REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on alternative tools to external credit ratings, the state of the credit rating market, competition and governance in the credit rating industry, the state of the structured finance instruments rating market and on the feasibility of a European Credit Rating Agency
Date: 2016-10-19
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: banking policy, credit institution, credit policy, financial control, financial legislation, financial market, financial solvency, investment company, market supervision

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 19.10.2016  COM(2016) 664 final   REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on alternative tools to external credit ratings, the state of the credit rating market, competition and governance in the credit rating industry, the state of the structured finance instruments rating market and on the feasibility of a European Credit Rating Agency  
 
 
Table of Contents 

INTRODUCTION .................................................................................................................. 3 

I. Risk of over-reliance on external credit ratings and available alternatives
 .................................................................................................................................................. 4 

1. Over-reliance on external credit ratings .............................................................................. 4 

2. Available alternatives to external ratings ........................................................................... 6 

II. State of the CR market and assessment of CRA Regulation provisions to 
boost competition in the credit rating market ........................................................ 9 

1. Analysis of the CRA market ................................................................................................... 9 

2. Impact and assessment of CRA Regulation provisions concerning competition
 ............................................................................................................................................................ 14 

III. Impact and assessment of CRA provisions concerning governance ...... 17 

1. Conflict of interests ................................................................................................................. 17 

2. Provisions related to SFIs and potential extension to other financial products .. 19 

3. Alternative remuneration models ....................................................................................... 19 

IV. Appropriateness and feasibility of supporting a European credit rating 
agency ................................................................................................................................. 20 

CONCLUSION ..................................................................................................................... 21 

2 

 
 
 
 
 
 
 
 
INTRODUCTION 

This  report responds  to  several  reporting  obligations  set  out in  Regulation  (EC)  No 
1060/2009  on  Credit  Ratings  Agencies  (CRA),  as  amended1 (CRA  Regulation).  In 
particular, this report: 

  analyses references to external credit ratings in EU legislation and in private 
contracts  among  parties  in  financial  markets.  It  also  assesses  potential 
alternatives to external credit ratings that are currently being used by market 
participants across the EU (Section I);2 

  assesses  the  impact  and  effectiveness  of  the  CRA  Regulation's  measures 

concerning competition in the credit rating industry (Section II);3 

  evaluates  the  impact  of  the  CRA  Regulation  on  governance  and  internal 
procedures of  CRAs,  in  particular  the  prevention  of  conflict  of  interests  and 
the  use  of  alternative  remuneration  models.  The  report  also  analyses  the 
provisions  relating  to  Structured  Finance  Instruments  (SFIs)  and  their 
potential extension to other asset classes (Section III);4 

  considers  the  feasibility  of  the  establishment  of  a  European  CRA  for  the 
assessment of sovereign debt and a European credit rating foundation for all 
other credit ratings (Section IV).5  

This  report  assesses  inter  alia  many  of  the  key  provisions  introduced  in  the  last 
amendment  of  the  CRA  Regulation.  It  draws  from  the  Technical  Advice  of  the 
European  Securities  and  Markets  Authority  (ESMA)  on  reducing  sole  and 
mechanistic  reliance  on  external  credit  ratings 6 ,  the  study  conducted  by  ICF 
Consulting  Services  on  the  Feasibility  of  alternatives  to  credit  ratings7,  the  ESMA 
Technical Advice on competition, choice and conflict of interest in the credit rating 
industry8 and  the  study  conducted  by  Europe  Economics  on  the  state  of  the  credit 

1 Regulation 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) as amended by Regulation (EU) No 513/2011 of the 
European  Parliament  and  of  the  Council  of  11  May  2011  (OJ  L  145,  31.5.2011),  by  Directive 
2011/61/EU of the European Parliament and of the Council of 8 June 2011 (OJ L 174, 1.7.2011), by 
Regulation (EU) No 462/2013 of the European Parliament and of the Council of 21 May 2013 (OJ L 
146, 31.5.2013), and by Directive 2014/51/EU of the European Parliament and of the Council of 18  
April 2014 (OJ L 153, 22.5.2014). 

