Proposal for a Regulation of the European Parliament and of the Council on Credit Rating Agencies {SEC(2008) 2745} {SEC(2008) 2746}
Date: 2008-11-12
Institutions: European Commission
Subjects: credit guarantee, credit institution, credit policy, exchange of information, financial solvency, official market, securities

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 12.11.2008 
COM(2008) 704 final 

2008/0217 (COD) 

Proposal for a 

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

on Credit Rating Agencies 

{SEC(2008) 2745} 
{SEC(2008) 2746} 

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EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL 

1.1. 

General context, grounds for and objectives of the proposal 

Credit rating agencies provide independent opinions on the probability of default or expected 
losses  of  companies,  governments  and  a  wide  range  of  financial  instruments.  These  ‘credit 
ratings’ are used by investors, borrowers, issuers and governments, and so play an important 
role in financial markets.  

In 2006 the Commission set out its regulatory approach to credit rating agencies1 and stated 
that  it  would  monitor  the  developments  in  this  area  very  carefully.  Credit  rating  agencies 
active  in  the  EU  are  mainly  governed  by  the  International  Organisation  of  Securities 
Commissions  (IOSCO)  code  of  conduct2,  which  is  based  on  voluntary  compliance,  and  are 
subject to a yearly assessment by the Committee of European Securities Regulators (CESR)3. 
The Commission stated that it would consider new proposals if compliance with existing EU 
rules or the IOSCO Code was clearly unsatisfactory or if new circumstances were to arise — 
including serious problems of market failure.  

It  is  commonly  agreed  that  credit  rating  agencies  contributed  significantly  to  recent  market 
turmoil by underestimating the credit risk of structured credit products. The great majority of 
subprime products were given the highest ratings, thereby clearly underestimating the major 
risks  inherent  in  those  instruments.  Furthermore,  when  market  conditions  worsened,  the 
agencies failed to adapt the ratings promptly. 

The current crisis has revealed weaknesses in the methods and models used by credit rating 
agencies. One reason may be that credit rating agencies operate in an oligopolistic market that 
offers  limited  incentives  to  compete  on  the  quality  of  the  ratings  produced.  The  sometimes 
poor quality of  ratings of  structured finance instruments has considerably contributed to  the 
current crisis. In addition, shortcomings in the agencies’ communication with users of credit 
ratings  became  evident.  As  a  result,  market  participants’  confidence  in  the  performance  of 
credit rating agencies and in the reliability of ratings has suffered.  

In October 2007 EU Finance Ministers agreed to a set of conclusions on the crisis (the ‘Ecofin 
Roadmap’)4 which included a proposal to assess the role played by credit rating agencies and 
to  address  any  relevant  deficiencies.  Specifically,  the  Commission  was  asked  to  examine 
possible conflicts of interest in the rating process, transparency of rating methods, time-lags in 
rating reassessments and regulatory approval processes. 

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4 

Communication from the Commission on Credit Rating Agencies, OJ C 59, 11.3.2006, p. 2 (http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2006:059:0002:0006:EN:PDF). 
Code of conduct fundamentals for CRAs (revised May 2008)  
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD271.pdf. 
The  CESR  is  an  independent  advisory  group  to  the  European  Commission  composed  of  the  national 
supervisors  of  EU  securities  markets;  see  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 
the CESR is to improve coordination among securities regulators, advise the European Commission and 
ensure more consistent and timely day-to-day implementation of Community legislation in the Member 
States. 
http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ecofin/96375.pdf. 

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To  clarify  the  role  of  the  agencies  and  assess  the  need  for  regulatory  measures,  in  autumn 
2007 the Commission requested the advice of the CESR and the European Securities Markets 
Expert Group (ESME)5. At around the same time, other countries also started reforms in this 
field  (US,  Japan),  and  since  then,  important  reports  by  IOSCO6,  the  Financial  Stability 
Forum7  and  the  Committee  on  the  Global  Financial  System8  have  addressed  the  issue. 
Meanwhile, credit rating agencies themselves have outlined some reforms they are prepared 
to undertake9. 

Self-regulation based on voluntary compliance with the IOSCO code does not appear to offer 
an adequate, reliable solution to the structural deficiencies of the business. While the industry 
has come up with several schemes for self-regulation, most of these have not been robust and 
or  stringent  enough  to  cope  with  the  severe  problems  and  restore  the  confidence  in  the 
markets.  Moreover,  individual  approaches  by  some  of  the  credit  rating  agencies  would  not 
have  the  market-wide  effect  necessary  to  establish  a  level  playing  field  across  the  EU  and 
preferably  worldwide.  In  terms  of  substantive  requirements,  the  Commission  considers  the 
revised  IOSCO  code  of  conduct  to  be  the  global  benchmark.  However,  the  code  has  some 
limitations that need to be overcome to make its rules fully operational. Some IOSCO rules 
are quite abstract and generic; they need to be concretised, and consolidated in some cases, to 
make them easier to apply in practice and more efficient. Most importantly, the code provides 
no enforcement mechanism but only invites credit rating agencies to give reasons if they do 
not  comply  with  it  (the  ‘comply  or  explain’  approach).  The  code  itself  is  open  to  being 
complemented by enforceable rules. It explicitly states that credit rating agencies should obey 
the  laws  and  regulations  of  the  jurisdictions  in  which  they  operate  and  that  these  laws  may 
include direct regulation of credit rating agencies that may incorporate elements of the code.  

In the US, where most of the credit rating agencies with significant EU activities have their 
parent companies, credit rating agencies have been subject to regulation and supervision since 
summer  200710.  Given  the  global  nature  of  the  rating  business,  it  is  important  to  level  the 
playing  field  between  the  EU  and  the  US  by  setting  up  a  regulatory  framework  in  the  EU 
comparable to that applied in the US and based on the same principles. 

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10 

the  FSF  on  Enhancing  Market  and 

The  European  Securities  Markets  Experts  Group  (ESME)  is  an  advisory  body  to  the  Commission, 
composed of securities markets practitioners and experts set up by the Commission in April 2006 and 
governed  by  Commission  Decision  2006/288/EC  of  30  March  2006  setting  up  a  European  Securities 
Markets  Expert  Group  to  provide  legal  and  economic  advice  on  the  application  of  the  EU  securities 
Directives (OJ L 106, 19.4.2006, p. 14). 
Code of conduct fundamentals for CRAs (revised May 2008)   
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD271.pdf. 
Report  of 
http://www.fsforum.org/publications/r_0804.pdf. 
CGFS Papers No 32: Ratings in structured finance: What went wrong and what can be done to address 
short comings? July 2008, http://www.bis.org/publ/cgfs32.pdf?noframes=1. 
For  example,  Standards  and  Poor’s  presented  a  reform  plan  that  included  measures  such  as  the 
appointment of an ombudsman for stakeholders, a public annual review of governance processes by an 
independent firm and client rotation for analysts. Moody’s has taken measures to enhance the quality of 
the data used in the rating process. Fitch has separated its non-rating businesses into a separate division 
and has made changes to its structured finance operations to support objectivity and consistency in the 
rating review process. 
The US Credit Rating Agency Reform Act of 2006 entered into force on 27 June 2007 establishing a 
legal  framework  for 
the  registration  of  NRSRO  (Nationally  Recognized  Statistical  Rating 
Organizations). 

Institutional  Resilience,  7  April  2008 

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In the light of these considerations, this proposal for a regulation has four overall objectives 
aiming at improving the process of issuance of credit ratings: 

–  first, to ensure that credit rating agencies avoid conflicts of interest in the rating process or 

at least manage them adequately; 

–  second, to improve the quality of the methodologies used by credit rating agencies and the 

quality of ratings; 

–  third, to increase transparency by setting disclosure obligations for credit rating agencies; 

–  fourth,  to  ensure  an  efficient  registration  and  surveillance  framework,  avoiding  ‘forum 

shopping’ and regulatory arbitrage between EU jurisdictions. 

The  Commission  intends  to  develop  the  regulatory  framework  for  the  issuance  of  credit 
ratings in order to ensure a high level of investor confidence and consumer protection. 

1.2. 

Existing provisions in the area of the proposal 

Community law addresses only two specific aspects of credit rating:  

–  While  credit  ratings  are  not  recommendations  within  the  meaning  of  Directive 
2003/125/EC11  implementing  the  Market  Abuse  Directive12,  recital  10  of  Directive 
2003/125/EC states that agencies should consider adopting internal policies and procedures 
designed to ensure that their credit ratings are fairly presented and that they appropriately 
disclose  any  significant  interests  or  conflicts  of  interest  concerning  the  financial 
instruments or the issuers to which their credit ratings relate. 

–  The Capital Requirements Directive13 (2006/48/EC) provides for the use of external credit 
assessments to determine risk weights and the resulting capital requirements applied to a 
bank  or investment firm’s  exposure. An external credit  assessment  may  only  be used for 
this  purpose  if  the  External  Credit  Assessment  Institution  (‘ECAI’)  providing  the  risk 
assessment has been recognised by the competent authorities. A recognition mechanism is 
outlined in Annex VI Part 2 of the Capital Requirements Directive. The competent national 
authorities  may  only  recognise  an  ECAI  if  the  latter  complies  with requirements  such  as 
objectivity,  independence,  ongoing  review,  credibility  and  transparency.  In  order  to 
promote convergence, the Committee of European Banking Supervisors (CEBS) has issued 
guidelines on the recognition of ECAIs14. 

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Commission  Directive  2003/125/EC  of  22  December  2003  implementing  Directive  2003/6/EC  of  the 
European Parliament and the Council as regards the fair presentation of investment recommendations 
and the disclosure of conflicts of interest (OJ L 339 24.12.2003, p. 73). 
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). 
Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the 
taking up and pursuit of the business of credit institutions (recast) (OJ L 177, 30.6.2006. p. 1). 
Guidelines on the recognition of External Credit Assessment Institutions of 20 January 2006 (GL07), 
http://www.c-ebs.org/formupload/41/413b2513-5084-4293-a386-16385b80411d.pdf. 

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1.3. 

Consultation of interested parties and impact assessment 

As stated in Section 1.1., in autumn 2007 the Commission asked the Committee of European 
Securities Regulators (CESR) and the European Securities Markets Expert Group (ESME) to 
provide advice on various aspects of credit rating agencies’ activity and role in the financial 
markets, especially in structured finance. Both groups widely consulted stakeholders, giving 
the  Commission  a  broader  view  and  more  evidence  of  the  role  of  credit  rating  agencies  in 
structured finance in the context of the subprime turmoil.  

As well as closely following the progress of work at CESR and ESME, the Commission has 
held  discussions  with  credit  rating  agencies,  and  sought  comments  from  other  interested 
parties including industry associations from the insurance, securities and banking sector and 
information providers. An open consultation was conducted on the internet between 31 July 
2008  and  5  September  200815.  Credit  rating  agencies,  banks,  investment  firms,  insurance 
companies,  fund  managers,  supervisory  and  regulatory  authorities,  ministries  of  finance, 
central  banks  and  other  interested  parties  were  represented  in  the  survey  answers,  through 
either individual or grouped responses16.  

1.4. 

Impact assessment  

In line with its ‘Better Regulation’ policy, the Commission conducted an impact assessment 
of policy alternatives. Four options were considered:  

–  Option  1:  keeping  the  status  quo  (self-regulatory  approach  based  on  the  IOSCO  code 

coupled with individual initiatives by credit rating agencies); 

–  Option  2:  drafting  a  European  code  of  conduct  and  setting  up  a  body  to  monitor  credit 

rating agencies’ compliance with the code, albeit with no enforcement powers; 

–  Option 3: issuing a (non-binding) Commission recommendation; 

–  Option 4: legislating to set up a registration and surveillance framework for credit rating 

agencies.  

