee 
that the issuer pays for it (t o avoid "shopping for ratings").  
– Analysts cannot receive gifts from  issuers in any amount over $25. 
– CRAs should differentiate ratings for structured products than ratings for traditional debt 
(corporate, sovereign), by usi ng different symbols or by disclosing the differences between 
ratings of structured prod ucts and other securities. 
On 1 July 2008 the SEC made public for consu ltation a package of am endments in the US 
legislation with the aim to review all referenc es to NRSRO ratings in US financial Law. SEC 
                                                 
87 See section 5.2.  
EN 77   EN considers that these references in the legislation might have c ontributed to an undue reliance 
on NRSRO ratings by market participants. Invest ors should improve the analysis of risks and 
should have clear the limits and purposes of credit ratings for structured products. The 
proposal is divided in three kind of measures: 
– Amend various rules and forms under the Secu rities Exchange Ac t of 1934 ("Exchange 
Act") to remove several references to NRSROs; 
– Replace rule and form requirements under the Securities Act of 1933 and the Securities 
Exchange Act of 1934 that rely on security  ratings with altern ative requirements; 
– Amend five rules under the Investment Compan y Act of 1940 and the Investment Advisers 
Act of 1940 that rely on NRSRO ratings.) 
EN 78   EN 9.6. Excerpts from ESME and CESR report in relation to the role of CRAs, its 
business model and the meaning of ratings. References to the reports in the text. 
Role of CRAs and importance of ratings (pages 3 to 5 of ESME's report) 
CRAs are recognised as independent providers of credit opinions and th ey play an important 
role as their ratings are used by investors,  borrowers, issuers and governments for a variety 
of reasons. For example, investors use ratings to determine their in vestment appetite; and 
governments require ratings in their financia l markets and banking supervision regulation.  
Investors vary in terms of their own credit research capac ity and accordingly the level of 
reliance placed on CRAs in the purchase of cr edit assets. Given the scale of the total 
outstanding rated debt (estimated at US$40 trilli on) the reliance on the CRAs in this regard 
has been very substantial.  
The CRA landscape is by and large diverse w ith a number of CRAs, but the three most 
recognised are Standard & Poor’s, Moody’s In vestors Service and Fitch Ratings. Between 
them, they effectively dominat e the market. There are also a number of local and well 
established agencies in Japan and Canada as well as  niche rating agencies such as AM Best 
in insurance in the US.  
Business models of CRAs  
The three CRAs above make all their public ratings on issuers available to the market free of 
charge on their websites, operating under the “issuer pays” model. Alternative business 
models, typically described as “investor pays ”, rely upon subscription revenues and thus the 
release of ratings to only those parties who have s ubscribed to that rating service. There has 
been a rapid growth in the number of structured  finance transactions, which is reflected in the 
CRAs’ revenues: CRAs currently earn approximat ely 50% of their revenue from structured 
finance ratings.  
A corporate would typically have two or thre e CRAs rating their de bt and an annual fee is 
paid to each. In contrast, struct ured finance issuers would pay th e bulk of the fee upfront with 
a modest annual surveillance fee. A portion of  the up-front fee may be recognised on a 
deferred basis, where part is deemed to cove r subsequent surveillance cost. Structured 
finance usually has more than one rating; excepti ons include the use of securities in the repo 
market where the ECB only demands one rating. ES ME's general view is that in principle, 
structured finance products should have more  than one rating, unless there are specific 
commercial reasons for having just one. The increased number of ra ting opinions would 
improve the quality of the ratings, decrease the risk of conflict of interest and improve 
investor information. 
Meaning of ratings  
A. Definitions  
A credit rating is a current opinion and measure of  the risk of an obligor with respect to a 
specific financial obligation based on all ava ilable information. For this purpose, S&P and 
Fitch define risk as the probability  of default (PD), whereas Moody’s  define it as ‘loss‘, which 
is the product of PD and th e loss rate given default.  
EN 79   EN The CRAs emphasise that the rating is a relative  measure of risk, i.e. BBB+ is a higher risk 
than A-, but better than BBB. It is not intended to  be an absolute measure of risk; therefore, it 
does not mean that a specific ra ting, e.g. BBB, which for struct ured finance securities has had 
an average default rate of 0.18%  between 1987 and 2007, is a math ematical prediction of the 
future PD. This is an area where there is  probably an understandable disconnect with the 
users of ratings where they tend to take the hi storic long-term defaul t experience by rating 
category as an indicator or a me asure of future default.  
The CRAs state that ratings have the same  meaning across asset classes (corporates, 
sovereigns and structured finance); therefore, the long-term default experience through the 
economic cycle should be similar.  
The appropriate measure of a CRA’s rating success is whether, at a por tfolio level over the 
long-term, its ratings are corre lated with the actu al default experience. An individual 
corporate collapse, which was not anticipated by  the CRAs, is not in isolation an appropriate 
measure of success or failure. An individual ra ting is ultimately an opinion, with a default 
probability, and should never be viewed as a ‘certa inty’, i.e. a total absolute endorsement of a 
particular security, even if it is rated AAA/Aaa.  
B. Differences between corporate vs. structured finance products  
The two broad non-sovereign categories of debt  rated by the CRAs are corporate and 
structured finance. While the CRAs indicate the rating of corporate debt and structured 
finance is similar, the rating is sues are arguably fundamentally di fferent. The characteristics 
of both and the differences, wh ich have relevance from a ra ting perspective and ESME’s 
mandate, are addressed below.  
Corporate debt  
– Corporate debt is essentially a single asset to the investor, although there may be senior 
and junior debt as well as short-term debt all of whic h may have separate ratings.  
– There is generally a relationship dimens ion between the CRA and management, which 
usually extends over many years.  
– Typically, the CRA would depl oy an industry specialist with extensive know ledge of the 
industry. This ‘macro’ perspective places the analyst in a strong pos ition to evaluate the 
‘business risk‘.  
– The rating reflects a judgement on the overall balance between the business' risk and 
financial risk (essen tially leverage).  
– While the gearing level can c hange substantially o ver the life of the debt it may be 
constrained by bank/bond covenants. The CRAs  have in any case benchmark leverage 
ratios which indicate how the rating may respond to changed leverage levels.  
– If a credit problem arises there are a range of remedies and management have the 
flexibility to respond to changes in the clim ate in which they are operating, e.g. the 
corporate may decide to raise new equity to address credit deterioration. This flexibility is typically not a feature of  structured finance.  
Structured finance debt:  
EN 80   EN – A structured finance security is  usually an obligation of a Spe cial Purchase Ve hicle (SPV), 
which has a pool of assets; these assets will ty pically have been sold by an originator into 
the SPV. The loan obligations underlying an individual structure are typically from a 
single asset class, e.g. prime or subprime residential mortgages, commercial mortgages, 
credit card receivables, LBO loans, etc.  
– Typically, the originator wishes to maximise  the borrowing against the portfolio, subject to 
acceptable pricing on the debt. The level of de bt that is acceptable to the market on the 
portfolio is essentially a functi on of the projected cash flow from the underlying loan assets 
relative to the debt service obligations on the SPV debt, taking account of stress scenarios. 
This takes account of the quality of the underlying assets (which reflects, inter alia, the original borrower LTV), the underlying interest  spread, projected amortisation speed, etc. 
This then determines the level of equity that is required; in the case of credit cards this 
could be as low as zero, i.e. the originating bank may be able to leverage the portfolio 100% essentially because of the combination of  the speed of amortisation and the interest 
spread. More typically, the leverage would range  up to a maximum of 95% for other asset 
classes and can be substantially lower.  
– At this stage there are two layers of debt: one  at the original indi vidual borrower level and 
the other at the SPV level. In certain circum stances, there may be th ree layers of leverage, 
where the assets within the SPV are debt tranches in another CDO SPV.  
– The SPV debt only has recourse to the underl ying assets in the SPV. Accordingly the 
remedies are limited if the cash flow falls to a level that does not afford 100% debt service.  
– The debt in the SPV is tranched ranging typi cally from senior ( AAA) through progressive 
layers of subordination. The mix and structure is designed to reflect the market’s risk 
appetite for the different tranches so as to minimise the co st of the overal l borrowing to the 
originator.  
– Unlike corporate debt, where the rating focus is  on whether the corpor ate will default or 
not, the rating focus in structured finance is on determining the likely total level of defaults 
and losses on the pool of assets, i.e. will the l evel of losses impair the capacity to meet the 
debt ser-vice obligations on the different tranches of debt?  
– One of the quoted advantages of  structured finance over a cor porate is that the purchaser 
of the paper has the benefit of risk diversi fication from the pooling of assets. The CRAs 
address this issue as part of  their rating process.  
– Concentration risk is the other side of risk diversification and is a fundamental issue in the 
rating of structured finance. This is the extent to which the assets are correlated, i.e. may default simultaneously. It arises because of so me common risk factor; usually, it is viewed 
by many on a sectoral basis. However, risk co ncentrations can arise in different guises, 
e.g. the subprime residential mortgages were  distinguished by the fact that the 
acknowledged primary source of re-payment was not the borrower cash-flow, but instead ‘refinancing’ which ultimately dried up as a source of repayment. This represented a 
concentration of risk that ultimately proved  fundamental in the crisis that ensued.  
– The ‘waterfall‘ repayment arrangements, with  priority based on se niority, determine the 
debt service coverage on the di fferent tranches, which in turn helps determine the rating of 
each individual tranche.  
EN 81   EN – The rating of structured finance debt has be en much more model-driven than corporate 
debt and has more systemised monitoring focused on monthly cash-flow and actual 
delinquency/default experience on the underlying assets. There is a substantial level of 
complexity in the rating of structured finance debt whic h requires a wide range of 
variables to be taken into account and inco rporated in the model. The models should 
reflect the cumulative expertise of the analysts in a CRA and data history to the extent that 
it is available and adequate.  
– The CRAs typically do not do any due dilige nce themselves on the underlying SPV assets. 
They rely typically on the assurances and du e diligence work by the originators and 
sponsoring banks.  
Page 14, second and third paragraphs of Question 8:  It may be that the strong macro 
perspective used in the rating of corporates, where the CRAs have a long record of 
credibility, was not considered in an equivale nt manner in the rating of structured finance 
securities. The surveillance/revi ew of structured fi nance securities appea red to have a heavy 
‘micro‘ focus on the monthly ca sh flow and delinquency experience as distinct from a broader 
strategic consideration of the big macro fact ors impacting the qualit y of the securities. 
Monthly cash flow and delinquency experience is essentially a lagging in dicator rather than a 
leading indicator.  
There is limited evidence available to suggest th at consideration was gi ven to the particular 
concentration risk inherent in  a pool of subprime residentia l mortgages, i.e. the primary 
source of repayment was the ‘refinancing‘ market which ultimately dried up and proved 
fundamental in influencing the scale of default/loss in the crisis that ensued. The CRA philosophy of ‘’rating through the cycle‘’ may have encouraged a bias where non-cyclical 
deterioration was sometimes viewed as cyclica l change, which would reverse over time. This 
may have been a contributory factor in the "m isreading" of subprime, which resulted in a 
delayed recognition of fundamental deteriorat ion and reflection thereof in the ratings.  
* * * 
The role of CRAs in structured finance (Points 90 to 96 of CESR's report)  
90. CRAs play a significant role in capital mark ets, providing a key s ource of information on 
credit risk to investors. As a reminder, a ccording to the definition included in the IOSCO 
Code of Conduct, a credit rating “is an opini on regarding the creditworthiness of an entity, a 
credit commitment, a debt or de bt-like security or an issuer of such ob ligations, expressed 
using an established and defined ranking system”.  Therefore, according to this definition, 
CRAs ratings are opinions on creditworthi ness but not on the price or liquidity 
characteristics. 
91. Structured finance consists of the pooling of assets and the subsequent sale to investors of 
tranched claims on the cash-flows backed by these pools, usually through a Special Purpose Vehicle (SPV). Over the past 5 years, the is suance volume of structured finance products 
soared partly as a result of the search for a lternatives in the context of the declining 
attractiveness of returns, but also driven by the incentive fo r banks to take loans off balance 
sheets. The volume of structured finance issues in Europe was estimated at EUR 480 billion in 
2006, grew by 72% yoy (year on year: comparing th e first half of 2007 with the first half of 
2006) in the first half year 2007 and then declined  by 40% yoy in the second half of 2007. 
EN 82   EN 92. Two main characteristics of  structured finance products ar e the pooling of assets and the 
tranching process which is designed to create seniority ordering among the different tranches 
of securities. Senior classes of  securities are desi gned in order to be immune, to a certain 