2  Article 39b(1) CRA Regulation. 
3  Article 39(4)(5) CRA Regulation. 
4  Article 39(4)(5) CRA Regulation. 
5  Article 39b(2) CRA Regulation.  
6  ESMA/2015/1471 – ESMA Technical Advice on reducing sole and mechanistic reliance on external 
at 

credit 
https://www.esma.europa.eu/sites/default/files/library/2015/11/esma-2015-
1471_technical_advice_on_reducing_sole_and_mechanistic_reliance_on_external_credit_ratings.pdf 
http://ec.europa.eu/finance/rating-
available 

7 MARKT/2014/257/F4/ST/OP-LOT1 

publication 

available 

ratings 

at 

– 

agencies/index_en.htm  

8    ESMA/2015/1472 – ESMA Technical Advice on competition, choice and conflicts of interest in 
at 
3 

publication 

available 

industry 

rating 

credit 

the 

– 

 
 
 
 
 
 
 
 
 
 
                                                        
 
rating  market 9 .  Stakeholders  were  extensively  consulted  through  workshops, 
questionnaires  and  interviews  in  the  course  of  the  preparation  of  these  technical 
advice and studies.10 

I. Risk of over-reliance on external credit ratings and available alternatives 

1. Over-reliance on external credit ratings 

The  international  response  to  the  global  financial  crisis  included  efforts  to  reduce 
reliance  on  external  credit  ratings,  in  particular  to  ”reduce  the  financial  stability-
threatening herding and cliff effects that currently arise from CRA rating thresholds 
being  hard-wired  into  laws,  regulations  and  market  practices”. 11  The  EU  has 
responded  to  these  efforts,  including  by  adopting  legislative  changes  (see  below). 
However,  it  remains  necessary  to  assess  to  what  extent  remaining  references  to 
external credit ratings in EU legislation may trigger over-reliance. In addition, over-
reliance  may  also  arise  through  the  use  of  external  credit  ratings  by  market 
participants in private contracts.  

Several  EU  legal  acts  in  the  area  of  financial  services  refer  to  the  use  of  external 
credit  ratings.  Some  of  these  (AIFMD12,  UCITS13 and  IORPs14)  were  amended  by 
Directive  2013/14/EU 15 ,  which  introduced  additional  rules  for  management  or 
investment companies of UCITS and AIFMs requiring risk-management processes to 
avoid relying solely and mechanistically on external credit ratings. This was in order 
to  avoid  over-reliance  on  ratings  in  the  measurement  of  credit  risk.  One  such  rule 
introduced  by  Directive  2013/14/EU  was  the  requirement  to  ensure  that  competent 
authorities supervise the adequacy of credit assessment processes. 

https://www.esma.europa.eu/sites/default/files/library/esma-2015-
1472_technical_advice_on_competition_choice_and_conflicts_of_int.pdf  

9  MARKT/2014/257/F/Lot 2 available at http://ec.europa.eu/finance/rating-agencies/index_en.htm. 
10   For  more  information  see  p.  5  of  ESMA’s  Technical  Advice  on  reducing  sole  and  mechanistic 
reliance on external credit ratings, p. 5 et seq. of the ICF study, p. 10 of ESMA’s Technical Advice 
on  competition,  choice  and  conflict  of  interest  in  the  credit  rating  industry,  p.  7  of  Europe 
Economics study. 

11   See in particular p. 1 of the Financial Stability Board's (FSB) Principles for Reducing Reliance on 
CRA Ratings, available at http://www.fsb.org/2010/10/r_101027/. See also the FSB's Roadmap for 
Reducing Reliance on CRA Ratings, available at http://www.fsb.org/2012/11/r_121105b/. 

12  Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative 
Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations 
(EC) No 1060/2009 and (EU) No 1095/2010. 

13   Directive  2009/65/EC  of  the  European  Parliament  and  of  the  Council  of  13  July  2009  on  the 
coordination  of  laws,  regulations  and  administrative  provisions  relating  to  undertakings  for 
collective investment in transferable securities (UCITS) (recast). 

14   Directive  2003/41/EC  of  the  European  Parliament  and  of  the  Council  of  3  June  2003  on  the 

activities and supervision of institutions for occupational retirement provision. 