Each  of  these  four  policy  options  was  assessed  against  four  criteria:  effectiveness17, 
certainty18,  common  framework19  and  flexibility20.  The  legislative  option  had  clear 
advantages  over  the  other  policy  options  especially  with  regard  to  its  effectiveness  and 
certainty, because the other options (self-regulatory approaches or a recommendation) cannot 
produce legally binding rules and an enforcement mechanism. Furthermore, legislation is the 
best  option  to  ensure  a  common  framework  throughout  the  EU  and  an  efficient 
counterbalance to other important jurisdictions, notably the US.  

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http://ec.europa.eu/internal_market/consultations/2008/securities_agencies_en.htm. 
A total number of 82 replies were received. The answers were published at: 
http://circa.europa.eu/Public/irc/markt/markt_consultations/library?l=/financial_services/credit_agencie
s&vm=detailed&sb=Title. 
The extent to which the measure fulfils the objectives referred to in section 1.1. 
Stakeholders’ confidence in the rules. 
The  extent  to  which  the  framework  for  operation  of  credit  rating  agencies  is  governed  by  the  same 
requirements in all Member States. 
The extent to which the respective policy option facilitates the operation of CRAs across the Member 
States. Flexibility also affects the costs incurred by credit rating agencies. 

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2. 

LEGAL ELEMENTS OF THE PROPOSAL 

2.1. 

Legal basis 

The proposal is based on Article 95 of the EC Treaty. 

2.2. 

Subsidiarity and proportionality  

The Commission proposal to regulate Credit Rating Agencies is in line with the principle of 
subsidiary as laid down in Article 5(2)  of  the EC Treaty,  which requires  the  Community to 
take action only if and in so far as the objectives of the proposed action cannot be sufficiently 
achieved  by  the  Member  States  and  can  therefore,  by  reason  of  the  scale  of  effects  of  the 
proposed action, be better achieved by the Community. The business of credit rating agencies 
is global.  Ratings  issued by  a credit rating agency based in one Member State  are used  and 
relied  upon  by  market  participants  throughout  the  EU.  Failures  or  the  lack  of  a  regulatory 
framework  for  credit  rating  agencies  in  one  specific  Member  State  could  adversely  affect 
market  participants  and  financial  markets  EU-wide.  Therefore,  sound  regulatory  rules 
applicable  throughout  the  EU  are  necessary  to  protect  investors  and  markets  from  possible 
shortcomings.  

It  is  necessary  to  lay  down  a  common  framework  of  rules  regarding  the  quality  of  credit 
ratings to be used by financial institutions regulated by harmonised rules in the Community. 
Otherwise,  there  would  be  a  risk  that  Member  States  would  take  diverging  measures  at 
national level. This would have a direct negative impact on and create obstacles to the good 
functioning of the internal market, since the credit rating agencies issuing credit ratings for the 
use of financial institutions in the Community, would be subject to different rules in different 
Member States.  

Finally, given the global nature and worldwide effects of the rating business, convergence of 
the  rules  regulating  the  issuance  of  credit  ratings  on  a  global  scale  ensuring  a  equally  high 
level  of  investor  confidence  and  consumer  protection  is  important.  Different  national 
regulations  in  the  EU  would  complicate  this  convergence  process  and  could  weaken  the 
position of the EU compared to important regimes elsewhere.  

The proposed regulation is also proportionate, as required by Article 5(3) of the EC Treaty. It 
targets  not  all  credit  rating  agencies  but  only  those  whose  ratings  are  used  for  regulatory 
purposes  by  financial  institutions,  i.e.  those  with  a  potentially  high  impact  on  the  financial 
system.  Many  of  its  substantive  provisions  are  inspired  by  the  IOSCO  code.  This  will  limit 
adaptation  costs  considerably,  since  many  credit  rating  agencies  already  comply  voluntarily 
with the code. The proposal takes into account regulation in place in major non-EU countries, 
to  accommodate  the  business  model  of  globally  operating  credit  rating  agencies,  but  also 
considers smaller agencies that follow a less complex business model21.  

2.3. 

Choice of instrument 

EU  legislation  appears  to  be  the  only  option  that  could  sufficiently  protect  investors  and 
European  financial  markets  against  the  risk  of  malpractice  by  credit  rating  agencies.  A 
uniform  approach  is  necessary  in  order  to  create  a  framework  where  Member  States 
competent authorities can ensure that credit rating agencies apply the new set of requirements 

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See Article 6(5). 

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consistently across the Community. A Regulation is the best instrument to ensure a consistent 
and uniform approach throughout the European Union because of its direct effect.  

No  comprehensive  registration  and  surveillance  regime  for  the  issuance  of  credit  ratings 
currently exists in any of the Member States. A Directive, which leaves the Member States a 
degree  of  flexibility  in  deciding  how  to  adapt  their  national  legal  orders  to  the  new 
framework, is therefore not efficient.  

Since it does not need transposition by Member States, a Regulation can immediately put in 
place the uniform framework needed to quickly restore the market's confidence in the credit 
rating activity. It is also less burdensome for the industry, as a single set of Community rules 
will apply throughout the European Union. 

2.4. 

Comitology 

The proposal is based on the Lamfalussy process for regulating financial services. The main 
part of the proposed regulation introduces principles in order to ensure that (i) the issuance of 
credit ratings is not affected by conflicts of interest, (ii) that credit rating issued are of high 
quality, and (iii) that credit rating agencies act in a transparent manner.  

The  technical  details  necessary  to  specify  the  principles  of  the  Regulation  are  laid  down  in 
Annex I and II of the Regulation. In order to allow a fast adaptation of the Regulation to any 
new  developments  affecting  the  rating  activity  the  technical  provisions  contained  in  the 
Annexes  can  be  amended  by  the  Commission  in  accordance  with  Council  Decision 
1999/468/EC of 28 June 199922s. Since those measures are of general scope and are designed 
to amend non-essential elements of this Regulation, they must be adopted in accordance with 
the regulatory procedure with scrutiny provided for in Article 5a of Decision 1999/468/EC. 

2.5. 

Content of the Proposal 

2.5.1. 

Scope (Article 2) 

The proposal introduces a legally binding registration and surveillance regime for credit rating 
agencies  issuing  credit  ratings  mainly  intended  for  use  for  regulatory  purposes  by  credit 
institutions, investments firms, insurance, assurance and reinsurance undertakings, collective 
investment schemes and pension funds.  

2.5.2. 

Independence and avoidance of conflicts of interest (Articles 5-6 and Annex I Section 
A, B, C) 

Further improvements in dealing with organisational requirements and conflicts of interest are 
crucial if credit rating agencies want to regain markets’ confidence. This calls for reforms to 
their  internal  governance  structure,  introducing  sound  internal  controls  and  sound  reporting 
lines, clearly separating the rating function from business incentives. External surveillance is 
strengthened by internal discipline by giving the independent, non-executive members of the 
administrative  or  supervisory  board  of  the  credit  rating  agency  specific  tasks  to  ensure 
efficient control (Article 5 and Annex I, Section A, Point 2).  

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Council  Decision  1999/468/EC  of  28  June  1999  laying  down  the  procedures  for  the  exercise  of 
implementing  powers  conferred  on  the  Commission  (OJ  L  184,  17.7.1999,  p.  23)  as  amended  by 
Council Decision 2006/512/EC of 17 July 2006 (OJ L 200, 22.7.2006, p. 11). 

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To ensure the independence of ratings, credit rating agencies are required to prevent conflicts 
of  interest  and/or  to  manage  these  conflicts  adequately  where  they  are  unavoidable.  They 
must disclose conflicts of interest in a complete, timely, clear, concise, specific and prominent 
manner  and  record  all  significant  threats  to  the  rating  agency’s  independence  or  that  of  its 
employees  involved  in  the  credit  rating  process,  together  with  the  safeguards  applied  to 
mitigate  those  threats.  They  must  limit  their  activity  to  credit  rating  and  related  operations, 
excluding consultancy or advisory services (Article 5 and Annex I, Section B). 

Agencies must have adequate internal policies and procedures to insulate employees involved 
in credit rating from conflicts of interest and ensure the quality, integrity and thoroughness of 
the  rating  and  review  process  at  all  times.  Linked  to  this,  agencies  must  allocate  sufficient 
employees with appropriate knowledge and experience to their credit rating activity and make 
appropriate rotation arrangements for analysts and persons approving credit ratings. (Article 6 
and Annex I, Section C). 

The  compensation  arrangements  of  employees  involved  in  the  rating  process  must  be 
determined  primarily  by  the  quality,  accuracy,  thoroughness  and  integrity  of  their  work 
(Article 6(6)). 

2.5.3.  Quality of ratings (Article 7) 

The purpose of credit rating is to provide a credible and sound analysis of the credit risk of a 
borrower or issuer based on the available information and economic analysis. Many investors 
rely  on  credit  rating  agencies  because  they  lack  the  expertise  and/or  resources  (in  time  and 
money)  to  undertake  their  own  analysis  of  the  credit  risk.  Moreover,  credit  rating  agencies 
often possess information that is not widely available to market participants. So, in theory, the 
ratings  issued  by  credit  rating  agencies  are  an  efficient  means  for  investors  to  measure  and 
manage credit risk, but only if they are sound and of good quality. The proposed Regulation 
aims to improve the quality of credit ratings, but it does not relieve investors of the need to 
exercise judgment and due diligence in relying on ratings when making investment decisions; 
nor does it jeopardise the independence of the rating process or of the ratings themselves, for 
which the credit rating agency retains full responsibility.  

To allow sophisticated market participants (banks and other institutional investors) to check 
the soundness of the methodologies used and to verify the rating issued by the credit rating 
agency,  but  also  to  increase  market  discipline,  credit  rating  agencies  must  disclose  the 
methodologies, models and key assumptions they use in the rating process. Methods must be 
kept  up-to-date  and  subject  to  review.  If  the  agency  changes  its  rating  methodology  it  must 
immediately disclose which ratings are likely to be affected by this change and re-rate them 
promptly.  Credit  rating  agencies  must  also  continually  review  ratings.  This  is  important  to 
keep the ratings up-to-date and responsive to changes in financial conditions. This provision 
should  prevent  credit  rating  agencies  from  concentrating  their  efforts  and  resources  on  the 
initial rating and neglecting subsequent monitoring, which can be detrimental to the ongoing 
quality of the ratings. 

2.5.4.  Disclosure and transparency obligations (Articles 8-11 and Annex I, Sections B, D, 

and E) 

The current crisis revealed weaknesses in the methods and models used by the agencies to rate 
structured  finance  instruments  that  were  financially  engineered  to  give  high  confidence  to 
investors, and in the agencies’ communication with the markets and investors both about the 

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characteristics and limitation of the rating of structured finance instruments and about critical 
model assumptions.  

The proposal obliges credit rating agencies to disclose ratings on a non-selective basis and in 
a  timely  manner,  unless  the  ratings  are  only  distributed  by  subscription.  It  seeks  to  enable 
investors  to  distinguish  between  ratings  for  structured  products  and  for  traditional  products 
(corporate, sovereign) by requiring the use of a different rating category for structured finance 
instruments  or  the  provision  of  additional  information  on  their  risk  characteristics.  Specific 
disclosure requirements apply to unsolicited credit ratings (Article 8). 

To  ensure  that  internal  processes  and  procedures  are  sufficiently  transparent,  credit  rating 
agencies  must  publicly  disclose  some  important  information,  e.g.  on  conflicts  of  interest, 
methodologies  and  key  rating  assumptions  and  the  general  nature  of  their  compensation 
policy.  They  must  also  periodically  disclose  data  on  the  historical  default  rates  of  rating 
categories  and  give  competent  authorities  certain  elements  such  as  the  list  of  the  largest  20 
clients by revenue (Article 9 and Annex I, Section E). 