extent, from default losses, which are ini tially borne by riskier (equity and mezzanine) 
tranches. This segmentation enables the product to appeal to investors with different risk 
profiles. 
93. These characteristics however imply a high l evel of complexity, as the tranching process 
consists of legally organizing th e distribution of cash-flows fr om the asset pool  to different 
tranche investors. In order to adequately assess these instruments, an investor needs to gauge the credit risk of the underlying (heterogeneous) collateral assets but also to have sufficient 
insight into the legal st ructure and the sp ecific provisions of the transaction (e.g., implication 
of asset managers) that organize the diff erent seniority levels of the tranches. 
94. Due to this complexity and the rising interest of la rger categories of in vestors, which often 
do not have the resources, time or expertise for a thorough analysis of the risk of the 
available securities, the market has come to heavily rely on credit ratings. They form the 
easiest source of information and a stan dardized evaluation of  structured finance 
transactions. In that sense, ratings help reduce the information asymmetry. Moreover, 
ratings, and particularly investment-grade ones, are also a requisite in or der to market senior 
tranches to those asset managers with rating-ba sed investment restrictions. However, ratings 
for structured finance products are designed pure ly to represent the lik elihood of default and 
do not indicate market valuation and liquidity risk, meaning that risk assessment based purely 
on these ratings will not cover the full range of risks associated with these investments. 
95. CRAs have thus developed and continue to  adapt methodologies (model-based) to rate 
structured finance transactions, which grew to a ccount for an increasingly significant part of 
their revenues and income. In 2007, despite th e drop in activity in the second half-year, 
structured finance ratings still represented 40 % to 50% of the CRAs’ revenue. Fees as a 
percentage of the nominal value of the transac tion are believed to be 2 to 3 times higher for 
structured finance than for traditional ratings. 
96. The difference in the rating pr ocess may explain this varian ce in fee levels. Not only are 
the ratings more complex and time consuming due to their very nature but also the rating of 
structured finance transactions distinguishes itself from the rating of traditional instruments by the greater flexibility to adap t the features of the transaction in order to achieve the rating 
level desired for each tranche of the structure. As opposed to traditional ratings, the rating of a structured finance transaction is  a target, not the outcome of the rating process. Therefore, 
CRAs have taken a more important and involved part in a deal's structuring process, with 
criticism from some quarters that  their involvement is now act ually advisory. Arrangers use 
CRAs’ models to structure the deal and subs equently go through an itera tive process with the 
CRA, with the ultimate goal for th e issuer being to maximize the size of the tranche(s) with the 
highest rating or minimize the cost/quality of assets used to reach a high rating tranche or minimize the level of credit protection needed for a certain tranche. Compared to their initial role of a third-party monitor of  credit default risk on the basi s of pre-existing financial and 
economic conditions, CRAs seem to have taken a much more interactive role in the deal 
process when it comes to structured finance transactions. 
EN 83   EN References in footnotes 
106. The current crisis has again given rise to cr iticisms that CRAs were much too slow to 
react, as was alleged to be the case in previous corporate scandals. The delay in the 
downgrading process of structured finance securiti es backed by subpri me mortgage assets 
raises questions on the effici ency of CRAs’ methodologies, the r obustness of their historical 
default models in a relatively new market  and their rating surveillance procedures.  
… 
136. When rating agencies revise their methodologies  for the rating of a particular asset class 
of structured finance they do not necessarily r eview all relevant existing rated securities 
against this methodology. The CRAs highlighted the fact that often th ese securities will be 
behaving as was expected at i ssuance and therefore reviewing these ratings against the new 
methodology would not be appropriate. Past-iss uances would be reviewed against the new 
methodology if they were performing outside of expected parameters.  
137. CESR found that whilst methodologies were free ly available it proved difficult to track 
which evolution of the particular methodology  had been used to rate/review specific 
issuances. This clearly could pose a problem to  market participants trying to assess what 
value to place on a particular rating. 
… 
225. The four CRAs’ codes comply to a large extent with the IOSCO Code. Some CRAs have 
implemented a couple of improvements in th eir respective code of conduct. There are, 
however, areas or provisions where the CRAs' codes do not comply. As well, CESR recognized a few areas of minor importance, where the CRAs do not formally mirror the 
IOSCO Code with their provisions but neverth eless reach the outcome the IOSCO Code aims 
at. However, CESR expected to see a more rigor ous approach from CRAs in response to last 
year’s report. Thus, CESR’s expectations for im provement were only partially met by the 
CRAs. 
EN 84   EN 9.7. Individual initiatives of the CRAs 
1. Standards and Poor's' (S&P's) reform plan 
On 7 February 2008, S&P publicly announced a se t of actions consisting o the following 
steps:  
• Appointment of an Ombudsman to  address concerns from issu ers, investors, employees 
and other market participants regarding potential conflicts of interest and S&P's analytical 
and governance processes.  
• Engagement of an independent firm to conduct periodic review s of compliance and 
governance processes, the results of which will  be publicly disclosed in a written opinion 
of the firm as to the independence of S&P's ratings.  
• New policies to strengthen analyst independe nce and prevent long-standing relationships 
from inadvertently affecting ratings, such as by providing for five year client rotations for 
all analysts, assigning primary analysts to new structured fi nance transactions so that 
analysts are responsible for transactions ma naged by different arrangers and implementing 
“look back” reviews whenever an analys t leaves to work for an issuer.  
• Additional identifier to the ratings of securitiza tions that will highlight to the market that 
the rating is on a securitization or a new type of instrument, with accompanying disclosure 
regarding the implications.  
• Enhancing ratings’ transparency by including “what if” scenarios to explain key rating 
assumptions and the potential impact of unexp ected events, to help investors assess an 
issue’s risk profile.  
• Complementing ratings analysis  by highlighting non-default risks that can influence the 
market performance of rated securities.  
• Work with issuers and investors to improve disclosure of information on collateral 
supporting securities.  
• Investor education through actions such as th e publication of a Cred it Ratings User Manual 
& Investor Guidelines, to prom ote better understanding of the ratings process and the role 
of ratings in the financial markets.  
2. Steps taken by Moody's  
Moody's put forward two individual initiatives in  the CRA debate. The first set of measures 
by Moody's was presented in September 2007: 
• Moody's would look for additional third party ov ersight that reviews the accuracy of the 
information provided by borrowers, apprai sers and brokers to  originators.  
• Moody's would look for loan originators an d issuers of non-prime mortgage backed 
securitizations reques ting ratings from Moody's to provid e investors stronger and more 
uniform representations and warranties that th e loan information provided to investors is 
accurate and that the loans included in the tr ansaction were appropriate for the borrowers.  
EN 85   EN • Prospectively, Moody's would look for services to provide monthly loan level performance 
information for all newly originated RMBS transactions. Moody's also recommended that 
for public transactions, loan level informati on both prior to closi ng and throughout the life 
of the transaction should be provided to al l transaction particip ants requesting it.  
In February 2008 Moody's published a consultation paper in which it invited user's views on 
differentiating the rating scales for structur ed finance products. In summary the options 
considered were:  
• Move to a completely new rating scale for st ructured securities, for example, numerical 
rankings of 1-21. These would cont inue to contain ordinal rankings  of expected credit risk 
and would probably map to corporate ratings.  
• Add a modifier to all structured  ratings utilizing th e existing rating scale,  e.g., Aaa.sf. This 
would designate the issue as structured, but add no other additional information.  
• Add a suffix to the existing rating scale for structured ratings that contains additional 
information – for example, estimates of multi-notch rating transition risk. This could be 
Aaa.v1, Aaa.v2, etc. We would derive these grad ations through an analytical process that 
would be disclosed to the market.  
• Use the existing rating scale for structured securities, and put additional analytical 
information in a separate scale that would exis t in a separate data field. For example, an 
issue could have an “Aaa rating, with a ratings  change risk indicator of v1”. The added 
field would be analogous to  our existing ratings outl ooks and watch lists.  
• Make no changes to th e rating scale, but pr ovide additional information and commentary 
through written research.  
On 26 March 2008 Moody's published further proposal s which aim to better address the issue 
of the quality of the data used  in the rating. In particular, fo llowing discussions with market 
participants, Moody's proposed more specific enhancements to improve transparency, data integrity, and accountability: 
• Stronger representations and warranties of the issuers with regard to how they address 
fraud, misrepresentation, data quality, ear ly payment defaults  and adherence to 
underwriting guidelines. 
• Independent third-party pre-securitizati on review of underlying mortgage loans 
• Standardized post-securitization forensic review 
• Expanded loan-level data reporting of initial mortgage pool and ongoing loan performance 
• More comprehensive originator assessments 
These five enhancements are intended to work t ogether to provide more standard and reliable 
information on residential mortgage-backed s ecurities (RMBS) transactions than that 
currently available. Moody's ability to rate a pa rticular RMBS or assi gn a high or investment 
grade rating will depend in part upon the degree to which issuer s incorporate these 
enhancements.  
EN 86   EN 3. Steps taken by Fitch  
Fitch has separated its non-rating businesses in to a separate division, Fitch Solutions. The 
CRA has implemented senior management change s in its structured finance operations and 
introduced a series of Group Credit Officer s into the major rating groups to support 
objectivity and consistency in the rating review pr ocess. Fitch is working on further initiatives 
including increased analyst a nd manager rotation, enhancements  to the formal internal 
training programs for analysts, gr eater external investor educati on efforts and is considering a 
broad range of feedback on other aspects of the current  agency business model. 
An operational review of major asset class crite ria has led to revision of the CRA’s approach 
to residential mortgage ratings in the US and to  the ratings of collatera lised debt obligations 
and market value products globally. Portfolio-wid e stress-test analyses of CMBS transactions 
in the US and Europe have also been comple ted and published. Further work is underway to 
improve transparency of rating assumptions, including the publication of a series of additional “what-if” scenarios for major a sset classes, the roll-out of additional electronic tools to 
communicate surveillance and cross-transaction comparisons for struct ured finance ratings, 
and the addition of Rating Outlooks at the tranch e level across structured  finance transactions 
in selected markets. The CRA also worked on the development of additional rating scales and 
indicators that will complement its opinions on structured finance 
EN 87   EN 9.8. Detailed policy options 
9.8.1. Policy options to remedy CRAs' insufficien cies in their inter nal organisation and 
controls in relation to conflicts of interest 
The general policy in this regard is that CRA s have to ensure that existing and potential 
conflicts of interest wi ll not affect ratings.  
1. There should be some limitations for CRAs in order to avoid conflicts of interest.  
Options:  
a) General principle:  CRAs shall identify conflicts of interest and either eliminate or 
properly manage and disclose them.88 . 
b) Impose concrete limita tions on CRAs activities:  CRAs shall not be entitled to issue a 
rating in situations that can impair their i ndependence, for instance, when an agency's 
rating revenues from a single client go beyond a certain limit,  or when the agency or 
its employees involved in the rating proce ss have ownership inte rest in the rated 
entity89. 
c) Impose high inter nal governance standards: CRAs shall have an independent review 
function accountable for periodically reviewing the methodologies, models and 
significant changes to methodologies a nd models it uses, as well as the 
appropriateness of those methods and me thodologies for the assessment of new 
financial instruments. The primary reporting lin e of the head of this function shall be 
to a policy sub-committee of the admini strative or supervisory board, composed 
exclusively of non-executive directors. At  least 50% of the non- executive directors 
of each CRA shall have relevant expertise and experience in the risk business; their 
compensation should be essentially a fixe d fee (i.e. they should not qualify for 
performance linked compensation, e.g. share op tions); they should have a fixed term 
of office.90 
2. To eliminate conflicts of interest in the provision of advisory services CRAs 
should avoid human or technical link betw een the rating and advisory activities. 
Options: 
a) Obligation to separate business: A CRA shall separate, opera tionally and legally, its 
credit rating business and CRA analysts from any other businesses of the CRA, 
including consulting businesses. It shall ensure that ancillary business operations 
which do not necessarily present conflicts of interest with the CRA’s rating business are subject to procedures and mechanisms  designed to minimize the likelihood that 
conflicts of interest will arise
91. 
                                                 