15  Directive 2013/14/EU of the European Parliament and of the Council of 21 May 2013, amending 
Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement 
provision,  Directive  2009/65/EC  on  the  coordination  of  laws,  regulations  and  administrative 
provisions relating to undertakings for collective investment in transferable securities (UCITS) and 
Directive  2011/61/EU  on  Alternative  Investment  Funds  Managers  in  respect  of  over-reliance  on 
credit ratings. 

4 

 
 
 
 
 
 
 
 
                                                                                                                                                              
EMIR 16 ,  the  legislation  on  Central  Counter  Parties  (CCPs),  allows  assessments 
carried out by CRAs to establish the level of risk but does not require nor necessarily 
incentivise CCPs to do so. If external ratings are employed, CCPs must provide some 
counter-analysis or supplement their assessment with their own analysis. 

CRR17 and CRD IV18 contain several provisions which allow for different treatments 
of risks associated with an exposure, depending on whether these exposures are rated 
or not.19 As a result, the capital requirements associated with an exposure may vary 
considerably depending on whether such exposure is rated by a CRA or not and the 
rating provided.20 The Basel Committee on Banking Supervision (BCBS) is currently 
in the process of revising the standardised approach for credit risk and has considered 
various  alternatives  to  replace  external  ratings. 21  The  Committee  proposes  to 
maintain references to external ratings while complementing its use with banks’ due 
diligence  processes,  as  well  as  enhancing  the  requirements  surrounding  the  use  of 
external  ratings,  so  as  to  ensure  that  banks  undertake  their  own  due  diligence  and 
internal risk management and do not rely mechanistically on external ratings. 

A similar mechanism is employed by Solvency II,22 which provides for different risk 
considerations depending on whether an external rating is available or not (and what 
rating is assigned to such exposure). To mitigate the risk of over-reliance on ratings, 
Solvency II provides that insurers, when they use an external credit rating assessment 
in the calculation of technical provisions and the Solvency Capital Requirement, shall 
assess  the  appropriateness  of  those  external  credit  assessments  as  part  of  their  risk 
management by using additional assessments wherever practicably possible in order 
to  avoid  any  automatic  dependence  on  external  assessments 23 .  In  addition,  the 
Solvency  II  Delegated  Act 24 sets  out  detailed  rules  on  the  use  of  external  credit 

16   Regulation  (EU)  No  648/2012  of  the  European  Parliament  and  of  the  Council  of  4  July  2012  on 

OTC derivatives, central counterparties and trade repositories. 

17  Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on 
prudential requirements for credit institutions and investment firms and amending Regulation (EU) 
No 648/2012. 

18  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to 
the activity of credit institutions and the prudential supervision of credit institutions and investment 
firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC. 
19    The  methodology  is  designated  in  the  legislative  text  as  the  "standardised  approach"  and  is 

currently the most commonly used methodology under CRR and CRD for banks. 

20   For  example,  in  the  case  of  exposures  to  corporates,  if  the  rating  by  a  CRA  is  available  and  the 
exposure receives the highest rating (e.g. AAA) the risk weight applied is 20%. Therefore the bank 
will be required to hold regulatory capital equal to 20% of the values of the exposure. If, however, 
a rating is not available, the risk weight to be applied would be at least 100%. 

21  Basel Committee on Banking Supervision, Second consultative document, Standards Revisions to 
the Standardised Approach for credit risk, Issued for comment by 11 March 2016, December 2015, 
available at http://www.bis.org/bcbs/publ/d347.htm 

22   Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on 

the taking-up and pursuit of the business of Insurance and Reinsurance. 

23   Article  44(4a)  of  Solvency  II,  and  Commission  Implementing  Regulation  (EU)  2015/2015  of  11 
November  2015  laying  down  implementing  technical  standards  on  the  procedures  for  assessing 
external credit assessments in accordance with Directive 2009/138/EC of the European Parliament 
and of the Council, OJ L 295, 12.11.2015, p.16. 

24  Article 3-6 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing 
Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit 
of the business of Insurance and Reinsurance (Solvency II). 

5 

 
 
 
 
 
                                                        
assessments, such as the requirement to produce internal credit assessments for larger 
or  more  complex  exposures,  which  also  contribute  to  reducing  the  risk  of  over-
reliance.  