To ensure that relevant, standardised data on credit rating agencies’ performance is available 
to allow market participants to make industry-wide comparisons, CESR is to create a publicly 
available central repository for such data (Article 9(2)).  

To  restore  public  confidence  in  the  rating  business,  credit  rating  agencies  must  publish  an 
annual transparency report (Article 10 and Annex I, Section E, Part III), and keep records of 
their activities (Articles 5-7 and Annex I, Section B, Points 7-9). 

2.5.5.  Registration (Articles 12-17) and surveillance (Articles 19-31)  

The  activity  of  credit  rating  agencies  whose  credit  ratings  are  intended  to  be  used  for 
regulatory  purpose  by  financial  institutions  to  comply  with  Community  legislation  will  be 
subject  to  prior  registration.  The  proposal  lays  down  the  conditions  and  the  procedure  for 
granting or withdrawing that registration. (Articles 12-17) 

A  credit  rating  activity  performed  by  a  credit  rating  agency  in  the  European  Union  has 
consequences  for  all  EU  markets;  thus  all  regulators  in  the  European  Union  should  be 
involved  in  the  registration  process.  The  proposal  introduces  a  single  entry  point  for  the 
registration, the CESR, which is best placed to provide a one-stop-shop for applications and a 
central  point  for  informing  and  coordinating  all  EU  national  regulators.  Responsibility  for 
registration and surveillance of the credit rating agency rests with the competent authority of 
the  home  Member  State,  i.e.  that  in  which  the  credit  rating  agency  has its  registered  office. 
That competent authority is best placed in terms of physical presence to closely supervise the 
credit  rating  agency.  Specific  provisions  are  also  proposed  for  groups  of  credit  rating 
agencies;  when  examining  the  applications  for  registration  submitted  by  a  group  of  credit 
rating  agencies,  the  competent  authorities  concerned  must  consider  the  group  structure  and 
agree on a facilitator who will be responsible for coordinating the registration process (Article 
14). 

To  function  as  a  single  entry  point,  CESR  should  be  closely  involved  in  the  registration 
process from the outset and be entitled to give its advice on the granting or withdrawal of the 
registration  by  the  competent  authority  of  the  home  Member  Stated  and  may  request  re-
examination  of  draft  decisions  (Article  17).  The  registration  will  become  effective  after 
publication  by  the  Commission  in  the  Official  Journal  of  the  European  Union  (Article  14). 

EN 

9 

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The  Commission  shall  publish  regularly  an  updated  list  of  the  credit  rating  agencies 
registered. 

The proposal creates a mechanism to ensure effective enforcement of the Regulation. It gives 
competent authorities the necessary powers to ensure that credit rating agencies comply with 
the Regulation throughout the Community. In carrying out their duties, competent authorities 
shall  not  interfere  with  the  content  of  credit  ratings  (Article  20(1)).  To  ensure  effective 
surveillance,  the  proposal  requires  specific  forms  of  cooperation  between  Member  States 
competent  authorities,  to  promote  a  common  supervisory  culture.  It  also  provides  for 
enhanced cooperation in case of a group of credit rating agencies, through the coordination of 
supervisory activities by the facilitator (Articles 25). Given the international scale of the credit 
rating business, it is also necessary to provide for the exchange of information with non-EU 
countries (Article 29). 

2.6. 

Budgetary implications 

The proposal has no implications for the Community budget. 

EN 

10 

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2008/0217 (COD) 

Proposal for a 

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

on Credit Rating Agencies 

(Text with EEA relevance) 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, and in particular Article 
95 thereof, 

Having regard to the proposal from the Commission, 

Having regard to the opinion of the European Economic and Social Committee23, 

Acting in accordance with the procedure laid down in Article 251 of the Treaty24, 

Whereas: 

(1) 

(2) 

assurance 

undertakings, 

Credit rating agencies play an important role in global securities and banking markets, 
as  their  ratings  are  used  by  investors,  borrowers,  issuers  and  governments  to  make 
informed  investment  and  financing  decisions.  Credit  institutions,  investments  firms, 
insurance 
undertakings, 
undertakings  for  collective  investment  in  transferable  securities  (UCITS)  and 
institutions  for  occupational  retirement  provision,  may  use  those  ratings  as  the 
reference for the calculation of their capital requirements for solvency purposes or for 
calculating  risks  in  their  investment  activity.  Consequently,  credit  ratings  have  a 
significant  impact  on  the  trust  and  confidence  of  investors  and  consumers.  It  is 
essential,  therefore,  that  credit  ratings  used  in  the  Community  are  independent, 
objective and of the highest quality.  

undertakings, 

reinsurance 

Currently, most credit rating agencies have their headquarters outside the Community. 
Most  Member  States  do  not  regulate  the  activities  of  credit  rating  agencies  or  the 
conditions  for  the  issuance  of  credit  ratings.  Despite  their  significant  importance  for 
the  functioning  of  the  financial  markets,  credit  rating  agencies  are  only  to  a  limited 
extent subject to Community legislation, notably Directive 2003/6/EC of the European 
Parliament  and  of  the  Council  of  28  January  2003  on  insider  dealing  and  market 
manipulation25.  Moreover,  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 

23 
24 
25 

OJ C , , p. . 
OJ C , , p. . 
OJ L 96, 12.4.2003, p. 16. 

EN 

11 

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credit  institutions  and  Directive  2006/49/EC  of  the  European  Parliament  and  of  the 
Council  of  14 June  2006  on  the  capital  adequacy  of  investment  firms  and  credit 
institutions26 refer to credit rating agencies. It is therefore important to lay down rules 
ensuring  that  all  ratings  used  by  financial  institutions  governed  by  Community 
legislation are of high quality and issued by credit rating agencies subject to stringent 
requirements. The Commission will continue to work with its international partners to 
ensure convergence of the rules applying to credit rating agencies. 

Credit  rating  agencies  may  apply  on  a  voluntary  basis  the  Code  of  Conduct 
Fundamentals  for  credit  rating  agencies  issued  by  the  International  Organisation  of 
Securities  Commissions,  hereinafter  the  "IOSCO  code".  In  2006  a  Communication 
from the Commission on Credit Rating Agencies27 invited the Committee of European 
Securities  Regulators,  hereinafter  "CESR",  to  monitor  compliance  with  the  IOSCO 
Code and report back to the Commission on an annual basis.  

The  European  Council  of  13  and  14  March  2008  agreed  to  a  set  of  conclusions  to 
respond  to  the  main  weaknesses  identified  in  the  financial  system.  One  of  the 
objectives was to improve market functioning and incentive structures, including the 
role of credit rating agencies.  

Credit  rating  agencies  are  considered  to  have  failed  to  reflect  early  enough  in  their 
credit ratings the worsening market conditions. This failure can be best corrected by 
measures  related  to  conflicts  of  interest,  the  quality  of  the  credit  ratings,  the 
transparency of the credit rating agencies, their internal governance and surveillance of 
the activities of the credit rating agencies. The users of credit ratings should not rely 
blindly  on  credit  ratings.  They  should  take  utmost  care  to  perform  own  analysis  and 
conduct due diligence regarding their reliance on such credit ratings.  

It  is  necessary  to  lay  down  a  common  framework  of  rules  regarding  the  quality  of 
credit ratings to be used by financial institutions regulated by harmonised rules in the 
Community.  Otherwise,  there  would  be  a  risk  that  Member  States  would  take 
diverging measures at national level. This would have a direct negative impact on and 
create obstacles to the good functioning of the internal market, since the credit rating 
agencies issuing credit ratings for the use of financial institutions in the Community, 
would  be  subject  to  different  rules  in  different  Member  States.  Moreover,  diverging 
quality  requirements  on  credit  ratings  could  lead  to  different  levels  of  investor  and 
consumer protection.  

In order to avoid potential conflicts of interest credit rating agencies should limit their 
activity to the issuing of credit ratings. A credit rating agency should not be allowed to 
carry  out  consultancy  or  advisory  services.  In  particular  credit  rating  agency  should 
not make proposals or recommendations regarding the design of a structured finance 
instrument.  However,  credit  rating  agencies  should  be  able  to  provide  ancillary 
services where this does not create potential conflicts of interest with the issuance of 
credit ratings. 

(3) 

(4) 

(5) 

(6) 

(7) 

26 
27 

OJ L 177, 30.6.2006, p. 201. 
OJ C 59, 11.3.2006, p. 2. 

EN 

12 

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(8) 

(9) 

(10) 

Credit rating agencies should establish appropriate internal policies and procedures in 
relation to employees involved in the credit rating process in order to prevent conflicts 
of interest and ensure at all times the quality, integrity and thoroughness of the rating 
and review process.  

Credit rating agencies should avoid situations of conflicts of interest and manage those 
conflicts adequately when they are unavoidable in order to ensure their independence. 
Credit  rating  agencies  should  disclose  conflicts  of  interest  in  a  timely  manner.  They 
should  also  keep  record  of  all  significant  threats  to  the  independence  of  the  credit 
rating agency and that of its employees involved in the credit rating process, as well as 
the safeguards applied to mitigate those threats. 

In  order  to  ensure  the  independence  of  the  credit  rating  process  from  the  business 
interest  of  the  credit  rating  agency  as  a  company,  the  credit  rating  agencies  should 
ensure  that  the  administrative  or  supervisory  board  shall  include  at  least  three  non-
executive members, who should be independent along the lines of point 13 in Section 
III  of  Commission  Recommendation  2005/162/EC  on  the  role  of  non-executive  or 
supervisory directors of listed companies and on the committees of the (supervisory) 
board28. Moreover, it is necessary that the majority of members of the administrative 
or supervisory board, including all independent members have sufficient expertise in 
financial services.  

(11) 

In order to avoid conflicts of interest the remuneration of independent members of the 
administrative or supervisory board should not depend on the business performance of 
the agency.  

(12)  A  credit  rating  agency  should  allocate  a  sufficient  number  of  employees  with 
appropriate  knowledge  and  experience  to  its  credit  rating  activity.  In  particular,  the 
credit  rating  agency  should  ensure  that  adequate  human  and  financial  resources  are 
allocated to the issuing of credit ratings as well as their monitoring and updating.  

(13)  Long lasting relationships with the same rated entities or its related third parties could 
compromise independence of analysts and persons approving credit ratings. Therefore 
those analysts and persons should be subject to a rotation mechanism.  

(14)  Credit  rating  agencies  should  use  rating  methodologies  that  are  rigorous,  systematic, 
and  continuous  and  result  in  ratings  that  may  be  subject  to  validation  based  on 
historical experience. Credit rating agencies should ensure that methodologies, models 
and  key  rating  assumptions  used  for  determining  credit  ratings  are  properly 
maintained, up-to-date and subject to a comprehensive review on a periodic basis. In 
cases where the lack of reliable data or the complexity of the structure of a new type, 
in particular structured finance instruments, raises serious questions as to whether the 
credit  rating  agency  can  produce  a  credible  credit  rating,  the  credit  rating  agency 
should refrain from issuing a credit rating or withdraw an existing credit rating.  

(15) 

In order to ensure the quality of ratings, a credit rating agency should take measures to 
ensure that the information it use in assigning a rating is reliable. For this purpose, a 
credit  rating  agency  may  envisage,  among  other  elements  reliance  on  independently 

28 

OJ L 52, 25.2.2005, p. 51. 

EN 

13 

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audited  financial  statements  and  public  disclosures;  verification  by  reputable  third 
party  services;  random  sampling  examination  by  the  credit  rating  agency  of  the 
information received; or contractual provisions clearly stipulating liability for the rated 
entity  or  its  related  third  parties,  if  the  information  provided  under  the  contract  is 
knowingly  materially  false  or  misleading  or  if  the  rated  entity  or  its  related  third 
parties  fail  to  conduct  reasonable  due  diligence  regarding  the  accuracy  of  the 
information as specified under the terms of the contract.  

