Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings of collective investment in transferable securities (UCITS) and Directive 2011/61/EU on Alternative Investment Funds Managers in respect of the excessive reliance on credit ratings
Date: 2011-11-15
Institutions: European Commission
Subjects: economic analysis, financial solvency, investment company, securities, venture capital

EUROPEAN COMMISSION 

Brussels, 15.11.2011 
COM(2011) 746 final 

2011/0360 (COD) 

Proposal for a 

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

amending Directive 2009/65/EC on the coordination of laws, regulations and 
administrative provisions relating to undertakings of collective investment in 
transferable securities (UCITS) and Directive 2011/61/EU on Alternative Investment 
Funds Managers in respect of the excessive reliance on credit ratings 

(Text with EEA relevance) 

{SEC(2011) 1354} 
{SEC(2011) 1355} 

 
 
  
 
EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL 

Regulation (EC) No 1060/2009 on credit rating agencies1 (CRA Regulation) entered into full 
application  on  7  December  2010.  It  requires  credit  rating  agencies  (CRAs)  to  comply  with 
rigorous rules of conduct in order to mitigate possible conflicts of interest, ensure high quality 
and sufficient transparency of ratings and the rating process. Existing CRAs had to apply for 
registration and to comply with the requirements of the Regulation by 7 September 2010. 

On 11 May 2011 an amendment to the CRA Regulation2 (Regulation (EU) No 513/2011) was 
adopted,  entrusting  the  European  Securities  and  Markets  Authority  (ESMA)  with  exclusive 
supervisory powers over CRAs registered in the EU in order to centralise and simplify their 
registration and supervision at European level. 

However, a number of issues related to credit rating activities and the use of ratings have not 
been sufficiently addressed in the existing CRA Regulation. One of these issues is the risk of 
overreliance  on  credit  ratings  by  financial  market  participants,  including  undertakings  for 
collective  investment  in  transferable  securities  (UCITS)  and  alternative  investment  funds 
(AIFs)3. 

The European Commission pointed to these open issues in its Communication of 2 June 2010 
("Regulating  financial  services  for  sustainable  growth")4  and  in  a  consultation  paper  of  the 
Commission services of 5 November 20115 announcing the need for a targeted review of the 
CRA Regulation which is delivered with this proposal. 

On  8  June  2011,  the  European  Parliament  issued  a  non-legislative  report  on  CRAs6.  The 
report  supports,  inter  alia,  the  need  to  enhance  the  regulatory  framework  for  credit  rating 
agencies and to take measures to reduce the risk of over-reliance of ratings. 

At  an  informal  ECOFIN  meeting  of  30  October  2010  the  Council  of  the  European  Union 
acknowledged  that  further  efforts  should  be  made  to  address  a  number  of  issues  related  to 
credit  rating  activities,  including  the  risk  of  over-reliance  on  credit  ratings  and  the  risk  of 
conflict of interests stemming from the remuneration model of rating agencies. The European 
Council  of  23  October  2011  concluded  that  progress  is  needed  on  reducing  overreliance  on 
credit ratings. 

1 

2 

3 

4 
5 
6 

Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 
on credit rating agencies, OJ L 302, 17.11.2009. 
Regulation  (EU)  No  513/2011  of  the  European  Parliament  and  of  the  Council  of  11  May  2011 
amending Regulation (EC) No 1060/2009 on credit rating agencies, OJ L 145, 31.5.2011. 
Overreliance on external credit ratings occurs when financial institutions and institutional investors rely 
solely  or  mechanistically  on  ratings  issued  by  credit  rating  agencies  while  neglecting  their  own  due 
diligence and internal risk management obligations. Overreliance on credit ratings may lead to herding 
behaviour of financial actors, e.g. parallel selling-off of debt instruments after that instrument has been 
downgraded below investment grade, which may affect financial stability – in particular when the few 
big rating agencies err collectively in their assessments. 
COM(2010)301 final. 
Available at http://ec.europa.eu/internal_market/consultations/2010/cra_en.htm. 
http://www.europarl.europa.eu/oeil/FindByProcnum.do?lang=en&procnum=INI/2010/2302. 