Whilst mitigating rules are in place to avoid sole and mechanistic reliance on external 
ratings, the use of ratings in critical areas of the CRR and Solvency II frameworks, 
notably those relating to calculations of regulatory capital or solvency requirements, 
may create an incentive for financial institutions and insurance companies to rely on 
assessments  from  rating  agencies.  The  Commission  will  therefore  continue 
monitoring  the  impact  of  these  requirements  and  provide  input  to  relevant  bodies, 
such  as  the  Basel  Committee,  to  mitigate  any  risks  of  excessive  reliance  on  credit 
ratings in the prudential framework for credit institutions and insurance undertakings. 

Avoidance  of  over-reliance  on  contractual  references  could  be  achieved  through 
prohibition  provisions  or  further  disclosure  requirements.  However,  while  the  latter 
appears  not  to  be  suitable  for  rating  triggers  provided  by  investment  policies  or 
guidelines,  the  former  would  constitute  a  restriction  to  contractual  freedom  and 
would necessarily have to be justified by imperative reasons of public interest. In any 
case, references to ratings should not be an excuse for managers to avoid undertaking 
their own due diligence before investment decisions. The Commission will continue 
to monitor market practices to identify any risks due to contractual over-reliance on 
external credit ratings. 

2. Available alternatives to external ratings 

The main available alternatives to external ratings are market-based measurement of 
credit risk, internal credit risk assessment tools, and third-party assessments. 

Market-based  measurement  (e.g.  default  swaps  spreads  and  bond  pricing 
information)  are  objective  and  transparent  in  terms  of  accessibility  and  allow  for 
specific risk weightings to be assigned to a given asset. They can be used to measure 
the  default  risk  probability  for  a  wide  range  of  different  asset  classes,  such  as 
sovereign debt, corporate debt and structured products. However, these measurement 
tools  may  be  subject  to  important  limitations.  The  two  main  risks  identified  by 
ESMA and the ICF study are the high volatility of these measurement tools and their 
inability  to  express  more  nuanced  indications  of  the  risk  associated  with  an 
investment.  In  particular,  market-based  measures  are  exposed  to  the  risk  of 
manipulation,  i.e.  the  risk  of  market  participants  strategically  influencing  prices  in 
order to generate and benefit from a regulatory consequence. 

Internal  credit-risk  assessment  tools  are  used  as  a  tool  for  risk  assessment  for 
prudential  purposes,  particularly  for  the  calculation  of  regulatory  capital  under  the 
Basel  III  framework  and  CRR  (specifically  under  the  Internal  Ratings  Based  (IRB) 
approach)  and  under  the  Solvency  II  framework  for  insurance  companies.  Internal 
methodologies  are  more  likely  to  correctly  reflect  the  risk  profile  of  a  specific 
borrower or security and can be customised on the basis of each market participant's 
needs. They can potentially also be used for any category of financial instruments and 
investment.   

6 

 
 
 
 
 
 
 
 
 
 
The  main  drawback  of  using  internal  credit  assessment  models  as  alternatives  to 
external  credit  ratings  is  the  high  costs  involved.  These  include  the  costs  related  to 
the development of the analytical tools and the collection of data – possibly including 
subscription  fees  to  access  databases  of  relevant  financial  data  -  as  well  as  hiring 
qualified  staff  to  perform  the  judgemental  part  of  the  analysis  and  to  perform 
validation and quality control of the models. 

Moreover,  internal  credit  risk  assessment  methodologies  might  not  offer  the  same 
level of comparability provided by external ratings when it comes to various types of 
contractual arrangements, while CRAs provide an objective and clear way of defining 
the  acceptable  level  of  risk  (by  means  of  a  standardised  ranking  systems  such  as 
AAA/AA, etc.). 

In addition, they also do not ensure a high level of transparency towards the market. 
This is mainly due to the fact that such models are not publicly available and there is 
an  objective  difficulty  for  their  standardisation  since  the  subjective  risk  factors  and 
business  model  taken  into  consideration  to  perform  the  internal  assessments  vary 
from one  market player to  another.  Therefore they can  be  considered useful for the 
single  investor  performing  the  analysis  but  they  do  not  provide  the  market  with  a 
clear picture and outlook of certain products such as sovereigns. 