88 This general obligation is inspir ed in IOSCO code, provision 2.6. 
89 The US Act on CRAs of 2006 contains similar limitations. 
90 Recommendations B1 to B4 from ESME report. 
91 Provision 2.5 of the IOSCO code.  In this regard, CESR considers th at a clearer consensus over what 
constitutes an advisory activity in the structured finance rating process would be beneficial to the 
EN 88   EN b) Separation with additional caveats:  an approach analogous to the one followed in 
Directive 2006/43/EC on statutor y audits could be suggested92. Article 40 of this 
Directive provides for the publication of a transparency report by the auditor of 
public interest entities. CRAs could be re quired to publish a tran sparency report with 
relevant information. In addition, the provi sion of additional non-rating services may 
be prohibited in case this would th reaten the agency's independence. 
c) Limited  prohibition:  CRAs shall not provide consulting or advisory services to 
issuers that they are rating.93  
d) Complete prohibition:  CRAs shall not provide any consulting or advisory services94.  
3. CRAs should ensure that the dialogue of  the analysts with the rated entity 
remains unbiased and objective. 
Options: 
a) Clearly defined role of the analysts:  Analysts shall be prohibited from making 
proposals or recommendations regarding the creation or design of structured finance 
products.95  
b) Transparency:  CRAs shall ensure that they are fully  transparent in terms of the exact 
nature of their interaction with issuers/arrangers of structured finance products. 
CRAs shall also ensure and demonstrate that they have strong policies and procedures in place to monitor and control th is interaction and ensure it reflects their 
public position.
96  
c) Record keeping:  In addition to the in troduction of an express prohibition of active 
analyst's role in structuring the product,  CRAs shall record the event and substance 
of the dialogue between the analyst and the issuer. Record s could take the form of 
audit trails subject to indepe ndent review by a third party.97  
                                                                                                                                                         