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At  the  international  level,  the  Financial  Stability  Board  (FSB)  issued  in  October  2010 
principles  to  reduce  authorities’  and  financial  institutions’  reliance  on  external  ratings7.  The 
principles  call  for  removing  or  replacing  references  to  such  ratings  in  legislation  where 
suitable alternative standards of creditworthiness are available and for requiring investors to 
make  their  own  credit  assessments.  Those  principles  were  endorsed  by  the  G  20  Seoul 
Summit in November 2010. 

2. 

RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND 
IMPACT ASSESSMENTS 

The  European  Commission  conducted  a  public  consultation  from  5  November  2010  to  7 
January  2011  presenting  various  options  to  address  the  issues  identified,  including  the 
question  of  over-reliance.  The  Commission  received  approximately  100  contributions  from 
stakeholders which have been taken into account in drafting this proposal. A summary of the 
responses to the consultation paper can be found at 

http://ec.europa.eu/internal_market/securities/docs/agencies/summary-responses-cra-
consultation-20110704_en.pdf. 

On 6 July, the Commission services held a roundtable in order to obtain further feedback from 
relevant stakeholders on these issues. A summary of the roundtable can be found at 

http://ec.europa.eu/internal_market/securities/docs/agencies/roundtable_en.pdf. 

An impact assessment has been produced for this proposal. It can be found at 

http://ec.europa.eu/internal_market/securities/agencies/index_en.htm. 

3. 

LEGAL ELEMENTS OF THE PROPOSAL 

3.1. 

Legal basis 

It is necessary, in order to reduce the risk of over-reliance of managers of UCITS and AIFs on 
credit ratings, to introduce amendments to Directive 2009/65/EC of the European Parliament 
and of the Council of 13 July 2009 on the coordination of law, regulations and administrative 
provisions  relating  to  the  undertakings  for  collective  investment  in  transferable  securities 
(UCITS)8 and Directive 2011/61/EU of the European Parliament and of the Council of 8 June 
2011 on Alternative Investment Fund Managers9. The Commission is presenting in parallel a 
proposal  of  Regulation  for  the  amendment  of  the  CRA  Regulation,  based  on  Article 114  of 
the Treaty of the Functioning of the European Union (TFUE).  

However,  that  proposal  of  Regulation  would  not  be  the  appropriate  legal  instrument  for  the 
amendment of these directives. On the one hand, those amendments include provisions which 
are  not  directly  applicable  and  need  transposition  into  national  law.  On  the  other  hand,  the 
proposal  for  the  amendments  of  Directive  2009/65/EC  and  Directive  2011/61/EU  should 
rather  be  based  on  Article  53(1)  of  the  TFUE,  which  provided  the  legal  basis  for  the  latter 

7 
8 
9 

http://www.financialstabilityboard.org/publications/r_101027.pdf 
OJ L 302, 17.11.2009, p.32. 
OJ L 174, 1.7.2011, p.1. 

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Directive.  Directive  2009/65/EC  was  based  on  the  corresponding  Article  95  of  the  Treaty 
establishing the European Community. 

Therefore,  it  appears  appropriate  that  the  draft  amendments  to  Directive  2009/65/EC  and 
2011/61/EU are presented in a proposal for a Directive based on Article 53(1) TFUE. 

3.2. 

Subsidiarity and proportionality. 

According  to  the  principle  of  subsidiarity  (Article  5(3)  of  the  TUE),  action  at  the  EU  level 
should  be  taken  only  where  the  aims  envisaged  cannot  be  achieved  sufficiently  by  Member 
States  alone  and  can  therefore,  by  reason  of  the  scale  and  effects  of  the  proposed  action  be 
better  achieved  by  the  EU.  The  business  of  credit  rating  agencies  is  global  and  has  been 
regulated at EU level. Ratings used by a credit rating agency based in one Member State are 
used and relied upon by market participants throughout the EU. Similarly, EU legislation has 
provided  for  a  prudential  regulatory  framework  for  investment  funds,  whether  UCITS  of 
AIFs,  which  allows  authorised  funds  to  operate  throughout  the  EU.  Failures  or  a  lack  of 
regulatory framework 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. Therefore, any 
further  action  to  reduce  the  over-reliance  on  credit  ratings  by  UCITs  and  AIFs  can  best  be 
achieved by EU action. 

The  proposed  amendments  are  also  proportionate,  as  required  by  Article  5(4)  TUE.  The 
amendments do not exceed what is necessary to achieve their objectives. The provisions on 
the  reduction  of  the  reliance  on  credit  ratings  are  integrated  into  the  general  obligation  for 
management and investment companies (as regards UCITS) and AIFMs (as regards AIFs) to 
employ risk-management processes or systems. The  provisions proposed are very similar to 
the ones recently proposed by the Commission as regards credit institutions10. 