(16) 

It  is  necessary  that  methodologies,  models  and  key  rating  assumptions  used  by  the 
credit rating agency are regularly reviewed in order to be able to properly reflect the 
changing  conditions  in  the  underlying  asset  markets.  With  a  view  to  ensuring 
transparency,  disclosure  of  any  material  modification  to  the  methodologies  and 
practices,  procedures  and  processes  of  credit  rating  agency  should  be  made  prior  to 
their  coming  into  effect,  unless  extreme  market  conditions  require  an  immediate 
change in the credit rating.  

(17)  The  credit  rating  agency  should  indicate  any  appropriate  risk  warning,  including  a 
sensitivity  analysis  of  the  relevant  assumptions.  This  analysis  should  explain  how 
various  market  developments  that  move  the  parameters  built  into  the  model  may 
influence  the  credit  rating  changes  (e.g.  volatility).  The  credit  rating  agency  should 
ensure  that  the  information  on  historical  default  rates  of  its  rating  categories  is 
verifiable  and  quantifiable  and  provides  a  sufficient  basis  for  interested  parties  to 
understand  the  historical  performance  of  each  rating  category  and  if  and  how  rating 
categories  have  changed.  If  the  nature  of  the  credit  rating  or  other  circumstances 
makes a historical default rate inappropriate, statistically invalid, or otherwise likely to 
mislead  the  users  of  the  rating,  the  credit  rating  agency  should  provide  appropriate 
clarifications. This information should, to the extent possible, be comparable with any 
existing  industry  patterns  in  order  to  assist  investors  in  drawing  performance 
comparisons between different credit rating agencies.  

(18)  Under  certain  circumstances  structured  finance  instruments  may  have  effects  which 
are  different  from  traditional  corporate  debt  instruments.  It  could  be  misleading  for 
investors  to  apply  the  same  rating  categories  to  both  types  of  instruments  without 
further  explanation.  Credit  rating  agencies  should  play  an  important  role  in  raising 
awareness  of  the  users  of  ratings  about  the  specificities  of  the  structured  finance 
products in relation to traditional ones. Therefore credit rating agencies should either 
use  different  rating  categories  when  rating  structured  finance  instruments  or  provide 
additional information on the different risk characteristics of these products. 

(19)  Credit rating agencies should take measures to avoid situations where issuers request 
the preliminary rating assessment of the structured finance instrument concerned from 
a number of credit rating agencies in order to identify the one offering the best credit 
rating for the proposed structure. Issuers should also avoid applying such practices.  

(20)  A  credit  rating  agency  should  keep  records  of  the  methodology  of  ratings  and 
regularly update changes thereto and also keep a record of the substantial elements of 
the dialogue between the analyst and the rated entity or its related third parties.  

(21) 

In  order  to  ensure  a  high  level  of  investor  and  consumer  confidence  in  the  internal 
market, credit rating agencies which issue credit ratings intended for use for regulatory 
purposes by financial institutions in the Community should be subject to registration. 

EN 

14 

   EN 

 
It is therefore necessary to lay down the conditions and the procedure for the granting, 
suspension and withdrawal of that registration.  

(22)  A credit rating agency registered by the competent authority of the relevant Member 
State  should  be  allowed  to  issue  credit  ratings  throughout  the  Community.  It  is 
therefore  necessary  to  establish  a  single  registration  for  each  credit  rating  agency 
which is valid throughout the Community. 

(23)  Some credit rating agencies are composed of several legal entities which together form 
a group of credit rating agencies. When registering each of the credit rating agencies 
being part of such a group, the competent authorities of the Member States concerned 
should  coordinate  the  assessment  of  the  applications  submitted  by  credit  rating 
agencies belonging to the same group.  

(24) 

It  is  necessary  to  establish  a  single  point  for  submission  of  applications  for 
registration. CESR should receive applications for registration and effectively inform 
competent  authorities  in  all  Member  States.  Nevertheless,  the  examination  of 
applications  for  registration  should  be  carried  out  at  national  level  by  the  relevant 
competent authority. In order to efficiently deal with credit rating agencies competent 
authorities  within  CESR  should  set  up  an  operational  network  supported  by  an 
efficient 
infrastructure  and  establish  a  subcommittee 
specialised  in  the  field  of  credit  ratings  of  each  of  the  asset  classes  rated  by  credit 
rating agencies. 

information 

technology 

(25)  The Commission has in November 2008 set up a high level group which will look into 
the  future  European  supervisory  architecture  in  the  field  of  financial  services, 
including the role of CESR. 

(26)  The  supervision  of  a  credit  rating  agency  should  be  carried  out  by  the  competent 
authority of the home Member State, and, in case of a group of credit rating agencies, 
in  cooperation  with  the  competent  authorities  of  the  other  Member  States  concerned 
and under coordination of CESR. 

(27) 

(28) 

In order to maintain a high level of investor and consumer confidence and enable an 
on-going  control  of  credit  ratings  used  by  financial  institutions  in  the  Community, 
credit rating agencies whose headquarters are located outside the Community should 
be required to set up a subsidiary in the Community in order to allow for an efficient 
supervision of their activities in the Community.  

It  is  appropriate  to  create  a  mechanism  to  ensure  the  effective  enforcement  of  the 
provisions of this Regulation. The competent authorities of the Member States should 
have  at  their  disposal  necessary  means  to  ensure  that  ratings  for  use  within  the 
Community  are  issued  in  compliance  with  this  Regulation.  Since  the  analytical 
independence  of  a  credit  rating  agency  in  the  process  of  issuing  its  credit  ratings 
should  be  preserved,  the  competent  authorities  should  not  interfere  in  relation  to  the 
substance  of  credit  ratings  and  the  methodologies  by  which  a  credit  rating  agency 
determines credit ratings. 

(29)  For  the  efficiency  of  supervision  and  in  order  to  avoid  duplication  of  tasks  the 

competent authorities of Member States should cooperate.  

EN 

15 

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(30) 

In case the competent authority of the home Member State does not take the necessary 
measures  in  order  to  eliminate  irregularities  committed  by  a  credit  rating  agency, 
competent  authorities  of  other  Member  States  should  be  able  to  intervene  and  take 
appropriate measures.  

(31) 

It is necessary to enhance convergence of the powers at the disposal of the competent 
authorities  in  order  to  achieve  an  equivalent  intensity  of  enforcement  across  the 
internal market. 

(32)  CESR should ensure coherence in the application of this Regulation. It should enhance 
and  facilitate  the  cooperation  of  competent  authorities  in  supervisory  activities  and 
assume a coordination role in day-to-day supervisory practice. Therefore CESR should 
establish  a  mediation  mechanism  in  order  to  facilitate  a  coherent  approach  by  the 
competent authorities.  

(33)  Member States should lay down rules on sanctions applicable to infringements of the 
provisions  of  this  Regulation  and  ensure  that  they  are  implemented.  The  sanctions 
should be effective, proportionate and dissuasive. 

(34)  Any  exchange  or  transmission  of  information  between  competent  authorities,  other 
authorities,  bodies  or  persons  should  be  in  accordance  with  the  rules  on  transfer  of 
personal data as laid down in Directive 95/46/EC of the European Parliament and of 
the  Council  of  24  October  1995  on  the  protection  of  individuals  with  regard  to  the 
processing of personal data and on the free movement of such data29. 

(35)  The  stricter  and  clearer  legal  framework  within  which  credit  rating  agencies  will 
operate  should  also  facilitate  recourse  to  civil  actions  in  respect  of  credit  rating 
agencies in appropriate cases, in accordance with the applicable regimes of liability of 
the Member States. 

(36)  The measures necessary for the implementation of this Regulation should be adopted 
in accordance with Council Decision 1999/468/EC of 28 June 1999 laying down the 
procedures for the exercise of implementing powers conferred on the Commission30. 

(37) 

In  particular  the  Commission  should  be  empowered  to  amend  Annex  I  and  II  of  the 
Regulation  which  lay  down  the  specific  criteria  for  assessing  the  compliance  of  a 
credit  rating  agency  with  its  duties  in  terms  of  internal  organisation,  operational 
arrangements, rules on employees, presentation of credit ratings and disclosure. Since 
those measures are of general scope and are designed to amend non-essential elements 
of this Regulation, they must be adopted in accordance with the regulatory procedure 
with scrutiny provided for in Article 5a of Decision 1999/468/EC. 

(38)  Since  the  objectives  of  the  action  to  be  taken,  namely  to  ensure  a  high  level  of 
consumer and investor protection by laying down a common framework with regard to 
the quality of credit ratings to be used by financial institutions operating in the internal 
market cannot be sufficiently achieved by the Member States, given the current lack of 
national  legislation  and  the  fact  that  a  majority  of  existing  credit  rating  agencies  are 
established  outside  the  Community,  and  can  therefore,  be  better  achieved  at 

29 
30 

OJ L 281, 23.11.1995, p. 31. 
OJ L184, 17.7.1999, p. 23. 

EN 

16 

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Community  level,  the  Community  may  adopt  measures,  in  accordance  with  the 
principle  of subsidiarity  as  set out  in Article 5 of the Treaty.  In accordance with the 
principle  of  proportionality,  as  set  out  in  that  Article,  this  Regulation  does  not  go 
beyond what is necessary in order to achieve those objectives,  

EN 

17 

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HAVE ADOPTED THIS REGULATION: 

TITLE I 
SUBJECT MATTER, SCOPE AND DEFINITIONS 

Article 1 

Subject matter 

This Regulation introduces a common approach to ensuring the high quality of credit ratings 
to be used in the Community, thereby contributing to the smooth functioning of the internal 
market  while  achieving  a  high  level  of  consumer  and  investor  protection.  It  lays  down 
conditions for the issuance of credit ratings and rules on the organisation and conduct of credit 
rating agencies to ensure in practice their independence and avoidance of conflicts of interest. 

Article 2 

Scope 

1. 

This Regulation shall apply to credit ratings that are intended for use for regulatory 
purposes  or  otherwise  by  credit  institutions  as  defined  in  Directive  2006/48/EC, 
investments  firms  as  defined  in  Directive  2004/39/EC  of  the  European  Parliament 
and  of  the  Council31,  insurance  undertakings  subject  to  Council  Directive 
73/239/EEC32,  assurance  undertakings  as  defined  in  Directive  2002/83/EC  of  the 
European  Parliament  and  of  the  Council33,  reinsurance  undertakings  as  defined  in 
Directive  2005/68/EC  of  the  European  Parliament  and  the  Council34,  undertakings 
for  collective  investment  in  transferable  securities  (UCITS)  as  defined  in  Directive 
[2009/XX/EC35]  or  institutions  for  occupational  retirement  provision  as  defined  in 
Directive  2003/41/EC  of  the  European  Parliament  and  of  the  Council36  and  are 
disclosed publicly or distributed by subscription.  

2. 

This Regulation shall not apply to private credit ratings. It shall not apply to credit 
ratings  issued  by  public  bodies  whose  credit  ratings  are  not  publicly  disclosed  and 
are not paid by the rated entity. 

31 
32 
33 
34 
35 
36 

OJ L 145, 30.4.2004, p.1. 
OJ L 228, 16.8.1973, p. 3. 
OJ L 345, 19.12.2002, p. 1. 
OJ L 323, 9.12.2005, p. 1. 
[ 
Recast] 
OJ L 235, 23.9.2003, p. 10. 

EN 

18 

   EN 

 
                                                 
Article 3  

Definitions 

1. 