Third  party  assessments  are  carried  out  by  parties  that  are  not  involved  in  the 
investment.  Examples  are  accounting-based  measures,  OECD  Country  Risk 
classification, scorings by Central Banks and scorings offered by private companies 
and based on computational models. 

i. 

Accounting-based measures 

Accounting-based measures can provide useful and easily comparable information on 
basic  financial  ratios,  which  may  help  in  assessing  the  creditworthiness  of  an 
investment. However, they are also subject to a number of important limitations and 
cannot be considered as a full alternative to external ratings. One of the disadvantages 
of accounting-based measures is that while they cover all corporate asset classes they 
are  not  suitable  for  sovereign  debt  and  for  many  structured  products.  Moreover, 
access to information, as highlighted by some of the stakeholders interviewed in the 
context of the ICF study, is still problematic since accounting-based measures may in 
some countries still not be easily available for non-listed companies because of lower 
or not harmonised reporting standards or obligations.  

Also,  specific  skills  as  well  as  sectorial  experience  are  necessary  to  effectively  use 
these tools and obtain reliable assessments. Interpretation and judgment plays a key 
role with the accounting-based measures particularly when comparisons are needed. 
For example, different analysts may apply different ratios for the same firm which in 
turn  may  lead  to  diverging  results.  While  this  is  not  in  itself  a  negative  aspect,  it 
implies  that  interpretation  of  ratios  without  an  adequate  expertise  and  contextual 
knowledge may be difficult.  

7 

 
 
 
 
 
 
 
 
 
 
 
 
 
ii.  OECD Country Risk classification 

The  OECD  Country  Risk  Classifications  offer  both  greater  geographical  coverage 
than external credit ratings and the relevant data is made publicly available. However, 
the  OECD  assessments  have  a  narrow  focus  and  take  into  account  only  specific 
categories of risk (political risks and others directly associated with it) while failing 
to include other relevant economic risk indicators which could be potentially useful 
for investors and investment decisions. Therefore, OECD country risk classifications 
can  be  considered  as  a  valid  tool  to  assess  certain  types  of  risk.  Although  they 
encounter some limitations, they could provide a good complement to, and a possible 
means for verification of, external ratings of sovereign debt.  

iii. 

Scorings by Central Banks 

Central Credit Registers (CCR) and Central Financial Statements Databases (CFSD) 
are relevant examples of scoring tools which are either owned or managed by central 
banks. CCRs and CFSDs' techniques are largely applied to corporate debt instruments 
but their geographical and sectoral coverage vary from country to country depending 
on  parameters  such  as  the  eligibility  of  the  instruments  as  collateral  for  monetary 
policy operations. The main drawback of CCRs and CFSDs is their limited country 
and  asset  class  coverage  as  well  as  limited  access  to  data.  They  are  also  limited  in 
their application to corporate debt and their coverage of non-financial corporations in 
some  countries  is  negligible.  Scorings  can  be  an  important  tool  for  smaller 
companies,  as  they  allow  a  cheaper  means  of  obtaining  a  credit  assessment 
(compared  to credit ratings by CRAs).  However, scorings do not  seem sufficient to 
provide a feasible full alternative to external credit rating systems but should rather 
be  employed  as  a  useful  complementary  source  of  information  about  the 
creditworthiness of a financial product. 

The technical analysis carried out to prepare this report shows that there are currently 
no feasible alternatives in the market to entirely replace external credit ratings. Some 
of the above mentioned tools and measures might to a certain extent be considered as 
valid  substitutes  for  CRAs'  assessments  but  entail  substantial  costs  which  in 
particular  could  be  prohibitive  for  smaller  players  in  the  financial  markets.  Other 
tools  might  only  be  used  as  a  complement  to  CRAs'  assessments.  Only  a  few  EU 
legislative provisions that relate to external ratings - such as the relevant provisions in 
CRR/CRD IV and Solvency II - may create an incentive for financial institutions and 
insurance companies to rely on assessments from rating agencies, which is why the 
further monitoring should be focused on these two frameworks.  

