EUROPEAN COMMISSION 
Brussels, 15.11.2011 
SEC(2011) 1355 final 
  
COMMISSION STAFF WORKING PAPER 
EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT 
Accompanying the documents 
Proposal for a Regulation 
amending Regulation (EC) No 106 0/2009 on credit rating agencies  
 
and a 
 
Proposal for a Directive 
 
amendin g Directive 2009/65/EC on coordination on laws, re gulations and administrative 
provisions relating to undertakings for collective investment in transferable securities 
(UCITS) and Directive 2011/61/EU on Alt ernative Investment Fund Managers 
{COM(2011) 747 final} 
{SEC(2011) 1354 final}  
 
EN 1   EN COMMISSION STAFF WORKING PAPER 
EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT 
Accompanying the documents 
Proposal for a Regulation 
amending Regulation (EC) No 1060/2009 on credit rating agencies  
 
and a 
 
Proposal for a Directive 
 
amending Directive 2009/65/EC on coordination  on laws, regulations and administrative 
provisions relating to undertakings for collec tive investment in tr ansferable securities 
(UCITS) and Directive 2011/61/EU on Alt ernative Investment Fund Managers 
INTRODUCTION  
Regulation (EC) No 1060/2009 on credit rating agencies1 (CRA Regulation) entered into full 
application on 7 December 2010. It sets out rule s of conduct for credit rating agencies 
(CRAs). Furthermore, on 11 May 2011 an amendment to the CRA Regulation2 was adopted, 
entrusting the European Securities and Markets Authority (ESMA)3 with exclusive 
supervisory powers over CRAs registered in the EU in order to centralise and simplify their 
supervision at European level. 
However, a number of issues related to credit rating activities and the use of ratings are not 
addressed in the existing CRA Regulati on. Many responses to the consultation4 carried out by 
the Commission and at the roundtable5 organised by the Commission in June 2011 confirmed 
the need to address some remaining issues. Thes e relate notably to the risk of overreliance on 
credit ratings by financial market participants, the high degree of concen tration in the rating 
market and, to a certain extent, th e way by which CRAs are remunerated. 
Although there are a number of smaller CRAs, the rating market is dominated by three major 
CRAs (Fitch, Moody's and Standard & Poors), w ith a combined market share above 95 % 
                                                 
1 Regulation of the European Parliament and of the Council on credit rating agencies of 16 September 
2009, OJ L 302, 17.11.2009. 
2 Regulation (EU) No 513/2011 of the European Parliament and of the Council of 11 May 2011 
amending Regulation (EC) No 1060/2009 on credit rating agencies, OJ L 145, 31.5.2011. 
3 Regulation (EU) No 1095/2010 of the European Parliament and of the Council established the European Supervisory Authority (European Secur ities and Markets Authority) (ESMA), OJ L 331, 
15.12.2010, p. 84. 
4 Public Consultation on Credit Rating Agencies launched by the European Commission services on 5 
November 2010 and closed on 7 January 2011 . More than 100 responses were received. 
5 Roundtable on Credit Rating Agencies of 6 July 2011 organised by European Commission services. 
 
EN 2   EN globally.6 Strong economies of scale in the sector as  well as reputation of CRAs, which is a 
crucial asset, limit market entry. The specificiti es of certain categories of ratings, notably 
related to sovereign debt instruments, are no t sufficiently addressed either. In particular, 
during the recent Euro debt crisis7, CRAs were criticised with re gard to the transparency and 
quality of the sovereign debt ratings and the question was rais ed whether the EU regulatory 
framework for CRAs needed to be further streng thened to address this. Finally, conflicts of 
interests linked to the shareholder structure of CRAs and civil liability of CRAs are also not 
sufficiently addressed in the current CRA Regulation.  
PROBLEM DEFINITION  
The problems described in the following sectio n can be grouped into six broad areas:  
• Overreliance on external credit ra tings leading to "cliff" effects8 in capital markets; 
• "Cliff" and contagion effects of sovereign debt rating changes;  
• Limited choice and competition in the credit rating market; 
• Insufficient right of redress for users of ratings suffering losses due to an inaccurate 
rating issued by a CRA that in fringes the CRA Regulation; 
• Potentially undermined independence of CRAs  due to conflicts of interest arising 
from the "issuer-pays" model,  ownership structure and long  tenure of the same CRA; 
and 
• Insufficiently sound credit rati ng methodologies and processes 
                                                 
6 Finance – FAZ.NET, S & P, Moody’ s and Fitch: Brussels’ battle against the rating oligopoly, June 
2011. Available from: http://financesjournal.co m/finances/moodys-fitch-brussels-battle-rating-
oligopoly-5972.html. 
7 A description and detailed analysis of the Euro debt crisis can be found in Annex VI of the Impact 
Assessment. 
8 "Cliff effects" are sudden actions that are triggered by a rating downgrade under a specific threshold, 
where downgrading a single security can have a disproportionate cascading effect. 
 