market as this would clarify market and regulator y expectations. Moreover, CESR supports the view 
that the IOSCO Code should provide greater clarity and act as a benchmark of acceptable practices for 
CRAs' interaction with issuers of  structured finance products. 
92 Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory 
audits of annual accounts and consolidated accounts , amending Council Directives 78/660/EEC and 
83/349/EEC and repealing Council Directive 84/253/EEC. This Directive contains several requirements in this regard: Article 40 provides for the publication of a transparency report by the auditor of public 
interest entities. This report includes financial information on the firm turnover divided into fees from 
audit and non audit services; Article 25  establishes that the fees should not influenced by the provision 
of additional services; Article 22  prohibits the provision of additional non-audit services if this threats 
the auditor's independence at unacceptable level. 
93 Recommendation B9 in the ESME report. 
94 Solution suggested by CRAs in the Joint White Paper. 
95 Provision 1.14-1 of IOSCO code, Recommendation B9 in ESME report and proposal from CRAs in the 
Joint White Paper. 
96 Paragraph 186 of CESR report. 
97 In accordance with the US Act on CRAs of 2006 th e CRA is obliged to keep records of: a) internal 
records including non-public information and work papers used to form the basis of a credit rating – 
including notes of conversations with management of issuers; b) internal records used to form the basis 
EN 89   EN d) Additional safeguards of analysts' independence:  the analysts and any other 
employees directly involved in the credit rating process shall not be allowed to participate in discussions regarding fees or payments with any rated entity
98 The 
rating agencies should also envisage com pulsory periodic rotation of analysts.99 
4. CRAs should avoid the negative impact of conflicts of in terest in relation to the 
remuneration prospects and other economic incen tives of persons involved in the rating 
process. 
a) Reporting lines  for the rating staff and their co mpensation arrangements shall be 
structured  to eliminate or effectively mana ge actual and potential conflicts of 
interest: in particular, analysts shall not be compensated or evaluated on the basis of 
the amount of revenue generated by the analyst.100  
b) Additional organisational requirements: the agency shall ensure the independence of 
the analysts and persons approving the ra tings in the design of the reporting and 
communication channels between them and the part of the agency responsible for the 
commercial interests of the entity;  
c) Increase the fixed element of  the salary for the top managers:  change the mix in 
compensation of the CRA top management towards a higher fixed salary component 
and substantially reduced pe rformance related incentives.101  
5. The "shopping for ratings" practice should be mitigated: 
a) Disclosure to the market: an agency shall disclose on a periodic basis a list of all 
cases where an issuer or arranger of a structured finance instrument provided the 
agency with information about a proposed structure and asked it for a preliminary 
rating of the proposed structure, but: (a) did not contract with th e credit rating agency 
for a final rating, but contract ed with another credit rating agency for a final rating of 
that same instrument; or (b) contracted with  the credit rating agency for a final rating 
and did not publish the credit rating agency’s  final rating, but published the ratings of 
another credit rating agency for that same instrument.102  
b) Encourage issuers to disclose all necessary information: CRAs shall in an industry 
effort exert pressure on structured finance issuers and arrangers of  structured finance 
products to publicly disclose all relevant in formation regarding these products so that 
investors and other CRAs can conduct their own analyses independently of the CRA contracted by the issuers and/or originator s to provide a rating. This would facilitate 
                                                                                                                                                        
 
for the opinions expressed in these reports, and c) ex ternal and internal communications that relate to 
initiating, determining, maintaining, ch anging or withdrawing a credit rating. 
98 Similar limitation could be found in US Act on CRAs of 2006 and in the provision 2.12 of IOSCO 
code. 
99 See recommendation B6 in ESME report. A similar requirement in article 42.2 of the Directive 
2006/43/EC on statutory audits. Standards and Poor's announced in January 2008 that it would be implementing a system of rotation. 
100 Provision 2.11 of IOSCO code and CRAs Joint White Paper. 
101 Recommendation E2 in ESME report. 
102 Proposal discussed in the CRAs task force of IOSCO. 
EN 90   EN the appearance of unsolicite d ratings which would help to avoid the "shopping for 
ratings" practice103. 
c) Clients should refrain from shopping for ratings: issuers should not inquire several 
credit rating agencies for their preliminary rating assessment of the potential structured finance instrument before they finally decide on the credit rating to be 
published. 
6. The independence of the analysts should  be granted even when he/she joins a 
rated entity: 
a) Cooling off period: During a certain period after leaving the agency the analyst shall 
not be able to accept key management positions from the previously rated entity.
104  
b) Look back reviews: The agency shall review the past work of an analyst in the event 
that he or she leaves the agency to work  for a client that he or she has rated.105 
9.8.2. Policy options for improving the qualit y of rating methodologies and the ratings 
1. Methodologies, models and key rating a ssumptions should be appropriate and up 
to date for the rated instruments. 
Options: 
a) CRAs shall put in place an independent review function:  CRAs should establish and 
implement a rigorous and formal review  function responsible for periodically 
reviewing the methodologies and models it us es, as well as the appropriateness of 
those methodologies and models for the assessment of new instruments. Where feasible and appropriate for the size and scope of its credit rating services, this function should be independe nt from the business lines that are principally 
responsible for rating various cla sses of issuers and obligations.
106  
b) CRAs shall review their methodolog ies in case of significant changes:  CRAs shall 
assess whether existing methodologies a nd models for issuing credit ratings of 
structured products are appropriate when the risk characteristics of the assets 
underlying a structured pr oduct change materially.107 In addition CRAs shall review 
all their methodologies on a regul ar basis, e.g. once a year. 
c) Methodologies and models should be validated by a public authority:  to ensure that 
the methodologies and models used by an agency are appropriate and up to date, 
such methodologies, models and assumptions  shall be validated and periodically 
                                                 