For the purpose of this Regulation, the following definitions shall apply: 

a) 

b) 

c) 

d) 

e) 

f) 

g) 

h) 

i) 

j) 

k) 

"credit rating" means an opinion regarding the creditworthiness of an entity, a 
credit commitment, a debt or debt-like financial instrument or an issuer of such 
obligations,  issued  using  an  established  and  defined  ranking  system  of  rating 
categories;  

"credit  rating  agency"  means  a  legal  person  whose  regular  and  principal 
occupation is the issuance of credit ratings;  

"home  Member  State  "  means  a  Member  State  in  which  the  credit  rating 
agency has its registered office; 

"analyst" means a person who performs analytical functions that are necessary 
for the issuance of a credit rating;  

"rated  entity"  means  a  legal  person  whose  creditworthiness  is  explicitly  or 
implicitly rated in the credit rating, whether it has solicited that credit rating or 
not or provided information for that credit rating; 

"rating  category"  means  a  rating  symbol  used  for  identifying  different  credit 
ratings for each class of credit ratings in order to distinguish the different risk 
characteristics  of  the  different  types  of  rated  entities,  issuers  and  financial 
instruments;  

"related  third  party"  means  the  originator,  arranger,  sponsor,  servicer  or  any 
other party that interacts with a credit rating agency on behalf of a rated entity, 
including any person directly or indirectly linked to it by control; 

"control"  means  the  relationship  between  a  parent  undertaking  and  a 
subsidiary,  as  set  out  in  Article  1  of  Council  Directive  83/349/EEC37,  or  a 
similar relationship between any natural or legal person and an undertaking;  

"financial instruments" means the instruments listed in Section C of Annex I to 
Directive 2004/39/EC; 

"structured  finance  instrument"  means  an  instrument  resulting  from  a 
securitisation  transaction  or  scheme  referred  to  in  Article  4(36)  of  Directive 
2006/48/EC; 

"group of credit rating agencies" means a group of undertakings consisting of a 
parent undertaking and its subsidiaries within the meaning of Article 1 and 2 of 
Directive  83/349/EEC38,  as  well  as  undertakings  linked  to  each  other  by  a 

37 
38 

OJ L 193, 18.7.1983, p. 1. 
OJ L 193, 18.7.1983, p. 1.  

EN 

19 

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relationship within the meaning of Article 12(1) of Directive 83/349/EEC and 
whose regular and principal occupation is the issuance of credit ratings. 

2. 

For  the  purposes  of  point  (a)  of  paragraph  1,  credit  ratings  shall  not  be  considered 
recommendations  within  the  meaning  of  Article  1(3)  of  Commission  Directive 
2003/125/EC39. 

Article 4 

Use of credit ratings 

Credit  institutions,  investments  firms,  insurance,  assurance  and  reinsurance  undertakings, 
undertakings for collective investment in transferable securities (UCITS) and institutions for 
occupational  retirement  provision  referred  to  in  Article  2  may  only  use  for  regulatory 
purposes  credit  ratings  which  are  issued  by  credit  rating  agencies  established  in  the 
Community and registered in accordance with this Regulation. 

Investment firms and credit institutions referred to in Art. 1 of Directive 2004/39/EC should 
not execute orders on behalf of their clients with respect to financial instruments which have 
been  rated,  unless  the  credit  rating  has  been  issued  by  a  credit  rating  agency  registered  in 
accordance with this Regulation. 

TITLE II 

ISSUING OF CREDIT RATINGS 

Article 5 

1. 

2. 

1. 

2. 

Independence and avoidance of conflicts of interest 

A credit rating agency shall ensure that the issuance of a credit rating is not affected 
by any existing or potential conflict of interest or business relationship involving the 
credit rating agency issuing the credit rating, its managers, employees or any person 
directly or indirectly linked to it by control.  

In  order  to  ensure  compliance  with  paragraph  1,  the  credit  rating  agency  shall 
comply with the requirements set out in Sections A and B of Annex I.  

Article 6 

Employees 

A  credit  rating  agency  shall  ensure  that  employees  directly  involved  in  the  credit 
rating process have appropriate knowledge and experience for the duties assigned. 

A credit rating agency shall ensure that employees who are directly involved in the 
credit  rating  process  shall  not  be  allowed  to  initiate  or  participate  in  negotiations 

39 

OJ L 339, 24.12.2003, p. 73. 

EN 

20 

   EN 

 
                                                 
3. 

4. 

5. 

6. 

1. 

2. 

3. 

regarding  fees  or  payments  with  any  rated  entity,  related  third  party  or  any  person 
directly or indirectly linked to the rated entity by control.  

A credit rating agency shall ensure that employees who are directly involved in the 
credit rating process meet the requirements set out in Section C of Annex I. 

A credit rating agency shall ensure that analysts and persons approving credit ratings 
shall not be involved in providing the credit rating services to the same rated entity or 
its  related  third  parties  for  a  period  exceeding  four  years.  For  that  purpose  it  shall 
establish a rotation mechanism with regard to those analysts and persons. 

The  period  after  which  the  analysts  and  persons  approving  credit  ratings  may  be 
involved  in  providing  the  credit  rating  services  to  the  rated  entity  or  related  third 
parties referred to in the first subparagraph may not be shorter than two years.  

Paragraph  4  shall  not  apply  to  a  credit  rating  agency  which  employs  less  than  50 
employees  and  takes  measures  to  ensure  the  objectivity  of  analysts  in  the  relations 
with the rated entity or related third parties. 

Compensation  and  performance  evaluation  of  analysts  and  persons  approving  the 
credit ratings shall not be contingent on the amount of revenue that the credit rating 
agency derives from the rated entities or related third parties to which the analyst or 
persons approving the credit ratings provide services. 

Article 7 

Rating methodologies 

A credit rating agency shall disclose to the public the methodologies, models and key 
rating assumptions it uses in the rating process.  

A  credit  rating  agency  shall  ensure  that  the  credit  ratings  it  produces  and 
disseminates  are  based  on  an  analysis  of  all  information  available  to  it  that  is  of 
relevance according to its rating methodologies. It shall adopt all necessary measures 
so that the information it uses in assigning a credit rating is of sufficient quality and 
from reliable sources.  

Where a credit rating agency is using an existing credit rating or ratings prepared by 
another  credit  rating  agency  with  respect  to  underlying  assets  or  structured  finance 
instruments,  it  shall  not  refuse  to  issue  a  credit  rating  of  an  entity  or  a  financial 
instrument  because  a  portion  of  the  entity  or  the  financial  instrument  had  been 
previously rated by another credit rating agency. 

A credit rating agency shall record all instances where in its credit rating process it 
downgrades  existing  credit  ratings  prepared  by  another  credit  rating  agency  with 
respect  to  underlying  assets  or  structured  finance  instruments  providing  a 
justification for the downgrade. 

4. 

A credit rating agency shall monitor credit ratings and review its credit ratings where 
necessary. A credit rating agency shall establish internal arrangements to monitor the 
impact of changes in macroeconomic or financial market conditions on credit ratings.  

EN 

21 

   EN 

 
5. 

When rating methodologies, models or key rating assumptions are changed a credit 
rating agency shall: 

a) 

b) 

c) 

immediately,  using  the  same  means  of  communication  as  was  used  for  the 
distributions  of  the  affected  credit  ratings,  disclose  the  likely  scope  of  credit 
ratings to be affected; 

review the affected credit ratings as soon as possible and not later than within 6 
months  after  the  change,  and  in  the  meantime  place  those  ratings  under 
observation; 

re-rate all credit ratings that have been based on those methodologies, models 
or assumptions. 

1. 

2. 

3. 

4. 

5. 

Article 8 

Disclosure and presentation of credit ratings 

A  credit  rating  agency  shall  disclose  any  credit  rating,  as  well  as  any  decisions  to 
discontinue a credit rating on a non-selective basis and in a timely manner.  

The  first  subparagraph  shall  not  apply  to  credit  ratings  that  are  distributed  by 
subscription. 

Credit  ratings  shall  be  presented  in  accordance  with  the  requirements  set  out  in 
Section D of Annex I. 

When a credit rating agency issues a rating for structured finance instruments it shall 
ensure either of the following: 

a) 

b) 

credit rating categories that may be attributed to structured finance instruments 
are clearly differentiated from rating categories that may be used to rate other 
types of rated entities or financial instruments; 

publish a report that provides a detailed description of the rating methodology 
used to determine the credit rating and an explanation of how it differs from the 
determination  of  ratings  for  any  other  type  of  rated  entity  or  financial 
instrument, and how the credit risk characteristics associated with a structured 
finance instrument differ from the risks related to any other type of rated entity 
or financial instrument. 

A credit rating agency shall disclose its policies and procedures regarding unsolicited 
credit ratings. 

When  a  credit  rating  agency  issues  an  unsolicited  credit  rating  it  shall  state  in  the 
credit rating that the rated entity or related third party did not participate in the credit 
rating process and that the credit rating agency did not have access to the accounts 
and other relevant internal documents of the rated entity or its related third party.  

Unsolicited credit ratings shall be identified with a different credit rating category. 

EN 

22 

   EN 

 
Article 9 

General and periodic disclosures 

1. 

2. 

3. 

A credit rating agency shall fully and publicly disclose and update immediately the 
information on matters set out in Annex I, Section E, Part I. 

Credit  rating  agencies  shall  make  available  in  a  central  repository  established  by 
CESR  information  on  their  historical  performance  data  and  information  about  past 
credit rating activities. The repository shall be open to the public.  

A  credit  rating  agency  shall  make  available  annually  to  the  competent  authority  of 
the  home  Member  State  the  information  on  matters  set  out  in  Annex  I,  Section  E, 
Part II, point 2. Competent authorities of home Member States shall not disclose that 
information. 

Article 10 

Transparency report 

A  credit  rating  agency  shall  publish  annually  a  transparency  report  which  includes  the 
information on matters set out in Annex I, Section E, Part III. The credit rating agency shall 
publish  its  annual  report  at  the  latest  three  months  after  the  end  of  each  financial  year  and 
shall ensure that it remains available on the website of the agency for at least five years. 

Article 11 

Public disclosure fees 

A credit rating agency may not charge a fee for the information provided in accordance with 
Articles 7 to 10. 

TITLE III 
SURVEILLANCE OF CREDIT RATING ACTIVITY 

CHAPTER I 
PROCEDURE FOR REGISTRATION 

Article 12 

Requirement for registration 

1. 

A  credit  rating  agency  may  apply  for  registration  in  order  to  ensure  that  its  credit 
ratings can be used for regulatory purposes by credit institutions, investments firms, 
insurance,  assurance  and  reinsurance  undertakings,  undertakings  for  collective 
investment  in  transferable  securities  (UCITS)  and  institutions  for  occupational 
retirement  provision  referred  to  in  Article  2  provided  that  it  is  a  legal  person 
established in the Community.  

EN 

23 

   EN 

 
2. 

3. 

4. 

5. 

1. 

2. 

3. 

The  registration  shall  be  valid  for  the  entire  territory  of  the  Community,  after 
publication in the Official Journal of the European Union in accordance with Article 
15(3). 

A  registered  credit  rating  agency  shall  comply  at  all  times  with  the  conditions  for 
initial registration.  

Credit rating agencies shall notify the competent authority of the home Member State 
of any material changes to the conditions for initial registration.  

The  competent  authority  of  the  home  Member  State  shall  register  the  credit  rating 
agency if it complies with the conditions for the issuance of credit ratings set out in 
this Regulation. 

Competent  authorities  may  not  impose  additional  requirements  on  the  registration 
which are not provided for in this Regulation. 

Article 13 

Application for registration  

The  credit  rating  agency  shall  submit  an  application  for  registration  to  CESR.  The 
application shall contain information on the matters set out in Annex II.  

An application for registration may be submitted by a group of credit rating agencies. 
In that case the members of the group shall mandate one of the members of the group 
to submit the application to CESR on behalf of the group. The mandated credit rating 
agency  shall  provide  the  information  on  the  matters  set  out  in  Annex  II  for  each 
member of the group. 