EN 3   EN  
Requirements to use external credit ratings in legislation
Excessive use of external ratings for internal risk 
management 
Lack of transparency on the sovereign rating process Investment strategies directly linked to ratings 
Insufficient information on structured finance products 
Insufficient objectivity and completeness of the sovereign 
rating process 
Inappropriate timing of ratings publication 
High market concentration in the credit rating market 
Potential conflicts of interest due to ownership structure
Potential conflicts of interest due to the "issuer-pays" modelLack of civil liability regimes in some Member States High barriers of entry into the market of credit ratings 
Lack of comparability of ratings 
Risk of regulatory arbitrage Overreliance on external 
ratings leading to 
procyclicality and "cliff" 
effects in capital markets 
 
 
 
 
Risks to  
market stability 
 
Low confidence 
in financial 
market 
 
Undermined 
investor 
confidence 
 
Undermined 
ratings quality  Contagion effects of 
sovereign debt rating 
changes 
 
Limited choice and 
competition in the 
credit-rating market 
Insufficient 
right of 
redress for 
investors 
Undermined independence 
of credit rating agencies 
Insufficient communication and transparency of ratings and 
their underlying methodologies  
Inappropriate timing of ratings publication Insufficiently sound credit rating 
methodologies and processes 
 Problem drivers Global problems Consequences 
 
Figure 1.  Problem tree 
 
EN 4   EN SUBSIDIARITY  
According to the principle of subsidiarity (Artic le 5(3) of the TEU), EU level-action should be 
taken only when the aims envisaged cannot be achieved sufficiently by Member States alone 
and can therefore, by re ason of the scale or effects of th e proposed action, be  better achieved 
by the EU. Although all the problems outlined above have important implications for individual Member States, their overall impact  can only be fully perceived in a cross-border 
context. This is because ratings can be issued in one country for financial instruments issued 
in another, so that action taken on a national le vel might not have any effect, as ratings could 
continue to be issued and used if they were produced in a different EU or even third country 
jurisdictions. As a result, nationa l responses to credit rating i ssuance risk being circumvented 
or ineffective without EU-level action. Therefore any further acti ons in the field of CRAs can 
best be achieved by a common effort. Accordingl y, EU action appears appropriate in light of 
the principle of subsidiarity. 
O
BJECTIVES AND PREFERRED POLICY OPTIONS  
The general objective of the proposal is to contribu te to reducing the risks to financial stability 
and restoring the confidence of investors and other market part icipants in financial markets 
and ratings quality. The set of policy options pres ented in this section aims at addressing the 
problems and reaching the corresponding specif ic objectives. The preferred options on the 
basis of their effectiveness and e fficiency are highlighted in bold.  
Policy options to diminish the impact of "cliff" effects9 on financial institutions and markets 
by reducing reliance on external ratings  
Policy Options 
1. No policy change. 
2. Reduce reliance on external ratings by enhancing internal risk management and promoting the use of internal rating 
models for regulatory purposes. 
3. Require credit institutions, investment firms, insu rance and reinsurance undertakings to use more than one rating. 
4. Improve disclosure requirements for issuers of structured finance products on an ongoing basis. 
The Impact Assessment shows that measures to enhance internal credit risk management and 
the use of internal models for regulatory pur poses and specifically improving disclosures by 
the issuers on structured finance products are th e most cost-effective options in the current 
situation. Good quality ratings are helpful and should continue to be used; however it is 
important to incentivise the development of inte rnal credit rating capabilities for firms with 
sufficient resources. Therefore, it should be ensu red that a principle preventing over-reliance 
on credit ratings in line with the principles of  the Financial Stability Board applies across the 
board to all actors in the financial markets. The first set of policy measures to limit reliance on credit ratings has already been included in  the new Commission proposal  for the modification 
of the Capital Requirements Directive (CRD IV).
10 Need for adaptation, at  this stage, remains 
in particular in the areas of undertakings for collective investment in transferable securities 
(UCITS) and of Alternative Investment Funds (AIFs). Double ratings for structured finance 
products could allow a further reduction in reli ance on ratings for thes e complex products.  
                                                 
9 "Cliff effects" are sudden actions that are triggered by a rating downgrade under a specific threshold, 
where downgrading a single security can have a disproportionate cascading effect. 
10 COM (2011) 453 final. 
 