103 Provision 2.8.c of IOSCO code. 
104 Similar solution in the Article 42.3 of the Statutory Audits Directive 2006/43/EC: "The statutory 
auditor or the key audit partner who carries out a stat utory audit on behalf of an  audit firm shall not be 
allowed to take up a key management position in the a udited entity before a period of at least two years 
has elapsed since he or she resigned as a stat utory auditor or key audit partner from the audit 
engagement" . 
105 Provision 2.17 of IOSCO code, recommendation in Q11 of ESME report, CRAs Joint White Paper. 
106 Provision 1.7-2 of IOSCO Code. 
107 Provision 1.7-3 of IOSCO code. 
EN 91   EN reviewed by the securities supervisor of the Member State where the agency 
operates, at the request of the agency. 
2. CRAs should diligently monitor the existing ratings. 
Options: 
a) Require CRAs to have – when feasible – separate teams for the initial rating and the 
ongoing surveillance of struct ured finance transactions108. If a CRA uses separate 
analytical teams for determining initial ratings and for subsequent monitoring of 
structured finance products, each team shoul d have the appropriate level of expertise 
and resources to perform their resp ective functions in a timely manner.109 
b) Require CRAs to regularly monitor and update ratings: A CRA shall ensure that 
adequate personnel and financial resources  are allocated to monitoring and updating 
its ratings. Once a rating is published th e CRA shall monitor on an ongoing basis and 
update the rating by: a) regularly reviewing th e issuer’s cred itworthiness; b) initiating 
a review of the status of the rating upon becoming aware of any information that 
might reasonably be expected to result in a rating action (including termination of a 
rating), consistent with the applicable  rating methodology; a nd, c) updating on a 
timely basis the rating, as appropriate, based on the results of such review.110  
c) Envisage expiry of rati ng after a certain period: In addition to the obligation to 
review the rating on a regular basis, the CRA is required to update the ratings at least 
once in a specified time period (e.g. one year). 
3. CRAs should apply changes in methodology consistently to all ratings concerned.  
Options:  
a) Impose disclosure obligation: CRAs shall disclose whether they apply retroactively 
model changes to existing ratings.111  
b) Re-rate regularly: Require CRAs to apply the changes to past ratings due to the new 
methodology in the course of the regular revi ew cycle of ratings. After a change in 
methodology CRAs shall update the ratings  in a timely manner using the new 
methodology. CRAs shall be transparent as to which methodology has been used for 
a current rating. CRAs should apply the change s in ratings criteria and assumptions 
where appropriate to both initia l ratings and subsequent ratings.112  
c) Require CRAs to promptly re-rate exi sting ratings according to new methodology:  
Whenever a rating methodology changes, CRA shall have to immediately disclose 
the likely scope of ratings that will be a ffected. After the change in methodology the 
CRAs have to re-rate all th e ratings that have been based on these methodologies. 
                                                 
108 CRAs proposal from the Joint White Paper. 
109 Provision 1.9-1 of IOSCO code. 
110 Provision 1.9 of IOSCO code. 
111 Approach of US Act on CRAs of 2006. 
112 Provision 1.9 of IOSCO code. 
EN 92   EN 4. CRAs should use sound information for the issuance of ratings. 
Options:  
a) General obligation of ensuring good quality of information: A CRA shall make sure 
that the information it uses in assigning a rating is of sufficient quality to support a 
credible rating.113  
b) CRAs or a suitable third party sha ll undertake due diligence of information:  CRAs 
shall have the responsibility to ensure that the information which underpins their 
ratings is statistically sound. This require s independent and robust due diligence to be 
undertaken. The CRAs shall carry out this due diligence themselves (if disposing of the necessary competence) or delegate it to a suitable third party like for instance a 
recognised accounting firm or, if  appropriate, the sponsoring bank.
114  
c) Quality warranties: CRA shall require underw riters to provide representations about 
the level and scope of due diligence th at they have performed on the underlying 
assets.115 An agency shall clearly indicate the limits to which it verifies information 
provided to it by the issuer or originator of a rated security.116 
d) Abstention from issuing ratings if no sound data:  If a CRA cannot obtain sound data 
or is not able to verify the data either itself or relying on a suitable third party, it shall refrain from issuing a credit rati ng or withdraw an existing rating.
117 In cases where 
the complexity or structure of a new type of  structured product or the lack of robust 
data about the assets underlying the struct ured product raise seri ous questions as to 
whether the CRA can determine a credible credit rating for the security, CRA should 
refrain from issuing a credit rating.118 
e) Warning if data limited or statistics sound: If the rating involves a type of financial 
product presenting limited historical data (s uch as an innovative financial vehicle), 
the CRA shall make clear, in a prominent place, the limitations of the rating.119 If an 
agency cannot obtain sound data or is not able  to verify the data either itself or 
                                                 
113 Provision 1.7 of IOSCO code. 
114 ESME considers that it is essentia l that CRAs accept that they have the responsibility to ensure comfort 
is given to investors on the integrity of the information which underpins their ratings, taking into 
account the crisis of conf idence in ratings and the collapse in the volume of  new structured finance 
issues. This would require independent and robust due diligence to be undertaken. In this regard the 
CRAs could either: a) Obtain assu rances from the sponsoring bank th at it has undertaken appropriate 
due diligence, in circumstances where the sponsoring bank is deemed credible and capable of honouring 
their obligations under their indemnities; or b) Commission a suitable external party, e.g. one of the 
internationally recognised accounting firms, to und ertake the due diligence, or c) Undertake the due 
diligence themselves. (Recomme ndation B7 in ESME report). 
115 First and second indents of the recommendation IV.6 of the Financial Stability Forum report. 
116 Provision 3.5.c of IOSCO code. 
117 Fourth indent of the recommendation IV.6 of the Financial Stability Forum report. 
118 Provision 1.7-3 of IOSCO code. 
119 Provision 1.7 of IOSCO code. 
EN 93   EN relying on a suitable third party, it shall disclose the limitations of the rating to the 
users.120 
5. CRAs shall allocate adequate staff to the rating process. 
Options: 
a) General obligation of employing appropriate staff:  CRAs shall ensure that 
employees directly involved in the rati ng process have appropr iate knowledge and 
experience for the duties assigned. In particular, the CRA shall ensure that its monitoring function is adequately staffed.
121  
b) Additional transparency requirement  with respect to the employees:  CRAs shall 
disclose staff numbers and quali fications as allocated to th e different functions of the 
rating agency122. CRAs have to keep record of the id entity of any credit analysts that 
participated in the determ ination of any credit rating. 
c) Require a formal qualif ication for rating analysts:  A specific professional 
qualification shall be developed for rati ng analysts defining a minimum level of 
knowledge and experience that credit analysts shall have . CRA shall rely on this 
qualification in order to em ploy suitable rating analysts.123  
6. The analysis of an issuer or a product by  the agency should take into account the 
impact of market developments an d macro economic expectations.  
Options:  
a) CRAs shall provide sufficient inform ation about loss and cash-flow analysis related 
to the structured finance instrument: Where a CRA rates a structured finance 
product, it shall provide invest ors with sufficient informati on about its loss and cash-
flow analysis so that an investor allowed to invest in the pro duct can understand the 
basis for the CRA’s rating. A CRA shall also disclose the degree to which it analyses 
how sensitive a rating of a structured fi nance product is to changes in the CRA’s 
underlying rating assumptions.124 
b) CRAs shall expand the initial and ongoing info rmation that they provide on the risks 
characteristics of structured products: CRAs shall include additional initial and 
ongoing information on rating stability, the assumptions underlying a structured 
product rating and the sensitivity of  the rating to changes in these 
assumptions.125They shall expand the information they give on model assumptions 
and stress testing . CRAs shall provide information on critical model assumptions, in 
                                                 
120 Provision 3.5.c of IOSCO code. 
121 Provision 1.9 of IOSCO code. 
122 A similar approach is followed in the US Act on CRAs of 2006. 
123 Inspired in Statutory Audits Directive 2006/43/EC. 
124 Provision 3.5.a of IOSCO code. 
125 Recommendation IV.5 in the Financial Stability Forum Report of April 2008. 
EN 94   EN particular, the weightings of key parame ters and correlations underlying structured 
finance ratings.126  
c) Public authorities shal l validate the models and a ssumptions applied by CRAs:  to 
ensure that the models and assumptions used by an agency include the information referred above, such methodologies, models a nd assumptions shall be subject to prior 
validation by the securities supervisor of the Member State where the agency 
operates, at the request of the agency.  
9.8.3. Policy options in relation to transpare ncy of the CRAs 
A number of options may be considered in order to trigger improvements in the CRAs' 
transparency (as regards their internal policies,  their performance and th e presentation of the 
ratings).  
In particular, the following specific objectives should be fulfilled:  
1. The agency has to be transparent with respect to the functioning of internal 
processes and procedures. 
Options:  
a) General transparency obligation:  CRAs shall publish suffici ent information about its 
procedures, methodologies, models and assu mptions so that outside parties can 
understand how a CRA arrived at a rating.  CRAs shall provide investors/subscribers 
with the necessary information to understand th e basis for the CRA’s rating, 
including sufficient information about the internal code of conduct of the agency, 
methodologies and historic performance data.
127 
b) Require CRAs to disclose a periodic report:  CRAs shall be required to publish 
periodically a transparency report containi ng information such as legal structure and 
ownership of the agency, description of the internal quality control system, indicators 
on staff allocation, descript ion of credit ratings record -keeping policy, outcome of 
internal review of indepe ndence compliance, financial information on the agency's 
revenue, description of management and ke y analysts rotation policy and a corporate 
governance statement.128  
2. The information included in the ratings ha s to be relevant and sufficient in order 
to efficiently assess the probability of default of an instrument.  
                                                 