Within 10 days of receipt of the application, CESR shall transmit the application to 
the  competent  authority  of  the  home  Member  State  and  inform  the  competent 
authorities of the other Member States of that transmission. 

Article 14 

Examination of the application by the competent authorities 

1. 

Within 10 days of receipt of the application for registration, the competent authority 
of the home Member State shall check whether the application is complete. 

In case the application is not complete, the competent authority of the home Member 
State shall set a deadline by which the credit rating agency shall provide additional 
information.  

2. 

Upon receipt of a complete application, the competent authority of the home Member 
State shall transmit the application to the competent authorities of the other Member 
States and CESR.  

EN 

24 

   EN 

 
3. 

4. 

5. 

1. 

2. 

In  case  an  application  for  registration  is  submitted  by  a  group  of  credit  rating 
agencies  the  competent  authorities  of  the  home  Member  States  concerned  shall 
closely co-operate in the registration process. They shall select among themselves a 
facilitator taking into account the following criteria:  

(a) 

the place where the group of credit rating agencies carries out or is planning to 
carry  out  the  most  important  part  of  its  credit  rating  activity  within  the 
Community;  

(b) 

the  place  where  the  group  of  credit  rating  agencies  generates  or  can  be 
expected to generate the major part of the revenue of the group. 

The  facilitator  shall  coordinate  the  examination  of  the  application  submitted  by  the 
group of credit rating agencies and ensure that all information necessary to carry out 
the examination of the application is shared among the competent authorities.  

In  case  of  an  application  for  registration  by  a  credit  rating  agency  the  competent 
authority  of  the  home  Member  State  shall  examine  the  application  and  prepare  an 
opinion on whether to grant or refuse registration. 

In  the  case  of  an  application  submitted  by  a  group  of  credit  rating  agencies,  the 
competent  authorities  of  the  home  Member  States  concerned  shall  jointly  examine 
the application  for registration and  shall reach agreement on whether to grant or to 
refuse registration. 

Article 15 

Decision on the registration of a credit rating agency 

Within  40  days  of  receipt  of  the  complete  application  and  before  registration,  the 
competent  authority  of  the  home  Member  State  shall  communicate  to  CESR  a 
motivated  draft  registration  decision  or  draft  refusal  decision.  In  case  of  an 
application  submitted  by  a  group  of  credit  rating  agencies  the  facilitator  shall 
communicate the outcome of the joint assessment to CESR.  

Within  15  days  of  receipt  of  that  communication,  CESR  shall  express  its  views  on 
the  application.  CESR  may  request  the  competent  authority  of  the  home  Member 
State concerned to re-examine the draft registration decision in case it considers that 
the conditions necessary for the registration as set out in Title II are not met or to re-
examine  its  draft  refusal  decision  in  case  it  considers  that  the  conditions  necessary 
for the registration as set out in this Regulation are met.  

The competent authority of the home Member State shall adopt its decision within 15 
days  after  receipt  of  the  opinion  of  CESR.  In  case  the  competent  authority  of  the 
home Member State departs from the opinion of CESR it shall motivate its decision. 
In case no opinion is submitted, the competent authority of the home Member State 
shall adopt its decision within 30 days after the draft registration decision, as referred 
to in paragraph 1, has been communicated to CESR. Where a group of credit rating 
agencies is concerned the competent authority of each home Member State shall take 
its decision on the basis of the outcome of the joint assessment referred to in Article 
14(5).  

EN 

25 

   EN 

 
Within  10  days  following  the  adoption  or  refusal  of  the  registration  decision  the 
credit  rating  agencies  concerned  shall  be  informed,  whether  or  not  they  have  been 
registered.  Where  the  competent  authority  of  the  home  Member  State  refuses  to 
register the credit rating agency, it shall give reasons in the decision for its refusal to 
the credit rating agency concerned.  

3. 

The  competent  authority  of  the  home  Member  State  shall  notify  the  European 
Commission,  CESR  and  the  other  competent  authorities  of  the  registration  it  has 
carried out. 

The  European  Commission  shall  publish  in  the  Official  Journal  of  the  European 
Union  an  updated  list  of  credit  rating  agencies  registered  in  accordance  with  this 
Regulation within 30 days of the notification by the competent authority of the home 
Member State. 

Article 16 

Registration fee 

The competent authority of the home Member State may charge a registration fee to the credit 
rating agency. The registration fee shall be proportionate to the cost of the procedures in that 
Member State.  

Article 17 

Withdrawal of registration 

1. 

The  competent authority of the home Member State shall withdraw the registration 
of a credit rating agency where the credit rating agency: 

a) 

b) 

c) 

d) 

expressly  renounces  the  registration  or  has  provided  no  credit  ratings  for  the 
preceding six months; 

has  obtained  the  registration  by  making  false  statements  or  by  any  other 
irregular means; 

no longer meets the conditions under which it was registered; 

has  infringed  the  provisions  of  this  Regulation  governing  the  operating 
conditions for credit rating agencies. 

2. 

3. 

The  competent  authorities  of  the  home  Member  State  of  the  credit  rating  agencies 
belonging to a group shall closely cooperate with each other. They shall carry out a 
joint assessment coordinated by the facilitator. They shall reach an agreement on the 
necessity  to  withdraw  the  registration.  The  competent  authority  of  each  home 
Member State shall take its decision on the basis of the agreement.  

CESR  or  a  competent  authority  from  another  Member  State,  in  which  the  credit 
ratings  issued  by  the  credit  rating  agency  concerned  are  used,  may  request  the 
competent  authority  of  the  home  Member  State  to  examine  whether  the  conditions 

EN 

26 

   EN 

 
for withdrawal of registration are met. In case the competent authority of the home 
Member  State  decides  not  to  withdraw  the  registration  of  the  credit  rating  agency 
concerned, it shall motivate its decision. 

4. 

The  competent  authority  of  the  home  Member  State  shall  notify  the  European 
Commission,  CESR  and  the  other  competent  authorities  of  the  withdrawal  of  the 
registration, which shall take immediate effect throughout the Community.  

The  European  Commission  shall  publish  in  the  Official  Journal  of  the  European 
Union  an  updated  list  of  credit  rating  agencies  the  registration  of  which  has  been 
withdrawn within 30 days of the notification by the competent authority of the home 
Member State. 

CHAPTER II 
CESR AND COMPETENT AUTHORITIES 

Article 18 

Committee of European Securities Regulators 

1. 

2. 

3. 

4. 

CESR shall provide advice to the competent authorities, in the cases provided for in 
this  Regulation.  The  competent  authorities  shall  consider  that  advice  before  taking 
any final decision under this Regulation. 

By  [within  one  year  after  entry  into  force  of  this  Regulation]  CESR  shall  issue 
guidance on: 

(a) 

the  registration  process  and  coordination  arrangements  between  competent 
authorities and with CESR; 

(b) 

enforcement practices and activities by competent authorities; 

(c) 

common  standards  on  the  presentation  of  the  information  that  credit  rating 
agencies shall disclose in accordance with Article 9(2) and Annex I, Section E, 
Part II, Point 1. 

CESR shall publish by [within one year after entry into force of this Regulation] and 
every year thereafter a report on the application of this Regulation. 

CESR shall cooperate, where appropriate, with the Committee of European Banking 
Supervisors established by Commission Decision 2004/5/EC 40 and the Committee of 
European  Insurance  and  Occupational  Pensions  Supervisors  established  by 
Commission Decision 2004/6/EC 41.  

40 
41 

OJ L 3, 7.1.2004, p. 28. 
OJ L 3, 7.1.2004, p. 30. 

EN 

27 

   EN 

 
                                                 
Article 19 

Competent authorities 

1. 

2 

1. 

2. 

Each  Member  State  shall  designate  a  competent  authority  for  the  purpose  of  this 
Regulation.  

Competent  authorities  shall  be  adequately  staffed  in  order  to  be  able  to  apply  this 
Regulation.  

Article 20 

Powers of competent authorities 

In  carrying  out  their  duties  under  this  Regulation  competent  authorities  of  Member 
States shall not interfere with the content of credit ratings. 

In order to fulfil their duties competent authorities shall have all the supervisory and 
investigatory powers that are necessary for the exercise of their functions. They shall 
exercise their powers: 

(a) 

directly; 

(b) 

in collaboration with other authorities; or 

(c) 

by application to the competent judicial authorities. 

3. 

The competent authorities of Member States shall have the following powers: 

(a) 

have access to any document in any form and to receive or take a copy thereof; 

(b)  demand information from any person and if necessary to summon and question 

a person with a view to obtaining information; 

(c) 

carry out on-site inspections with or without announcement; 

(d) 

require records of telephone and data traffic. 

Article 21 

Supervisory measures 

1. 

The  competent  authority  of  the  home  Member  State  may  take  the  following 
measures: 

(a)  withdraw the registration in accordance with Article 17;  

(b) 

impose  temporary  prohibition  of  issuing  credit  ratings  with  effect  throughout 
the Community; 

EN 

28 

   EN 

 
(c) 

(d) 

(e) 

impose  suspension  of  the  use  of  credit  ratings  with  effect  throughout  the 
Community; 

adopt  appropriate  measures  to  ensure  that  credit  rating  agencies  continue  to 
comply with legal requirements; 

issue  public  notices  when  a  credit  rating  agency  breaches  the  obligations  set 
out in this Regulation;  

(f) 

refer matters for criminal prosecution to the competent jurisdictions. 

2. 

Competent authorities shall not make use of the powers provided for in paragraph 1 
and  Article  22  before  communicating  a  motivated  draft  decision  to  CESR.  CESR 
shall  express  its  views  on  the  draft  decision  within  15  days  of  receipt  of  that 
communication.  

The first subparagraph shall not apply in cases of urgency, notably in the presence of 
a situation threatening the orderly functioning of financial markets. In this case, the 
competent authority shall immediately inform CESR of the decision taken. 

Article 22 

Action by competent authorities other than the competent authority of the home 
Member State  

Where the competent authority of a Member State has grounds for believing that a registered 
credit rating agency acting within its territory is in breach of the obligations arising from this 
Regulation, it shall inform the competent authority of the home Member State. 

If, after discussions between the competent authorities concerned, the competent authority of 
the home Member State refuses to act or is unable to adopt effective measures or if, despite 
the  measures  taken  by  the  competent  authority  of  the  home  Member  State  such  measures 
prove inadequate to protect the interests of the investors of the Member State concerned or the 
orderly functioning of markets, the competent authority of that Member State, after informing 
the competent authority of the home Member State may take all appropriate measures except 
for the measures referred to in point (a), (b) and (c) of Article 21(1). CESR shall be consulted 
before the adoption of such measures. 

CHAPTER III 
COOPERATION BETWEEN COMPETENT AUTHORITIES  

Article 23 

Obligation to cooperate 

Competent authorities of Member States shall cooperate where it is necessary for the purposes 
of  this  Regulation,  including  in  cases  where  the  conduct  under  investigation  does  not 
constitute an infringement of any regulation in force in the Member State concerned.  

EN 

29 

   EN 

 
1. 

2. 

1. 

2. 

3. 

Article 24 

Cooperation in case of request for on-site inspections or investigations 

The  competent  authority  of  one  Member  State  may  request  assistance  of  the 
competent  authority  of  another  Member  State  with  regard  to  on-site  inspections  or 
investigations.  

The  competent  authority  shall  inform  CESR  of  any  request  referred  to  in  the  first 
subparagraph.  In  case  of  an  investigation  or  inspection  with  cross-border  effect, 
CESR may assume coordination of the investigation or inspection.  