EN 5   EN The preferred options are consis tent with stakeholders' views that removing rules triggering 
mechanistic reliance on ratings from  legislation is just one step and is not an immediate cure. 
Stakeholders also noted that it is a challenge to find suitable measures to replace the current 
use of external ratings. Using market measures instead of ratings was seen as inappropriately 
pro-cyclical and volatile by ma ny, including industry groups and governments, but they could 
be taken into account alongside other measures. Some stakeholders, particularly issuers, 
opposed the idea of requiring multiple ratings as a measure to reduce overreliance, while 
some smaller CRAs welcomed a requirement for multiple ratings. 
Policy options to mitigate the ri sks of contagion effects linked  to sovereign debt ratings 
Policy Options 
1. No policy change. 
2. Require CRAs to publish a full research report on sovereign debt ratings and allocation of staff. 
3. Require CRAs to publish sovereign ratings after the closure of EU trading venues. 
4. Require CRAs to conduct the sovereign debt ratings process more frequently. 
5. Extend powers of competent authorities (ESMA) to ensure rating methodologies comply with legal requirements. 
6. Require (EU) sovereigns to publish a standardised set of  data on economic performance to enable credit risk assessment. 
7. Grant ESMA the power to restrict or ban issuance of sovereign debt ratings temporarily in exceptional situations. 
8. Encourage an existing, independent EU structure or a br and new European Credit Rating Agenc y to issue credit ratings. 
9. Prohibit sovereign debt ratings. 
In the Impact Assessment, nine options were id entified to mitigate the market stability risks 
resulting from sovereign ratings, out of which five options have been  assessed as preferred 
ones. It is suggested that CRAs publish full res earch reports on sovereig n ratings (option 2) – 
a measure which was also supported by some  governments and industry stakeholders. The 
sovereign debt ratings process should also be conducted more frequently (option 4) and 
ESMA should have the necessary powers to en sure the compliance of methodologies with the 
requirements of the Regulation, but also to be  in a position to ban issuance of sovereign 
ratings temporarily in well defined, exceptiona l circumstances (options 5 and 7), although 
some stakeholders opposed this idea. In the Im pact Assessment, it is furthermore considered 
preferable that sovereign ratings are published after the closure of EU trading venues (option 
3). The impact analysis concludes that for reas ons of objectivity and cr edibility, as perceived 
by the market, it would not be a ppropriate to use an existing i ndependent EU st ructure or to 
establish a brand new, public European Cred it Rating Agency to issue sovereign credit 
ratings. Many stakeholders also ra ised concerns, in particular, with  respect to the credibility of 
such ratings. 
Policy options to improve credit  rating market conditions with a view to improving ratings 
quality  
Policy Options 
1. No policy change. 
2. Encourage the emergence of a network of small and medium-sized rating agencies. 
3. Encourage the emergence of a new European rating agency. 
4. Harmonise ratings scales to improve comparability of ratings between CRAs. 
5. Establish a European Rating Index (EURIX). 
6. Require CRAs to issue joint ratings at the level of the rating committee. 
 