8 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
II.  State  of  the  CR  market  and  assessment  of  CRA  Regulation  provisions  to 
boost competition in the credit rating market 

1. Analysis of the CRA market 

Current state of the market 

The rating industry is  currently dominated by three US-based firms (S&P, Moody's 
and Fitch), with a global geographic coverage25 of all asset classes (corporate bonds, 
sovereign  bonds,  SFIs  and  covered  bonds26)  (see  also  Table  1)  and  a  cumulative 
market  share  in  revenues  of  approximately  92%  percent  in  the  EU  (Table  2) 27. 
Although new firms have entered the European credit rating market - which currently 
consists of 26 registered and 4 certified credit rating agencies28 - most of the smaller 
CRAs rate a limited set of asset classes and have limited cross-border activities and 
geographical scope. 

25  With reference to the location of the issuer or instrument rated.  
26  See categories of assets classes in the CEREP database.  
27  Market shares calculated on the basis of the 2014 financial statements. 
28
certified 

registered 

updated 

See 

and 

list 

of 

https://www.esma.europa.eu/supervision/credit-rating-agencies/risk 

CRAs 

available 

at 

9 

 
 
 
 
 
 
 
                                                        
Table 1: Categories of credit ratings offered by EU registered credit rating agencies 2011-2015 (source ESMA, CEREP) 

CRA 

FI 

IN  CO SV SS PE SN SF CB FI  IN CO SV SS PE SN SF CB FI  IN CO SV SS PE SN SF CB FI  IN CO SV SS PE SN SF CB FI  IN CO SV SS PE SN SF CB 

2011 

2012 

2013 

2014 

2015 (First Semester) 

AM Best Europe-Rating Services Ltd. (AMBERS) 

ARC Ratings, S.A. 
ASSEKURATA Assekuranz Rating-Agentur GmbH 
Axesor SA 
BCRA-Credit Rating Agency AD 
Capital Intelligence (Cyprus) Ltd 
CERVED Group S.p.A. 
Creditreform Rating AG 
CRIF S.p.A. 
Dagong Europe Credit Rating Srl (Dagong Europe) 
DBRS Ratings Limited 
The Economist Intelligence Unit Ltd 
Euler Hermes Rating GmbH 
European Rating Agency, a.s. 
EuroRating Sp. zo.o. 
Feri EuroRating Services AG 
Fitch Ratings Limited 
GBB-Rating Gesellschaft für Bonitätsbeurteilung mbH 
ICAP Group SA 
INC Rating Sp. zo.o. 
modeFinance S.r.l. 
Moody's Investors Service Ltd 
Rating-Agentur Expert RA GmbH 
Scope Ratings AG 
Spread Research SAS 
Standard & Poor's Credit Market Servics Europe 

Legend: 

IN  CO 

  CO 

IN 

FI 
FI 

IN  CO 

  SS 

  CO SV 
  CO 
  CO 
  CO 

IN CO 

  FI 

  CO 

IN 

IN CO 

  CO 

IN 

IN CO 

  CO SV 

IN 

IN CO 

  CO SV 

IN 

  CO 
  FI  IN CO 
  FI 

  SS 

  CO SV 
  CO 
  CO 
  CO 

  CB 

  CO 
  FI  IN CO 
  FI 

  SS 

  CO SV 
  CO 
  CO 
  CO 

  SF CB 

  FI 

  CO 
  FI  IN CO SV SS 
  FI 

  CO SV 
  CO 
  CO 
  CO 
  FI  IN CO 

  SF CB 

  CO 
  FI  IN CO SV SS 
  FI 

  CO SV 
  CO 
  CO 
  CO 
  FI  IN CO 

  SF CB 

  SF 

  SF 

  SF CB 

FI 

IN  CO SV SS  PE 

  SF CB  FI  IN CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB 

FI 

  CO 

  FI 

  CO 

  SS 

  SV 

  SS 

  SV 

  FI 

  CO 

  SS 

  SV 

  FI 

  CO SV 

  SV 

  FI 

  CO 

  SS 

  FI 
  FI 

  CO 
  CO SV 

  SV 

  FI 

  CO 

  SS 

  FI 
  FI 

  CO 
  CO SV 

  SF 

FI 
FI 

IN  CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB 

  CO 
  CO 

  FI 

  CO 
  CO 

  FI 

  CO 
  CO 

  FI 

  CO 
  CO 

  FI 

  CO 
  CO 

  CO 

  SS 

FI 

IN  CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB 

  CO 

  CO 

  CO 
  CO 

  SF 

  FI 

  CO 
  CO 

  SF 

  FI  IN CO SV 
  FI 

  CO 
  CO 

  PE 

  SF 

FI 

IN  CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB  FI  IN CO SV SS  PE SN SF CB 