This proposal supplements the Commission proposal, submitted in parallel, for a Regulation 
amending  the  CRA  Regulation,  which  contains  other  provisions  regarding,  inter  alia,  the 
reduction of the excessive reliance by market participants on credit ratings. Further to setting 
this  general  principle  on  the  avoidance  of  over-reliance,  the  proposal  for  the  amendment  of 
the CRA Regulation provides for some measures that should facilitate investors’ achievement 
of that objective. Hence, it foresees that investors should be able to have access to additional 
information disclosed to the market by credit rating agencies and issuers of structured finance 
instruments. Credit rating agencies should disclose information on their rating methodologies 
and underlying assumptions, on any proposed changes to their methodologies or on specific 
information on certain types of credit ratings, such as sovereign ratings. Issued credit ratings 
should  also  become  easily  comparable  for  investors  thanks  to  the  European  Rating  Index 
(EURIX)  to  be  operated  by  ESMA  and  incorporating  harmonised  rating  scales.  Issuers  of 
structured  financed  instruments  should  provide  more  information  on  their  products  to  the 
market,  including  information  on  the  credit  quality  and  performance  of  the  individual 
underlying  assets  of  the  structured  finance  instrument,  the  structure  of  the  securitization 
transaction,  the  cash  flows  or  any  collateral  supporting  a  securitisation  exposure.  This 

10 

Commission proposal of 20 July 2011 for a Directive of the European Parliament and of the Council on 
the access to the activity of credit institutions and the prudential supervision of credit institutions and 
investment firms and amending Directive 2002/87/EC of the European Parliament and of the Council 
on the supplementary supervision of credit institutions, insurance undertakings and investment firms in 
a financial conglomerate, COM(2011) 453 final. See point (b) of Article 77. 

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additional  information  should  facilitate  that  investors,  such  as  UCITS  or  AIFs,  could  make 
their own credit risk assessments and need not systematically and mechanically rely on credit 
rating  agencies  to  assess  the  creditworthiness  of  the  instruments,  in  particular  structured 
finance instruments, in which they invest. 

3.3. 

Explanation of the proposal 

3.3.1.  Amendment of Directive 2009/65/EC on UCITS 

Directive 2009/65/EC provides for the regulation at the EU level of UCITS. UCITS meeting 
certain  conditions  are  therefore  allowed  to  operate  across  the  Union.  Article  51  of  this 
Directive established some prudential requirements as regards risk management. It requests in 
particular that a management or investment company managing UCITS should employ a risk-
management  process  which  enables  it  to  monitor  and  measure  at  any  time  the  risk  of  the 
positions  and  their  contribution  to  the  overall  risk  profile  of  the  portfolio.  The  Commission 
received  delegated  powers  to  specify,  through  delegated  acts,  the  criteria  for  assessing  the 
adequacy of the risk management process employed by those managing the UCITS. 

Article  1  of  the  proposal  amends  Article  51  of  Directive  2009/65/EC  as  regards  the  risk 
management process: 

– 

– 

point (1) introduces a requirement for the management or investment company not to 
solely  or  mechanistically  rely  on  external  credit  ratings  for  assessing  the 
creditworthiness  of  the  UCITS  assets.  External  credit  ratings  may  be  used  as  one 
factor among others in this process but shall not prevail; 

point (2) proposes corresponding amendments to the existing empowerments for the 
Commission  to  adopt  delegated  acts  with  a  view  to  specifying  the  provisions  of 
Article 51(1) of 2009/65/EC. 

3.3.2.  Amendment of Directive 2011/61/EC on managers of AIFs 

Similarly,  Directive  2011/61/EU  provides  for  the  regulation  at  the  EU  level  of  managers  of 
alternative investment funds (AIFs). AIFs meeting certain conditions are therefore allowed to 
operate  across  the  Union.  Article  15  of  Directive  2011/61/EU  established  some  prudential 
requirements as regards risk management. It requests in particular that the manager of an AIF 
should implement adequate risk-management systems in order to identify,  measure,  manage 
and  monitor  appropriately  all  risks  relevant  to  each  AIF  investment  strategy  and  to  which 
each  AIF  is  or  may  be  exposed.  The  Commission  received  delegated  powers  to  specify, 
through  delegated  acts,  the  risks  management  systems  to  be  employed  by  the  managers  of 
AIFs in relation to the risks they incur on behalf of the AIFs they manage. 