EN 6   EN Policy Options 
7. Ban large CRAs from acquiring small and medium-sized CRAs. 
8. Introduce temporary market  share ceilings for CRAs. 
9. Require CRAs to disclose pricing of ratings and ensure that prices are not discriminatory and are based on costs. 
The Impact Assessment analyses a wide range of  options to improve credit rating market 
conditions that should be conducive to ensu ring independence of CRAs and high quality 
ratings. Improved transparency (options 5 and 9)  and comparability of ratings (option 4) are 
considered to be cost-effective options. Moreover, fostering the creation of a network of small 
and medium-sized rating agencies is seen as a preferred option to reduce the barriers to entry 
into the market. The creation of a European ra ting agency as a public, rather than private, 
initiative has not been assessed as a preferred option. A vast majority of stakeholders were 
also against this measure. The ban for large CRAs from acquiring small and medium-sized CRAs would be necessary to ensure effectivene ss of other preferred options, including those 
addressing issues on CRAs' independence. Ho wever, this ban on its own would not be 
effective to change the market struct ure and could be circumvented by CRAs. 
Policy options to ensure ri ght of redress for investors  
Policy Options 
1. No policy change. 
2. Introduce civil liability of CRAs into EU legislation. 
3. Ensure civil liability of CRAs towards users of credit ratings before national courts. 
To ensure the right of redress for investor s, the Impact Assessment recommends option 3 
which would introduce a general obligation to en sure civil liability of CRAs before national 
courts. There is a general view  from the stakeholders (with the notable exception of the CRAs 
themselves) that it should be possible to pursu e civil action against ra ting agencies but only 
for gross negligence or intent. 
Policy options to  improve ratings quality by reinfo rcing independence of CRAs and 
promoting sound credit rati ng processes and methodologies 
Policy Options 
1. No policy change. 
2. Require investors to pay for ratings ("investor-pays" model). 
3. Require trading venues to set up and ensure the adm inistration of the "Trading venues pay" model. 
4. Require CRA selection to be undertaken by an independent board. 
5. Introduce rotation rules for the CRAs engaged by an issuer to rate its own products and to rate the issuer itself. 
6. Introduce specific requirements on CRAs' independence and objectivity in relation to their shareholders 
7. Strengthen rules on disclosure of rating methodologies 
8. Require CRAs to inform issuers sufficiently in advance of the publication of a rating 
The Impact Assessment identifies eight options  to reinforce independence of CRAs. Other 
models that could be alternatives to the "issuer pays" model are not entirely free from 
potential conflicts of interest. In this rega rd, the Commission will continue to monitor the 
appropriateness of credit rating agencies' remuneration models and will submit a report 
thereon to the European Parliament and the Council by 7 December 2012, as required by 
Article 39 (1) of the CRA Regulation. The pr eferred options in the Impact Assessment 
 
EN 7   EN encompass the measures to further mitigate in dependence risks under the "issuer pays" model. 
Indeed, many stakeholders believed that the risks under the "issu er pays" model are 
manageable. To this end, the Impact Assessm ent recommends mandatory rotation of CRAs 
(option 5), including the requirement  to have different CRAs to rate an issuer and its products 
(not applicable in respect to s overeigns), and rules to deal with  ownership interests (option 6). 
Moreover, rules on transparency and publicati on of ratings are asse ssed to be preferred 
options (options 7 and 8) to further address conf licts of interest and c ontribute to high quality 
ratings. However, the effectiveness of these m easures, in particular mandatory rotation of 
CRAs, can only be ensured if the market cond itions are conducive to the growth of small 
CRAs and the entrance of new players in the rating market. 
OVERALL IMPACT OF THE PACKAGE  
Cumulative Impacts and Synergies 
This section presents the cumulative impact s from the implementation of the package of 
preferred policy options. The package of prefer red policy options has been developed in a 
way to ensure the achievement of the overall objective to " contribute to reducing the risks to 
financial stability and restori ng investor and other market participants' confidence in 
financial markets and ratings quality ". 
The preferred options are expected to reduce ov erreliance on external ratings by reducing the 
importance of external ratings in financial serv ices legislation. This is expected to reduce 
reliance on external ratings by credit institutions, insurance undertakings, investment funds and the asset management sect or. In addition, the preferred policy measure to introduce a 
requirement for issuers to improve disclosu re regarding the underl ying asset pools of 
structured finance products is expected to help investors to make their own credit risk 
assessment, rather than leaving them to rely solely on external ratings. 
Furthermore, the preferred options will improve  the transparency and quality of sovereign 
debt ratings through verificati on of underlying information with a sovereign. A first measure 
will require CRAs to verify the accuracy of information with sovereigns to ensure that 
potential errors of sovereign ra tings are avoided. Moreover, the transparency and quality of 
sovereign ratings would be e nhanced through the publication of the fu ll research report 
accompanying the rating. The publication of sovere ign ratings after the closure of European 
trading venues aims at enabling all market par ticipants to have the new rating information 
before the trading venues are opened and it woul d thus contribute to limiting major market 
disturbances. Additionally, to mitigate the risk of contagion effects of sovereign downgrades ESMA, in specific situations determined by the regulation, would be granted the power to ban 
sovereign ratings temporarily. This measure s hould be temporary, exceptional and subject to 
very strict conditions. 
The preferred policy measures are also expected  to improve choice and optimise the structure 
of the rating industry. Small and medium-sized  rating agencies would be encouraged to 
exchange information which could facilitate ne w market entrants entering the rating industry 
and offer a wide range of services. In addition, comparison of ratings from distinct rating agencies could be facilitated by promoti ng common standards for rating scales and a 
European Rating Index (EURIX). Furthermore,  improved transparency on pricing policies 
and fees would not only facilitate competition in the rating market, but would also enable ESMA to effectively monitor potential conflicts of interest resulting from the "issuer pays" 
model. Finally, mandatory ro tation of CRAs would not only substantially reduce the 
 