FI 

Corporate – Financial 

SN 

Supranational 

IN 

Corporate – Insurance 

SF 

Structured Finance 

CO 

Corporate – Non Financial 

CB 

Covered Bonds 

SV 

Sovereign 

Non registered 

SS 

Sub-Sovereign 

PE 

Public Entities 

10 

 
 
 
 
 
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table  2:  Market  share  calculation  based  on  2014  turnover  from  credit  rating 
activities and ancillary services at group level in the EU 

Registered Credit Rating Agency 

AM Best Europe-Rating Services Ltd. (AMBERS) 
ARC Ratings, S.A. 
ASSEKURATA Assekuranz Ratings-Agentur GmbH 
Axesor S.A. 
BCRA-Credit Rating Agency AD 
Capital Intelligence (Cyprus) Ltd. 
CERVED Group S.p.A. 
Creditreform Rating AG  
CRIF S.p.A. 
Dagong Europe Credit Rating Srl 
DBRS Ratings Limited 
Euler Hermes Rating GmbH 
European Rating Agency, a.s. 
EuroRating Sp. Zo.o. 
Feri EuroRating Services AG 
Fitch Group29 
GBB-Rating Gesellschaft für Bonitätsbeurteilung mbH 
ICAP Group SA 
INC Rating Sp. Zo.o.30 
ModeFinance S.A.31 
Moody’s Group32 
Rating-Agentur Expert RA GmbH33 
Scope Credit Rating GmbH 
Spread Research SAS 
Standard & Poor’s Group34 
The Economist Intelligence Unit Ltd.  
Total 

Source: ESMA 

Market Share 
0.79% 
0.02% 
0.21% 
0.61% 
0.02% 
0.12% 
1.20% 
0.50% 
0.33% 
0.02% 
1.47% 
0.20% 
0.00% 
0.00% 
0.64% 
16.80% 
0.32% 
0.55% 
0.00% 
0.00% 
34.67% 
0.00% 
0.14% 
0.11% 
40.42% 
0.87% 
100% 

The  oligopolistic  and  highly  concentrated  structure  of  the  CRA  industry  –  both 
overall and at the individual product category level – suggests that the largest CRAs 
operating  globally  may  in  principle  be  able  to  exercise  market  power  to  profitably 
raise prices above competitive levels over time or restrict the choice or quality of the 
services provided.   

Each  CRA  operates  as  a  platform,  which  offers  access  to  a  network  of  issuers  and 
investors  and in  which supply and demand are  interdependent: issuers prefer to  use 
those  CRAs  that  are  recognised  by  the  largest  number  of  relevant  investors  and 

29 Fitch France S.A.S; Fitch Deutschland GmbH; Fitch Italia S.p.A.; Fitch Polska S.A.; Fitch Ratings 
España S.A.U.; Fitch Ratings Limited and Fitch Ratings CIS Limited. 
30 Registered with effect from 27 October 2015. 
31 Registered with effect from 10 July 2015. 
32 Moody’s  Investors  Service  Cyprus  Ltd;  Moody’s  France  S.A.S.;  Moody’s  Deutschland  GmbH; 
Moody’s  Italia  S.r.l.;  Moody’s  Investors  Service  España  S.A.;  Moody’s  Investors  Service  Ltd;  and 
Moody’s Investors Services EMEA Ltd. 
33 Registered with effect from 1 December 2015. 
34 Standard & Poor’s Credit Market Services France S.A.S.; Standard & Poor’s Credit Market Services 
Italy S.r.l.; and Standard & Poor’s Credit Market Services Europe Limited. 

11 

 
 
 
 
 
 
 
 
                                                        
investors want to use the CRAs who can offer the greatest coverage of the issuers and 
instruments they are interested in.  