Article  2  of  the  proposal  amends  Article  15  of  Directive  2011/61/EU  as  regards  the  risk 
management systems: 

– 

point  (1)  introduce  a  requirement  for  the  AIF  Manager  not  to  solely  or 
mechanistically  rely  on  external  credit  ratings  for  assessing  the  creditworthiness 
ofthe AIF assets. External credit ratings may be used as one factor among others in 
this process but shall not prevail; 

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– 

point (2) proposes corresponding amendments to the existing empowerments for the 
Commission  to  adopt  delegated  acts  with  a  view  to  specifying  the  provisions  of 
Article 15(1) of Directive 2011/61/EU. 

3.3.3.  Transposition 

The proposal provides for a transposition period of 12 months. 

4. 

BUDGETARY IMPLICATION 

The Commission's proposal has no impact on the European Union budget. 

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2011/0360 (COD) 

Proposal for a 

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

amending Directive 2009/65/EC on the coordination of laws, regulations and 
administrative provisions relating to undertakings of collective investment in 
transferable securities (UCITS) and Directive 2011/61/EU on Alternative Investment 
Funds Managers in respect of the excessive reliance on credit ratings 

(Text with EEA relevance) 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 53(1) thereof, 

Having regard to the proposal from the European Commission, 

After transmission of the draft legislative act to the national Parliaments, 

Having regard to the opinion of the European Central Bank1, 

Having regard to the opinion of the European Economic and Social Committee2,  

Acting in accordance with the ordinary legislative procedure, 

Whereas: 

(1) 

(2) 

Directive  2009/65/EC  of  the  European  Parliament  and  of  the  Council3  provides  for 
regulation  at  Union  level  of  undertakings  of  collective  investment  in  transferable 
securities (UCITS). Similarly, Directive 2011/61/EU of the European Parliament and 
of the  Council4 provides for regulation at the Union level of managers  of alternative 
investment funds (AIFs). Both directives establish prudential requirements as regards 
risk  management  by  management  or  investment  companies  managing  UCITS  or 
managers of AIFs, respectively.  

An  effect  of  the  financial  crisis  has  been  that  investors,  including  UCITS  and  AIFs, 
rely  excessively  on  credit  ratings  to  carry  out  their  investments  on  debt  instruments, 
without  necessarily  conducting  their  own  assessments  of  the  creditworthiness  of 
issuers  of  such  debt  instruments.  In  order  to  improve  the  quality  of  the  investments 

1 
2 
3 
4 

OJ C , , p. . 
OJ C , , p. . 
OJ L 302, 17.11.2009, p.32. 
OJ L 174, 1.7.2011, p.1. 

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(3) 

(4) 

(5) 

made  by  UCITS  and  AIFs  and,  therefore,  to  protect  investors  in  those  funds,  it  is 
appropriate  to  require  the  persons  managing  UCITS  and  AIFs  to  avoid  relying 
exclusively  and  automatically  on  external  credit  ratings  when  assessing  the  risk 
involved in the investments made by the UCITS and AIFs they manage. The general 
principle  on  the  avoidance  of  excessive  reliance  on  external  credit  ratings  should 
therefore  be  integrated  into  the  risk  management  processes  and  systems  of  the 
managers of UCITS and AIFs, and adapted to their specificities.  

In  order  to  specify  further  the  general  principle  on  overreliance  that  should  be 
introduced  into  Directives  2009/65/EC  and  2011/61/EU,  the  power  to  adopt  acts  in 
accordance with Article 290 of the Treaty on the Functioning of the European Union 
should be delegated to the Commission in particular to ensure that managers of UCITS 
and  AIFs  are  effectively  prevented  from  over-relying  on  external  credit  ratings  for 
assessing the creditworthiness of the assets held by UCITS or AIFs. It is appropriate in 
this  regard  to  amend  the  powers  of  the  Commission  in  those  Directives  to  adopt 
delegated  acts  in  respect  of  the  general  provisions  regarding  risk  management 
processes  and  systems  employed  by  the  managers  of  UCITS  and  AIFs.  It  is  of 
particular importance that the Commission carry out appropriate consultations during 
its preparatory work, including at expert level. 