EN 8   EN familiarity threat to CRA independence result ing from a long business relationship between a 
CRA and an issuer, but would al so have a significant positive effect on improving choice in 
the rating industry by providing more bus iness opportunities for smaller CRAs. 
In terms of investor protection, the preferred options would ensure that investors have an 
appropriate right of redress against CRAs. This would also  provide strong incentives for 
CRAs to comply with legal obligations  and to ensure high quality ratings. 
Independence of ratings will be improved by intr oducing a requirement for issuers to change 
CRA periodically. Risks of conflic ts of interest woul d be further reduced by the requirement 
that a CRA should not be able to provide solicited ratings fo r an issuer and its products 
simultaneously. Furthermore, independence wi ll be improved by enhancing the ownership 
structure of CRAs. In addition, transparency and quality of ratings would be improved by 
strengthening the rules on the disclosure of rating methodologies , by introducing a process for 
the development and approval of rating met hodologies, including the requirement for CRAs 
to communicate and justify th e reasons for modifications to their rating methodologies. 
Finally, the quality of ratings would be en hanced by requiring CRAs to inform issuers 
sufficiently in advance of the publication of a rating. 
Assessment of Administrative Burden and Compliance Costs 
There would be additional costs for financial firms resulting from the requirements to enhance 
internal risk management and the use of inte rnal rating models for regulatory purposes. These 
costs would be substantial for relevant financial sectors as a whole, but proportional with 
respect to individual financial fi rms. There would also be addi tional costs to issuers due to 
enhanced disclosure requirements, the total of which could amount to EUR 1.7 million one-
off cost and EUR 1.92 million annually. 
A set of options to mitigate risks of contagi on effects linked to sovere ign ratings, would also 
lead to additional recurring compliance cost s to CRAs, which could amount to EUR 3.27 
million annually to the industry. 
Measures to improve competition would not significantly increase the costs for CRAs (the 
annual compliance cost for the rating industry is expected to be around EUR 1.38 million). 
The costs would only relate to promoting the emergence of a network of small and medium-
sized CRAs that could range annually betw een EUR 0.9 and 1.95 million, for which the 
Commission would explore po ssibilities for EU funding. 
The policy option related to civil liability of CRAs towards investors is expected to cause 
compliance costs due to the need to insure th eir civil liability or, in the absence of the 
insurability, to create a financial buffer to  cover potential claims from investors. 
Finally, the preferred options de aling with CRA independence are not expected to entail any 
significant costs. 
Choice of Legal Instrument 
The current initiative encompasses a wide rang e of measures. They can be divided in four 
categories: 
• measures requiring amendments to the current CRA Regulation; 
 
EN 9   EN • measures requiring amendments to the cu rrent CRA Regulation coupled by technical 
standards to be developed by ESMA; 
• measures requiring amendments to sector al legislation (Dir ectives on UCITS and 
managers of AIFs); 
• measures building on an existing Union funding program in order to promote a 
network of small and medium sized CRAs. 
MONITORING AND EVALUATION  
If the recommended policy options are put into  practice, the Commission will monitor how 
Member States apply the proposed policies. Wh en necessary, the Commission will pursue the 
procedure set out in Article 226 of the Treaty in  case any Member State fails to respect its 
duties concerning the implementation and application of Union Law. 
In order to assess the effectiv eness of the proposed policies, the Commission will propose to 
set up a range of indicators to feed into a monitoring system to facilitate an evaluation three years after the transposition da te (possibly in the form of a report to the Council and the 
Parliament). 
As part of the monitoring exercise, ESMA wo uld receive quarterly reports from national 
competent authorities on the various policy areas.