Where  a  competent  authority  receives  a  request  from  a  competent  authority  of 
another Member State to carry out an on-site inspection or an investigation, it shall 
do any of the following: 

a) 

b) 

c) 

carry out the on-site inspection or investigation itself; 

allow the competent authority which submitted the request to participate in an 
on-site inspection or investigation; 

allow the competent authority which submitted the request to carry out the on-
site inspection or investigation itself; 

d) 

appoint auditors or experts to carry out the on-site inspection or investigation;  

(e) 

share  specific  tasks  related  to  supervisory  activities  with  the  other  competent 
authorities.  

Cooperation of competent authorities in case of a group of credit rating agencies 

Article 25 

In case of a group of credit rating agencies referred to in Article 14(3) the competent 
authorities  of  the  home  Member  States  concerned  shall  consult  each  other  before 
taking measures in accordance with this Regulation. 

The facilitator referred to in Article 14(3) shall plan and coordinate the actions of the 
competent authorities of the home Member States concerned.  

The  facilitator  and  the  competent  authorities  of  the  Member  States  concerned  shall 
establish coordination arrangements regarding the following matters:  

a) 

the information to be exchanged between competent authorities; 

b) 

cases in which competent authorities have to consult each other; 

c) 

cases in which competent authorities delegate supervisory tasks in accordance 
with Article 24. 

EN 

30 

   EN 

 
Article 26 

Delegation of tasks between competent authorities 

The  competent  authority  of  the  home  Member  State  may  delegate  any  of  its  tasks  to  the 
competent  authority  of  another  Member  State  subject  to  the  agreement  of  that  authority. 
Delegation  of  tasks  is  not  intended  to  affect  the  responsibility  of  the  designated  competent 
authority.  

Article 27 

Mediation 

1. 

2. 

1. 

2. 

CESR  shall  establish  a  mediation  mechanism  to  assist  in  finding  a  common  view 
among competent authorities concerned. 

In  case  of  disagreement  between  competent  authorities  of  Member  States  on  an 
assessment  or  action  under  this  Regulation,  competent  authorities  shall  refer  the 
matter to CESR for mediation. The competent authorities shall take into account the 
opinion of CESR.  

Article 28 

Professional secrecy 

The  obligation  of  professional  secrecy  shall  apply  to  all  persons  who  work  or  who 
have worked for the competent authority or for any authority or person to whom the 
competent authority has delegated tasks, including auditors and experts contracted by 
the  competent  authority.  Information  covered  by  professional  secrecy  may  not  be 
disclosed to any other person or authority except when such disclosure is necessary 
for legal proceedings. 

All the information exchanged between competent authorities under this Regulation 
shall  be  considered  confidential,  except  when  the  competent  authority  states  at  the 
time  of  communication  that  such  information  may  be  disclosed  or  when  such 
disclosure is necessary for legal proceedings. 

CHAPTER IV 
COOPERATION WITH THIRD COUNTRIES 

Article 29 

Agreement on exchange of information 

The competent authorities may conclude cooperation agreements on exchange of information 
with the competent authorities of third countries only if the information disclosed is subject to 
guarantees of professional secrecy which are at least equivalent to those set out in Article 28. 
Such  exchange  of  information  must  be  intended  for  the  performance  of  the  tasks  of  those 
competent authorities. 

EN 

31 

   EN 

 
With  regard  to  transfer  of  personal  data  to  a  third  country,  Member  States  shall  apply 
Directive 95/46/EC. 

Article 30 

Disclosure of information 

The competent authority of a Member State may only disclose the information received from 
a  competent  authority  of  another  Member  State  or  from  competent  authorities  of  third 
countries  if  the  competent  authority  of  the  Member  State  concerned  has  obtained  express 
agreement  of  the  competent  authority  which  have  transmitted  the  information  and,  where 
applicable,  the  information  is  disclosed  solely  for  the  purposes  for  which  that  competent 
authority gave its agreement. 

TITLE IV 
PENALTIES, COMMITTEE PROCEDURE, REPORTING, TRANSITIONAL AND FINAL 
PROVISIONS 

CHAPTER I 
Penalties, committee procedure and reporting  

Article 31 

Penalties 

Member  States  shall  lay  down  the  rules  on  penalties  applicable  to  infringements  of  the 
provisions  of  this  Regulation  and  shall  take  all  measures  necessary  to  ensure  that  they  are 
implemented. Penalties shall, at least, cover cases of gross professional misconduct and lack 
of due diligence. The penalties provided for must be effective, proportionate and dissuasive.  

The Member States shall notify those provisions to the Commission by [six months after the 
entry  into  force  of  this  Regulation]  at  the  latest  and  shall  notify  it  without  delay  of  any 
subsequent amendment affecting them. 

Article 32 

Amendments to Annexes 

The  Commission  may  amend  the  Annexes  in  order  to  take  account  of  developments  on 
financial  markets,  in  particular  in  relation  to  new  financial  instruments  and  with  regard  to 
convergence of supervisory practice.  

Those measures designed to amend non-essential elements of this Regulation shall be adopted 
in accordance with the regulatory procedure with scrutiny referred to in Article 33(2). 

EN 

32 

   EN 

 
Article 33 

Committee procedure 

1. 

2. 

The Commission shall be assisted by the European Securities Committee established 
by Commission Decision 2001/528/EC42. 

Where  reference  is  made  to  this  paragraph,  Article  5a(1)  to  (4)  and  Article  7  of 
Decision  1999/468/EC  shall  apply,  having  regard  to  the  provisions  of  Article  8 
thereof. 

Article 34 

Report 

By [three years after the entry into force of this Regulation] the Commission shall make an 
assessment  of  the  application  of  this  Regulation,  including an assessment of the  reliance  on 
credit ratings in the Community and of the appropriateness of the remuneration of the credit 
rating agency by the rated entity ("issuer-pays model"), and submit a report to the European 
Parliament and the Council of the European Union.  

CHAPTER II 
Transitional and final provisions 

Article 35 

Transitional provision 

Credit rating agencies operating in the Community before [the date of entry into force of this 
Regulation]  shall  adopt  all  necessary  measures  to  comply  with  this  Regulation  and  shall 
submit  an  application  for  registration  by  [six  months  after  the  entry  into  force  of  this 
Regulation]. 

The  credit  rating  agencies  referred  to  in  the  first  subparagraph  shall  cease  to  issue  credit 
ratings if registration is refused. 

Article 36 

Entry into force 

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

It shall apply from [insert exact date; six months after entry into force].  

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OJ L 191, 13.7.2001, p.45. 

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This Regulation shall be binding in its entirety and directly applicable in all Member States. 

Done at Brussels,  

For the European Parliament 
The President 

For the Council 
The President 

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INDEPENDENCE AND AVOIDANCE OF CONFLICTS OF INTEREST 

ANNEX I 

Section A 

Organisational requirements 

1. 

The  credit  rating  agency  shall  have  an  administrative  or  supervisory  board  that  is 
responsible for ensuring: 

a) 

the independence of the rating process; 

b) 

that conflicts of interest are properly identified, managed and disclosed; 

c) 

compliance of the credit rating agency with the remaining requirements of this 
Regulation. 

2. 

A  credit  rating  agency  shall  be  organised  in  a  way  that  ensures  that  the  business 
interest of the company does not impair the independence and accuracy of the rating 
process.  

The  senior  management,  as  defined  in  Article  2(9)  of  Commission  Directive 
2006/73/EC43  of  a  credit  rating  agency  shall  be  of  good  repute  and  sufficiently 
skilled and experienced, and shall ensure the sound and prudent management of the 
credit rating agency. 

The  administrative  or  supervisory  board  of  a  credit  rating  agency  shall  include  at 
least three non-executive members who shall be are independent. The remuneration 
of  the  independent  members  of  administrative  or  supervisory  board  shall  not  be 
linked to the business performance of the credit rating agency and shall be arranged 
so  as  to  ensure  the  independence  of  their  judgement.  The  term  of  office  of  the 
independent members of the administrative or supervisory board shall be for a pre-
agreed  fixed  period  not  exceeding  five  years  and  shall  not  be  renewable.  The 
dismissal  of  independent  members  of  the  administrative  or  supervisory  board  shall 
only take place in case of misconduct or professional underperformance. 

The  majority  of  members  of  the  administrative  or  supervisory  board,  including  all 
independent  members,  shall  have  sufficient  expertise  in  financial  services.  At  least 
one  independent  member  of  this  board  should  have  in-depth  knowledge  and 
experience at a senior level of the structured credit and securitisation markets.  

In  addition  to  the  overall  responsibility  of  the  board,  the  independent  members  of 
administrative  or  supervisory  board  shall  have  the  specific  task  of  monitoring  the 
development  of  the  credit  rating  policy,  the  effectiveness  of  the  internal  quality 
control system of the credit rating agency on the credit rating process to ensure that 
there  are  no  conflicts  of  interest  and  the  compliance  and  governance  processes 
including the efficiency of the review function referred to in point 7 of this Section. 
Opinions of the independent directors issued on these matters shall be  presented to 

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3. 

4. 

5. 

6. 

7. 

8. 

the board periodically and made available to the competent authority, whenever the 
latter requests it. 

A  credit  rating  agency  shall  establish  policies  and  procedures  which  ensure 
compliance with this Regulation.  

A  credit  rating  agency  shall  have  sound  administrative  and  accounting  procedures, 
internal control mechanisms, effective procedures for risk assessment, and effective 
control and safeguard arrangements for information processing systems. 

A credit rating agency shall establish organisational and administrative arrangements 
to identify, prevent and manage conflicts of interest referred to in point 1 of Section 
B. It shall keep a record of all significant threats to its independence and that of its 
employees involved in the credit rating process, as well as the safeguards applied to 
mitigate those threats.  

A  credit  rating  agency  shall  use  appropriate  systems  to  ensure  continuity  and 
regularity in the performance of its credit rating activities.  

A credit rating agency shall establish a review function responsible for periodically 
reviewing the methodologies, models and significant changes to methodologies and 
models it uses, as well as the appropriateness of those methodologies and models for 
the assessment of new financial instruments.  

This review function must be independent of the business lines which are responsible 
for  credit  rating  activities  and  report  to  the  members  of  the  administrative  or 
supervisory board referred to in point 2 of this Section. 

A credit rating agency shall monitor and evaluate the adequacy and effectiveness of 
its systems, internal control mechanisms and arrangements established in accordance 
with this Regulation and take appropriate measures to address any deficiencies.  

Section B 

Operational requirements 

1. 

2. 

3. 

A credit rating agency shall identify and eliminate or, where appropriate, manage and 
disclose any actual or potential conflicts of interest that may influence the analyses 
and  judgments  of  its  analysts  that  participate  in  determining  a  credit  rating  and 
persons approving credit ratings.  

A  credit  rating  agency  shall  publicly  disclose  the  names  of  the  rated  entities  or 
related third parties from which it receives more than 5 % of its annual revenue.  

A  credit  rating  agency  shall  not  issue  a  credit  rating  or  shall  withdraw  an  existing 
credit rating in the following cases: 

(a) 

the  credit  rating  agency,  an  analyst  that  participated  in  determining  a  credit 
rating,  or  person  approving  the  credit  ratings,  directly  or  indirectly  owns 
financial  instruments  of  the  rated  entity  or  any  related  third  party  or  has  any 
other direct or indirect ownership interest in that entity or party; 

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(b) 

(c) 

the credit rating is issued with respect to a rated entity or any related third party 
directly or indirectly linked to the credit rating agency by control; 

an analyst who participated in determining a credit rating, or person approving 
the credit rating is a member of the administrative, management or supervisory 
bodies of the rated entity or any related third party.  

A credit rating agency shall not provide consultancy or advisory services to the rated 
entity  or  any  related  third  party  regarding  the  corporate  or  legal  structure,  assets, 
liabilities or activities of the rated entity or any related third party.  