126 This information should include an economic explanation for the assumptions in order to allow 
investors to fully understand the structured finance ratings and thus to make better use of them in their 
investment decisions. Information on the level of stress testing carried out during the rating process, to address concerns over tail risks would also provide investors with the information needed for them to 
judge the impact of economic events or market disruption on the volatility of the ratings (Paragraph 134 
of CESR report). 
127 Provisions 3.5 and 4.3 of IOSCO code. 
128 This option is inspired in the Directive 2006/43/EC on statutor y audits of annual accounts and 
consolidated accounts, article 40. Th ere are similar requirements of disc losure for the registration of a 
NRSRO in accordance to US Act on CRAs. The agencies have to update this information annually in case there is any material change. 
EN 95   EN Options:  
a) Obligation to provide informatio n on loss and cash-flow analysis and about 
sensitiveness to changes  in rating assumptions:  Where a CRA rates a structured 
finance product it should pr ovide investors and/or s ubscribers (depending on the 
CRA’s business model) with sufficient in formation about its loss and cash-flow 
analysis so that an inve stor can understand the basi s for the CRA’s rating. A CRA 
should also disclose the de gree to which it analyses ho w sensitive a rating of a 
structured finance product is to changes in the CRA’s underlying rating 
assumptions.129  
b) CRAs to be more engaged in investors' education: CRAs shall clearly explain 
attributes and limitations of credit rati ng opinions and focus their efforts on 
communicating better and educat ing rating users as necessary.130  
c) Require additional technical information in the ratings: CRAs shall share 
information on the key assumptions, includi ng, e.g. ‘expected loss‘ with disclosure 
also of historic ‘worst case/best case s cenarios‘ and ‘break-even‘ credit loss for 
different tranches. They should include ‘w hat if’ scenario analysis to convey an 
understanding of the sensitivity of the rating to adverse or positive events.131  
3. Avoid investors' confusion triggered by  the use of the same symbols for the 
ratings for structured products and the ratings for traditional debt (corporate, 
sovereign).  
Options:  
a) Use different symbols for traditional ratings and structured finance ratings: A CRA 
shall differentiate ratings of structured finance products from traditional corporate 
bond ratings, either by introduction of a di fferent rating scale or with additional 
symbols. A CRA shall also disclose  how this differentiation functions.132 Instead of 
using different symbols the agency may disc lose the differences between ratings of 
structured products and other securities133  
b) Use the same scale but aggregate a dditional information to the ratings:  CRAs shall 
inform users of the greater potential volat ility associated with structured finance 
instruments and the reasons for it. A labe l/rating suffix to m easure and communicate 
the inherent volatility may be introduced, i.e. the likelihood of rapid and large rating 
transition.134  
                                                 
129 Provision 3.5.a of IOSCO code. 
130 For example, user manuals may be needed to assist different investor groups in their use of ratings, due 
to widely varying levels of technical capacity to understand the rating complexities (recommendation 
C9 in ESME report). 
131 Recommendations C1 and C2 in ESME report. 
132 Provision 3.5.b of IOSCO code and Recommendation IV.2 of the Financial Stability Forum report of 
April 2008. 
133 SEC proposal to implement the US Act on CRAs announced on 11 June 2008. 
134 Recommendation C6 of ESME report. 
EN 96   EN c) Educate investors in the particularitie s of the ratings for different products: CRAs 
shall clearly indicate attributes and limitations of credit rating opinions.135 
4. CRAs should make available to market pa rticipants the relevan t data about their 
performance in a standardised manner to allow for industry-wide comparisons.  
Options:  
a) Initiative of the CRA industry:  CRAs shall establish a centralized repository for 
ratings performance studies to allow easier market comparisons among the CRAs and make available ratings performance da ta to regulatory authorities, upon request, 
to allow regulatory author ities to conduct their own st udies of ratings performance.
136  
b) Obligation to publish hi storical default rates: CRAs shall publish sufficient 
information about the histori cal default rates of CRA ra ting categories and whether 
the default rates of these categories have changed over time. If the nature of the 
rating or other circumstances makes a hi storical default rate inappropriate, 
statistically invalid, or otherwise likely to mislead the users of the rating, CRAs shall 
explain this. This information shall include verifiable, quantifiable historical information about the performance of its rating opinions, organi zed and structured, 
and, where possible, standard ized in such a way to as sist investor s in drawing 
performance comparisons between different CRAs.
137  
c) Impose on CRAs the obligat ion to disclose standardise d performance information 
and create a repository of ratings at EU level:  CRAs shall disclose information on 
their performance to a central repository  that could be created and managed by 
CESR, with the assistance of the CRAs.  CESR shall issu e guidance on common 
standards on the historical  performance data that CRAs would have to disclose. 
9.9. CRAs joint proposals in the White Paper. Summary 
In October 2007, a group of CRAs including A.M. Best Company, Inc.; DBRS Limited; 
Fitch, Inc.; Moody's Investors Serv ice, Inc.; and Standard & P oor's Ratings Services began 
working together to suggest measures to e nhance confidence in the credit rating process, 
particularly with respect to structured finan ce securities. They have communicated their views 
on those subjects to regulators and legislators, by circulating a discus sion paper in December 
2007 in which the partic ipating CRAs made certain prop osals regarding enhancing the 
independence, quality and tran sparency of credit ratings.  
The main content of this disc ussion paper is as follows: 
                                                 