The  relevant  measures  should  be  complementary  to  other  provisions  in  Regulation 
(EU) No 1060/2009 of the European Parliament and of the Council of 16 September 
2009 on credit rating agencies5 as amended by Regulation (EU) No [xxx/xxxx] of the 
European Parliament and of the Council of [xxx xxx xxxx] amending Regulation (EU) 
No  1060/20096.  Those  provisions  set  the  general  objective  of  reducing  excessive 
reliance by investors on external credit ratings and should facilitate the achievement of 
that aim.  

Since  the  objective  of  this  Directive,  namely  to  contribute  to  the  reduction  of  the 
excessive  reliance  of  UCITS  and  AIFs  on  external  credit  ratings  when  making  their 
investments,  cannot  be  sufficiently  achieved  at  the  Member  State  level  and  can 
therefore, by reason of the pan-Union structure and impact of the activities of UCITS, 
AIFs and credit rating agencies, be better achieved at the Union level, the Union may 
adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 
of  the  Treaty  on  the  European  Union.  In  accordance  with  the  principle  of 
proportionality,  as  set  out  in  that  Article,  this  Directive  does  not  go  beyond  what  is 
necessary in order to achieve those objectives. 

(6) 

Directive  2009/65/EC  and  Directive  2011/61/EU  should  therefore  be  amended 
accordingly, 

5 
6 

OJ L 302, 17.11.2009, p. 1. 
OJ L […], […], p. […]. 

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HAVE ADOPTED THIS DIRECTIVE: 

Article 1 

Amendments to Directive 2009/65/EC 

Article 51 of Directive 2009/65/EC is amended as follows: 

(1) 

in paragraph 1, the first subparagraph is replaced by the following: 

'A  management  or  investment  company  shall  employ  a  risk-management  process 
which  enables  it  to  monitor  and  measure  at  any  time  the  risk  of  the  positions  and 
their contribution to the overall risk profile of the portfolio. In particular, it shall not 
solely  or  mechanistically  rely  on  external  credit  ratings  for  assessing  the 
creditworthiness of the UCITS assets.'; 

(2) 

in paragraph 4, point (a) is replaced by the following: 

'(a)  criteria  for  assessing  the  adequacy  of  the  risk  management  process  employed 
by  the  management  company  in  accordance  with  the  first  subparagraph  of 
paragraph  1.  These  criteria  shall  ensure  that  the  management  company  is 
prevented from relying solely or mechanistically on external credit ratings for 
assessing the creditworthiness of the UCITS assets;'. 

Article 2 

Amendments to Directive 2011/61/EU 

Article 15 of Directive 2011/61/EU is amended as follows:  

(1) 

in paragraph 2, the first subparagraph is replaced by the following: 

'AIFMs  shall  implement  adequate  risk  management  systems  in  order  to  identify, 
measure, manage and monitor appropriately all risks relevant to each AIF investment 
strategy and to which each AIF is or may be exposed. In particular, AIFMs shall not 
solely  or  mechanistically  rely  on  external  credit  ratings  for  assessing  the 
creditworthiness of the AIF assets.'; 

(2) 

in paragraph 5, point (a) is replaced by the following:  

'(a) 

the  risks  management  systems  to  be  employed  by  AIFMs  in  relation  to  the 
risks  which  they  incur  on  behalf  of  the  AIFs  they  manage.  These  risk 
management  systems  shall  prevent  AIFMs 
relying  solely  or 
mechanistically on external credit ratings for assessing the creditworthiness of 
the AIF assets.'. 

from 

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Article 3 

Transposition 

1. 

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions necessary to comply with this Directive by XX XXXX [12 months from 
the  date  of  entry  into  force  of  the  directive]  at  the  latest.  They  shall  forthwith 
communicate to the Commission the text of those provisions and a correlation table 
between those provisions and this Directive. 

When  Member  States  adopt  those  provisions,  they  shall  contain  a  reference  to  this 
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official 
publication. Member States shall determine how such reference is to be made. 

2. 

Member States shall communicate to the Commission the text of the main provisions 
of national law which they adopt in the field covered by this Directive. 

Article 4 

Entry into force 

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

Article 5 

Addressees 

This Directive is addressed to the Member States. 

Done at Brussels, 

For the European Parliament 
The President 

For the Council 
The President 

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