A  credit  rating  agency  may  provide  services  other  than  issuance  of  credit  ratings, 
hereinafter  "ancillary  services".  A  credit  rating  agency  shall  determine  what  it 
considers as ancillary services. It shall ensure that the provision of ancillary services 
does not present conflicts of interest with its credit rating activity. 

A  credit  rating  agency  shall  ensure  that  analysts  do  not  make  proposals  or 
recommendations,  either  formally  or  informally,  regarding  the  design  of  structured 
finance instruments on which credit rating agency is expected to issue a credit rating. 

A credit rating agency shall design its reporting and communication channels so as to 
ensure  independence  of  analysts  and  persons  approving  the  credit  ratings  from  the 
other  parts  of  the  credit  rating  agency  representing  the  commercial  interests  of  the 
credit rating entity.  

A credit rating agency shall keep records and audit trails of all its activities, including 
records of agreements between the credit rating agency and the rated entity or related 
third  party  and  all  significant  elements  of  the  dialogue  with  the  rated  entity  and  its 
related third parties, as well as records in relation to the obligations set out in Articles 
5, 6 and 7.  

Records  and  audit  trails  referred  to  in  point  7  shall  be  kept  at  the  premises  of  the 
registered  credit  rating  agency  for  at  least  five  years  and  be  made  available  upon 
request to the competent authorities of the Member States concerned.  

Where  the  registration  of  a  credit  rating  agency  is  withdrawn,  the  records  shall  be 
kept for at least three years. 

Records  which  set  out  the  respective  rights  and  obligations  of  the  credit  rating 
agency and the rated entity or its related third parties under an agreement to provide 
services shall be retained for at least the duration of the relationship with that rated 
entity or its related third parties. 

4. 

5. 

6. 

7. 

8. 

9. 

Section C 

Rules on employees 

1. 

Credit  rating  analysts  and  other  employees  directly  involved  in  the  credit  rating 
process,  as  well  as  persons  closely  associated  with  them  as  enumerated  in  Article 

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1(2)(a) to (d) of Commission Directive 2004/72/EC44, shall not buy or sell or engage 
in  any  transaction  in  any  financial  instrument  issued,  guaranteed,  or  otherwise 
supported by any rated entity within the area of primary analytical responsibility of 
the analyst, other than holdings in diversified collective investment schemes. 

2. 

No employee shall participate in or otherwise influence the determination of a credit 
rating of any particular rated entity if this employee or any person closely associated 
with them as enumerated in Article 1(2)(a) to (d) of Directive 2004/72/EC: 

a) 

b) 

c) 

owns financial instruments of the rated entity, other than holdings in diversified 
collective investment schemes; 

owns financial instruments of any entity related to a rated entity, the ownership 
of  which  may  cause  or  may  be  generally  perceived  as  causing  a  conflict  of 
interest, other than holdings in diversified collective investment schemes; 

has  had  a  recent  employment  or  other  business  relationship  or  any  other 
relationship with the rated entity that may cause or may be generally perceived 
as causing a conflict of interest.  

3. 

Credit  rating  agencies  shall  ensure  that  employees  directly  involved  in  the  credit 
rating process: 

a) 

b) 

c) 

d) 

take  all  reasonable  measures  to  protect  property  and  records  in  possession  of 
the credit rating agency from fraud, theft or misuse; 

do  not  disclose  any  information  about  credit  ratings  or  possible  future  credit 
ratings of the credit rating agency, except to the rated entity or its related third 
party; 

do not share confidential information entrusted to the credit rating agency with 
employees of any person directly or indirectly linked to it by control; 

do not use or share confidential information for the purpose of trading financial 
instruments,  or  for  any  other  purpose  except  the  conduct  of  the  business  of 
credit rating agency.  

An employee directly involved in the credit rating process shall not solicit or accept 
money,  gifts  or  favours  from  anyone  with  whom  the  credit  rating  agency  does 
business.  

Upon becoming aware that another employee with the credit rating agency is or has 
engaged in conduct that is illegal, an employee of a credit rating agency shall report 
such  information  immediately  to  the  person  in  charge  of  compliance  with  this 
Regulation in the credit rating agency.  

Where  an  analyst  terminates  his  or  her  employment  and  joins  a  rated  entity,  in  the 
rating  of  which  the  analyst  has  been  involved,  or  a  financial  firm,  with  which  the 
analyst  has  had  dealings  as  part  of  his  or  her  duties  at  the  credit  rating  agency,  a 

4. 

5. 

6. 

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OJ L 162, 30.4.2004, p. 70. 

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credit rating agency shall review the relevant work of analyst over 2 years preceding 
his departure.  

7. 

Employees  directly  involved  in  the  credit  rating  process  shall  not  take  up  a  key 
management position with the rated entity or its related third party before 6 months 
have lapsed since the credit rating. 

Section D 

Rules on the presentation of credit ratings  

I. 

1. 

General obligations 

A credit rating agency shall ensure that a credit rating states clearly and prominently 
the  name  and  job  title  of  the  lead  analyst  who  was  primarily  responsible  for 
preparing the credit rating.  

2. 

A credit rating agency shall ensure that at least: 

a) 

b) 

all substantially material sources used to prepare the credit rating are indicated, 
including the rated entity or, where appropriate, its related third party together 
with the fact whether the credit rating has been disclosed to that rated entity or 
its  related  third  party  and  amended  following  this  disclosure  before  its 
dissemination; 

is  clearly 

the  rating 

indicated,  with  a  reference 

the  principal  methodology  or  methodology  version  that  was  used  in 
determining 
its 
comprehensive  description;  where  the  rating  is  based  on  more  than  one 
methodology,  or  where  reference  only  to  the  principal  methodology  might 
cause investors to overlook other important aspects of the rating, including any 
significant  adjustments  and  deviations,  the  credit  rating  agency  shall  explain 
this  fact  in  the  credit  rating  and  indicate  how  the  different  methodologies  or 
these other aspects are taken into account in the credit rating; 

to 

c) 

the meaning of each rating category and the definition of default or recovery is 
explained and any appropriate risk warning, including a sensitivity analysis of 
the relevant assumptions, accompanied by worst-case scenario ratings as well 
as best-case scenario ratings;  

d) 

the date at which the credit rating was first released for distribution and when it 
was last updated is indicated clearly and prominently.  

3. 

A  credit  rating  agency  shall  ensure  that  any  credit  rating  states  clearly  and 
prominently any attributes and limitations of the credit rating. In particular, a credit 
rating  agency  shall  prominently  state  in  any  credit  rating  whether  it  considers 
satisfactory the quality of information available on the rated entity and to what extent 
it has verified information provided to it by the rated entity or its related third party. 
If a credit rating involves a type of entity or financial instrument for which historical 
data  is  limited,  the  credit  rating  agency  shall  make  clear,  in  a  prominent  place,  the 
limitations of the credit rating. 

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In  case  where  the  lack  of  reliable  data  or  the  complexity  of  the  structure  of  a  new 
type of instrument or the quality of information available is not satisfactory or raises 
serious questions as to whether a credit rating agency can provide a credible credit 
rating, the credit rating agency shall refrain from issuing a credit rating or withdraw 
an existing rating.  

4. 

When  announcing  a  credit  rating,  a  credit  rating  agency  shall  explain  in  its  press 
releases or reports the key elements underlying the credit rating. 

Where the information laid down in points 1, 2 and 3 would be disproportionate in 
relation to the length of the credit rating distributed, it shall suffice to make clear and 
prominent reference in the credit rating itself to the place where such disclosures can 
be  directly  and  easily  accessed,  including  a  direct  web  link  to  the  disclosure  on  an 
appropriate website of the credit rating agency. 

II. Additional obligations in relation to credit ratings of structured finance instruments 

1. 

2. 

Where a credit rating agency rates a structured finance instrument, it shall provide in 
the credit rating information about loss and cash-flow analysis it has performed. 

A  credit  rating  agency  shall  state  what  level  of  assessment  it  has  performed 
concerning the due diligence processes carried out at the level of underlying assets of 
structured finance instruments. The credit rating agency shall disclose whether it has 
undertaken any assessment of such due diligence processes or whether it has relied 
on a third-party assessment, indicating how the outcome of such assessment impacts 
the rating.  

Section E 

Disclosures 

I. 

General disclosures 

A credit rating agency shall generally disclose the following information: 

1. 

2. 

3. 

4. 

5. 

6. 

Actual and potential conflicts of interest referred to in point 1 of Section B; 

Definition  of  what  the  credit  rating  agency  considers,  or  does  not  consider  to  be 
services ancillary to its core rating business; 

Policy  of  the  credit  rating  agency  concerning  the  publication  of  credit  ratings  and 
other related communication; 

General nature of its compensation arrangements; 

Methodologies, models and key rating assumptions as well as their material changes; 

Any material modification to its practices, procedures, and processes.  

II. 

Periodic disclosures 

A credit rating agency shall periodically disclose the following information:  

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1. 

2. 

Every six months, data about the historical default rates of its rating categories and 
whether the default rates of these categories have changed over time; 

On a yearly basis the following information: 

a) 

b) 

a list of the largest 20 clients of the credit rating agency by revenue; 

a  list  of  those  clients  of  the  credit  rating  agency  whose  contribution  to  the 
growth rate in the revenue of the credit rating agency in the previous financial 
year exceeded the growth rate in the total revenues of the credit rating agency 
in that year by a factor of more than 1.5 times; each such client shall only be 
included on this list where in that year it accounted for more than 0.25 % of the 
worldwide total revenues of the credit rating agency at global level. 

For the purposes of the first subparagraph of point 2 "client" shall mean a company, 
its  subsidiaries,  and  associated  companies  in  which  the  company  has  holdings  of 
more than 20 %, as well as any other entities in respect of which it has negotiated the 
structuring of a debt issue on behalf of a client and where a fee was paid, directly or 
indirectly, to the credit rating agency for the rating of that debt issue. 

III. 

Transparency report 

A credit rating agency shall make available annually the following information: 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

Detailed  information  on  legal  structure  and  ownership  of  the  credit  rating  agency, 
including  information  on  holdings  within  the  meaning  of  Articles  9  and  10  of 
Directive 2004/109/EC of the European Parliament and of the Council45; 

A description of the internal quality control system; 

Statistics on staff allocation to new credit ratings, credit rating reviews, methodology 
or model appraisal and management; 

A description of the credit ratings record-keeping policy; 

The outcome of the annual internal review of the independence compliance;  

A description of the management and analyst rotation policy; 

Financial  information  on  the  revenue  of  the  agency  divided  into  fees  from  credit 
rating and non credit rating services with a comprehensive description of each; 

A  governance  statement  within  the  meaning  of  Article  46a(1)  of  Council  Directive 
78/660/EEC46;  for  the  purposes  of  that  statement,  the  information  referred  to  in 
Article  46a(1)(d)  of  that  Directive  shall  be  provided  by  the  credit  rating  agency 
irrespective  of  whether  it  is  subject  to  Directive  2004/25/EC  of  the  European 
Parliament and of the Council47.  

45 
46 
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OJ L 390, 31.12.2004, p. 38 
OJ L 222, 14.8.1978, p. 11.  
OJ L 142, 30.4.2004, p. 12. 

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ANNEX II 

Information to be provided in the application for registration 

full  name  of  the  credit  rating  agency,  address  of  the  registered  office  within  the 
Community;  

name and contact details of a contact person; 

legal status;  

class of credit ratings for which the credit rating agency is applying to be registered;  

description  of  the  procedures  and  methodologies  used  to  issue  and  maintain  credit 
ratings;  

policies and procedures to identify and manage conflicts of interests; 

information regarding employees;  

compensation arrangements; 

ancillary services; 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

programme of operations, including indications of where the main business activities 
are expected to be carried out and setting out the type of business envisaged. 

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