135 CRAs Joint  White Paper. 
136 CRAs Joint White Paper. ESME recommends that the major CRAs, with input from IOSCO and other 
relevant market sources, should agree a set of measurement principles and framework which would become the market norm for evaluating the pe rformance and success of rating agencies. ESME 
suggested that the framework shou ld incorporate, inter alia, ‘ra ting accuracy‘, the incidence of 
downgrades relative to a benchmark ‘norm‘ and the average downgrade in terms of number of notches moved (Recommendation D.1 in ESME report). 
137 Provision 3.8 of IOSCO code. 
EN 97   EN Independence of the credit rating process  
– CRAs should explicitly forbid credit ra ting analysts from making proposals or 
recommendations regarding the creation or  design of securitization products.  
– CRAs should not provide consul ting or advisory services.  
– CRAs should conduct "look-back" reviews, as a ppropriate, when analysts leave CRAs to 
work for issuers or advisers with wh om they have regularly interacted. 
– CRAs should conduct formal, periodic, intern al reviews of remuneration policies and 
practices for analysts and other CRA employees who participate in rating committees to ensure 
that these policies and practices do not compromise analyst objectivity. 
Quality of credit ratings  
– CRAs should conduct formal, periodic, inte rnal reviews of rating criteria and 
methodologies to promote ratings quality.  
– CRAs should establish separate teams for initial credit ratings and ongoing surve illance of 
structured finance transactions, whenever feasible. 
– CRAs should require analysts to participat e in continuing education programs on credit 
analysis, methodologies and CRA  policies and procedures. 
– CRAs should encourage greater market unde rstanding of securi tization products by 
supporting full disclosure by issuers to the ma rket of the information needed to make 
informed investment decisions about  structured finance transactions. 
Transparency øf credit ratings  
– CRAs should help to establish a centralized repository for ra tings performance studies to 
allow easier market comparisons among the CRAs. 
– CRAs should make available ratings performa nce data to regulatory authorities, upon 
request, to allow regulatory authorities to conduc t their own studies of ratings performance. 
– CRAs should clearly indicate attributes a nd limitations of credit rating opinions. 
– CRAs should play an active role in raising awareness among investors and other market 
participants about the meaning and intended pur pose of credit rating opinions, the credit rating 
process and the CRAs' role in financial markets.  
EN 98   EN 9.10. Information on asset write-downs and credit losses since the beginning of 2007 
till mid May 2008.  
(Source: Bloomberg) 
The following table shows that there has been $379 billion in asset write downs and credit 
losses since the beginning of 2007, including reserves set aside fo r bad loans, at more than 
100 of the world's biggest banks and securities firms.  
The write-down column includes asset-value re ductions that some banks list on their balance 
sheets rather than booking the losses against earnings. Regulatory filings show $35 billion of 
such balance-sheet write downs at 20 banks.  
All the charges stem from the collapse of the U.S. subprime- mortgage market. The figures, 
from company statements and filings, also reflect some credit losses or write downs of mortgage assets that aren't subprime, as  well as charges taken on leveraged-loan 
commitments.  
All numbers are in billions of U. S. dollars. They are net of fina ncial hedges the firms used to 
mitigate losses.  
Firm Write-down C redit Loss Total 
Citigroup 37.3 5.6 42.9 
UBS 38.2  38.2 
Merrill Lynch 37  37 
HSBC 6.9 12.6 19.5 
IKB Deutsche 16  16 
Royal Bank of Scotland 15.2  15.2 
Bank of America 9.2 5.7 14.9 
Morgan Stanley 12.6  12.6 
JPMorgan Chase 5.5 4.2 9.7 
Credit Suisse 9.5  9.5 
Washington Mutual 1.1 8 9.1 
Credit Agricole 8.3  8.3 
Deutsche Bank 7.7  7.7 
EN 99   EN Wachovia 4.6 2.4 7 
HBOS 6.9  6.9 
Bayerische Landesbank 6.7  6.7 
Fortis 6.6  6.6 
Societe Generale 6.3  6.3 
Mizuho Financial Group 6.2  6.2 
ING Groep 6  6 
Barclays 5.2  5.2 
WestLB 4.8  4.8 
Canadian Imperial (CIBC) 4.2  4.2 
LB Baden-Wuerttemberg 4  4 
E*Trade 2.5 0.9 3.4 
Dresdner 3.4  3.4 
Natixis 3.4  3.4 
Wells Fargo 0.6 2.7 3.3 
Lehman Brothers 3.3  3.3 
Bear Stearns 3.2  3.2 
National City 0.5 2.6 3.1 
Goldman Sachs 3  3 
BNP Paribas 2.1 0.6 2.7 
Lloyds TSB 2.7  2.7 
Nomura Holdings 2.5  2.5 
HSH Nordbank 2.5  2.5 
ABN Amro 2.4  2.4 
EN 100   EN Bank of China 2  2 
Commerzbank 1.9  1.9 
Royal Bank of Canada 1.7  1.7 
UniCredit 1.6  1.6 
DZ Bank 1.5  1.5 
Alliance & Leicester 1.4  1.4 
Dexia 1.1 0.2 1.3 
Caisse d'Epargne 1.2  1.2 
Hypo Real Estate 1  1 
Gulf International 1  1 
European banks not listed above 
(a) 9.2  9.2 
Asian banks not listed above (b) 7.5 0.3 7.8 
North American banks not listed 
above (c) 3 1.1 4.1 
TOTALS * 332.3 46.9 (d) 379.2 
* Totals reflect figures befo re rounding. Some company names have been abbreviated for 
space. 
(a) The following European banks have experienced  losses of less than $1 billion each: Allied 
Irish Banks, Bradford & Bingley, Aareal Bank, Deutsche Postbank, St andard Chartered, 
Northern Rock, NordLB, Rabobank, HVB Group, Sachsen LB, Intesa Sanpaolo, Landesbank 
Hessen-Thueringen, SEB AB, Erste Bank, Dn B NOR, Anglo Irish, KBC Group, LB Berlin, 
NIBC Holding.  
(b) Asian banks with write downs of less than $1 billion: Mits ubishi UFJ, Shinsei, Sumitomo 
Trust, Aozora Bank, DBS Group, Australi a & New Zealand Banking Group, Abu Dhabi 
Commercial, Bank Hapoalim, Arab Banking Corp., Fubon Financial, Industrial & 
Commercial Bank of China, Citic Internati onal, BOC Hong Kong, Bank of East Asia, China 
Construction Bank, Sumitomo Mitsui, ICICI Bank, State Bank of Indi a, United Overseas, 
Wing Lung.  
(c) North American banks included in this group: Bank of Montr eal, National Bank of 
Canada, Bank of Nova Scotia, BB&T Corp., PN C Financial Services Group, SunTrust Banks, 
South Financial Group, Sovere ign Bancorp, First Horizon. 
EN 101   EN 9.11. Data on issuance of structured finance products 
European and US issuance of SF instruments (E uro, billions), from 2000 to first quarter 2008 
(Source: ESF Securitisation Data Report Q1:2008, p. 2) 
 
 
Year EU US 
2000 78,2 1086,0 
2001 152,6 2308,4 
2002 157,7 2592,7 
2003 217,3 2914,5 
2004 243,5 1956,6 
2005 327,0 2650,6 
2006 481,0 2455,8 
2007 453,7 2404,9 
2008 40,0 285,2 
 
The figures clearly show how the trend of issuance of structured products falls sharply in the 
first quarter of 2008, both in the EU and in US. Th e figures below show th at this trend started 
in the second half of 2007 and how it evolved till the first quarter of 2008. 
 
European and US issuance of SF  instruments (Euro, billions) 
2007 and 1st quarter 2008 
 2007:Q1 2007:Q2 2007:Q3 2007:Q4 2008:Q1 
EU 128,7 152 98,2 74,7 40 
US 747,5 811,5 481,6 364,3 285,2 
 
 
EN 102   EN 9.12. Comparative table with the Commission proposal, US rules and IOSCO code 
EU Proposal US rules/proposal IOSCO Code Other / Comment 
Organisational, corporate requirements 
Requirement for 
registration In line with SEC 
rules Not required. The 
code is applied on a voluntary basis (Comply or explain principle)  
Supervision by the 
competent authority In line with SEC 
rules. CRAs 
(NRSRO are 
supervised by the US SEC) Not envisaged  
Reporting lines and the 
compensation of the persons involved in the 
rating  process to be 
separated
 from the 
business end of the CRA.  Not envisaged.  A general rule in the 
IOSCO Code (reporting lines for CRA employees and 
their compensation 
should be structured to eliminate or effectively manage actual/potential 
conflicts of interest).  Envisaged in the ESME 
report.  
 EU measure would 
make the IOSCO 
principle more concrete.  
 
Internal functions to: 
(i) develop the CRA rating 
policy, monitor 
compliance with internal 
procedures and processes for the rating activity, and review the feasibility of providing ratings for new 
instruments; 
(ii) review the 
methodologies, models and significant changes to methodologies and models. This function 
should be independent of 
the rating activities. Not envisaged.  Broadly in line with 
IOSCO Code.   
A special function on 
rating policy for some 
members the board  to 
monitor development of the rating policy, 
effectiveness of the rating Not envisaged.  Not envisaged.  Envisaged in the ESME 
report.  
A board committee, as 
the primary reporting line of the internal 
EN 103   EN internal quality systems, 
compliance and governance processes.  functions mentioned 
above, would increase profile of their 
activities and 
independence of these functions.  
Whistle-blowing 
mechanism for anonymous 
reporting of irregularities by staff.   In line with the 
IOSCO Code. A necessary tool for 
strengthening internal controls. Already a standard in most 
organisations.  
 
Conflicts of interest 
General policy : CRAs to 
ensure that conflicts of interest (existing, potential) 
will not affect ratings. 
Conflicts of interest to be: 
(i) identified and  either (ii.1) eliminated or 
(ii.2) properly managed and 
disclosed.  In line with the SEC 
rules. In line with the 
IOSCO Code. In line with EU 
approach in other areas (MiFID). 
Disclosure when:  
5% or more revenue from 1 
entity Stricter in the SEC 
rules (prohibition if 
more than 10%). Broadly in line with 
the IOSCO Code 
(disclosure of more than 10%).  
Prohibition of offering / 
continuing rating when :  
1) analyst or person 
approving ratings has direct 
ownership in the rated entity, 
2) analyst or person 
approving ratings is a member of supervisory or management board of the rated entity 
3) CRA associated with the 
rated entity In line with the SEC 
rules.  In line with the 
IOSCO Code.  
Provision of 
consulting/advisory prohibited.  Broadly in line with 
the SEC rules. In line with the 
IOSCO Code.  
Rating staff prohibited to In line with the SEC In line with the  
EN 104   EN engage in fee negotiations.  rules. IOSCO Code. 
Rules on rating staff 
conduct: 
- prohibition to engage in any 
transactions in instruments 
related to the rated entity, 
- handling confidential 
information (incl. unpublished ratings), 
- no gifts from the rated 
entity, 
- look-back reviews of ratings 
after an analyst has left to work for the rated entity. In line with the SEC 
rules (look-back reviews not explicitly mandated by the 
SEC).  In line with the 
IOSCO Code. Look-back reviews, 
introduced by the revised IOSCO code, are an important tool 
to detect any 
irregularities on the part of analysts leaving the CRA to join a client.  
Rules excluding employees from the rating process. 
(triggered by conflicts of 
interest arising from owning 
financial instruments, recent 
employment, business or other relationship)  In line with the SEC 
rules. In line with the 
IOSCO Code.  
Rules on rotation of 
analysts and other persons approving credit ratings. 
Max.  4 years  on the same 
client, cooling-off 2 years 
minimum.  Not envisaged.  Not envisaged.  Envisaged in the 
ESME report.  
Rotation requirement 
follows the solution in 
the auditing 
profession. 
 
Quality of ratings 
General policy : CRAs to 
use methodologies that are 
rigorous, systematic, continuous, and may be validated based on historical experience. Applied consistently by analysts. 
CRAs to ensure that 
methodologies, models and key ratings assumptions are up-to-date and  subject to 
comprehensive review.  Broadly in line with 
the SEC rules. In line with the 
IOSCO Code.  
Duty to re-rate : CRAs to re-
rate all ratings following Broadly in line with 
the SEC rules. SEC In line with the 
IOSCO Code: The duty to re-rate is 
consistent with the 
EN 105   EN changes in methodologies, 
models, assumptions.  rules focus on 
disclosure of CRA's practice (CRAs to 
disclose if they 
apply retroactively model changes to existing ratings). CRAs to update 
ratings on a timely basis and to keep 
them consistent 
with applicable methodology. IOSCO approach 
and only makes it more concrete.  
 
Monitoring activity : CRAs 
should monitor and update the rating on an on-going 
basis.  Broadly in line with 
the SEC rules. SEC rules focus on 
disclosure of CRA's 
practice (duty to disclose monitoring frequency).  In line with the 
IOSCO Code. The duty to monitor 
ratings is consistent with the IOSCO 
approach. SEC-like 
disclosure is also required.  
Limits to rating activity : 
CRAs not to issue ratings / withdraw existing rating when (i) lack of robust data; 
(ii) a new structure which 
raises serious doubts re. ability to assess creditworthiness.  Broadly in line with 
the SEC rules. SEC rules apply to structured finance 
ratings. Broadly in line 
with the IOSCO Code. IOSCO rules apply to structured 
finance ratings. It is necessary to 
extend the prohibition to rate when information 
insufficient also 
beyond the structured finance products.  
 
Communication with the markets 
General rule : if ratings 
are intended for distribution channels or for the public, any rating 
decision should be 
disclosed on a non-selective basis and in a timely manner.  Broadly in line with the 
SEC rules.  Broadly in line with 
the IOSCO Code. Approach consistent 
with US and IOSCO approaches. It also covers situations where 
ratings are not provided 
to the public free of charge (subscriber-pays model). 
Different rating categories (symbols) for structured and 
traditional debt (either 
using different symbols or 
a attaching each time a report on the differences between a structured and traditional rating) .  In line with the SEC 
rules.  In line with the 
IOSCO Code (IOSCO indicates different symbols 
as the preferred 
way to differentiate between structured and traditional rating).   
 
Record keeping obligations 
Internal records support 
rating opinions to be kept for at least 5 years (incl. Broadly in line with 
the SEC rules (3 years).  In line with the 
IOSCO Code.  
EN 106   EN records of analysts' dialogue 
with the rated entity).  
 
Other malpractice 
Prohibition of the notching practice  
(discriminatory treatment of 
ratings issued by other CRAs in situations where they could be used in the 
CRA's rating process)  In line with the SEC 
rules. Not envisaged.  Such prohibition – 
following the US example – is crucial to eliminate the described anticompetitive practice of the main CRAs.  
 
EU Measure US measure IOSCO Other / 
Comment 
Disclosures and transparency   
Continuous disclosures 
The following disclosures would 
be required on a continuous basis: 
Methodologies, models and key 
assumptions in use. Any material 
modifications to methodologies and key assumptions.  
Potential and existing conflicts of 
interest.  
Definition of an ancillary service.  
General nature of compensation 
arrangements  
Information about rating staff 
numbers and allocation to different 
functions  
 Other internal policies, significant for users of ratings e.g. policy on distribution of ratings.   
 
 Broadly in line with the 
SEC rules.  In line with the 
IOSCO Code.  
 
Annual transparency report  
EN 107   EN Agencies to produce a yearly 
report (publicly available) 
outlining its organisational arrangements, policies and 
practices with regard to rating activity and its quality and compliance aspects. Such report could describe:  
Legal structure and ownership 
(incl. significant direct and indirect 
shareholdings)  
Description of the internal quality 
system 
Information about rating staff 
numbers and allocation to different 
functions 
Description of record keeping 
policy  
Outcome of the annual internal 
review of independence 
compliance 
Financial information on revenue 
from rating fees and non-rating revenue.  
Management and analyst rotation 
policy.  Broadly in line with the 
SEC rules. While the reporting requirements 
imposed by the SEC 
may have a different scope (greater reliance on maintaining records facilitated to SEC inspectors), the 
transparency principle 
and the character of information provided to the markets is substantially similar.  Broadly in line 
with the IOSCO Code. 
The transparency 
report is not envisaged by IOSCO Code, but most of the disclosures that 
would be included 
in the transparency report may be required by IOSCO on an on-going 
basis.  The report 
would be useful for 
supervisory 
purposes and could also be referred to by users of ratings. 
 
Other periodic disclosures  
Historical performance data  
(default and transition studies) to 
be put in a central repository 
managed by CESR.  
 Envisaged as 
disclosure on website. (1, 3, 10 year horizon 
required for each 
rating category). Methods used for calculation to be publicly explained.  Envisaged.  
 
Standards for presentation of ratings  
EN 108   EN CRA should ensure that the rating 
reports respect some basic 
standards for presentation of 
ratings . The elements to consider:  
Name and job title of analyst All substantial sources and whether 
CRA discussed draft rating with the rated entity 
Methodology. methodology 
version, any deviations explained 
Rating meaning, definition or 
default and recovery, risk warnings (sensitivity analysis and what-if scenarios). Best case and worst 
case ratings. 
Limitations of the rating including 
the CRA's statement whether it is satisfied with the information quality and if it verified the 
information in any way 
Whether rating was unsolicited For structured finance ratings, 
information about any loss and cash-flow analysis performed 
For structured finance ratings, 
CRA's statement if it has sufficient 
knowledge of due diligence processes at the underlying assets level (and outcome of any analysis performed).  Broadly in line with 
the SEC rules. Other major elements like 
methodology (-ies) in 
use, monitoring frequency, what information is used to establish ratings for structured products, 
and how CRA relies 
on due diligence by 3
rd parties to verify 
asset quality are disclosed on a 
general basis (not 
with regard to specific ratings). Broadly in line 
with the IOSCO Code. 
The standards for 
presentation of ratings have not been envisaged by IOSCO Code, but most of the 
disclosures that 
would be included in the rating report are anyway required by 
IOSCO.  The alignment of 
standards for presentation will 
benefit users of 
ratings, who will be furnished with higher quality material (in terms of transparency 
and accuracy) for 
their analysis. It is worth noting that similar standards have 
been set for 
investment recommendations in the Market Abuse Directive.