Notwithstanding  the  2013  amendments  to  the  CRA  Regulation,  a  slight  increase  in 
concentration  in  the  overall  CRA  market  has  been  observed,  the  calculation  being 
based on revenues from rating activity only. Measures of market share based on total 
revenues (revenues from rating activity and ancillary services) show lower levels of 
concentration  compared  to  measures  based  on  revenue  from  credit  rating  activity 
alone.  However,  the  calculation  of  market  shares  on  the  basis  of  total  revenues  is 
made  more  complex  by  a  lack  of  universal  definition  and  treatment  of  “ancillary 
services”. This could indicate that ancillary services constitute an important activity 
for  smaller  CRAs,  while  larger  CRAs  rely  more  on  rating  revenues.  Furthermore, 
with regard to the type of rating, concentration has increased for corporate bonds (the 
most  concentrated  market),  while  it  has  decreased  in  the  sovereign  ratings  and  in 
SFIs.  

The  majority  of  issuers  tend  to  use  one  or  two  CRAs  only  rather  than  a  range  and 
their  choice  is  largely  driven  by  a  CRA's  acceptability  among  investors,  regulators 
and  central  banks35.  In  addition,  there  seems  to  be  a  strong  preference  for  CRAs 
which have a global coverage, reflecting the fact that the credit rating business is of a 
highly reputational nature. Presumably, the choice of CRAs therefore highly depends 
on their name recognition.  

A  highly  concentrated  market  constitutes  a  risk  for  financial  stability  if  CRAs 
observe  each  other’s  behaviour  and  respond  by  posting  similar  opinions  about 
creditworthiness of issuers, as demonstrated during the latest financial and sovereign 
debt crisis. 

Barriers to market entry 

Market  entry  may  be  inhibited  by  the  presence  of  regulatory  and  market  related 
barriers.  

On  the  regulatory  barriers,  the  European  Association  of  Credit  Rating  Agencies 
(EACRA) has expressed concern about the exclusion of the majority of the registered 
CRAs  from  the  list  of  External  Credit  Assessment  Institutions  (ECAIs)  under  the 
Eurosystem's Credit Assessment Framework (ECAF) for the acceptance of collateral, 
as  this  might  stifle  competition 36 .  ECAIs  must  indeed  meet  several  operational 
criteria  and  provide  relevant  coverage:  in  particular,  they  must  comply  with  the 
minimum coverage requirements defined by the Eurosystem in terms of rated assets, 
rated  issuers  and  rated  volume  diversified  across  the  eligible  asset  classes  and  euro 
area countries. As a result, only CRAs of systemic importance to the financial system 
are  currently  recognised  as  ECAIs  by  the  ECB  –  namely  S&P,  Moody's,  Fitch  and 
DBRS  -  and  this  could  limit  competition  in  the  rating  market.  As  pointed  out  in 
ESMA's  Technical  Advice,  "credit  ratings  remain  a  factor  within  the  collateral 

35  For instance, since the ECB decided to include DBRS in the list of ECAIs in the ECAF, DBRS has 

started to have better access to the market.  

36   EACRA  –,  Position  Paper,  Reference:  ECB  criteria  for  acceptance  of  Credit  Rating  Agencies  as 

ECAI sources for ECAF purposes, 26 February 2016. 

12 

 
 
 
 
 
 
 
 
 
                                                        
assessment  frameworks  of  some  central  banks  in  the  EU  that  may  have  significant 
knock  on  effects  for  financial  market  participants’  own  internal  assessment 
procedures".  One way to mitigate this barrier to market entry could be to reduce the 
reliance  on  ratings  within  the  ECB's  European  Credit  Assessment  Framework 
(ECAF). 

In  addition,  some  of  the  claims  in  the  Call  for  Evidence37 refer  to  compliance  cost 
constituting another barrier for new entrants, especially for smaller CRAs. In order to 
be registered as a CRA, firms need to demonstrate compliance with the requirements 
of  the  CRA  Regulation.  Despite  exemptions  from  certain  requirements  for  smaller 
CRAs,  industry  stakeholders  consider  that  the  regulatory  requirements  favour  the 
dominant  CRAs,  as  meeting  compliance  requirements 38  is  very  costly  for  small 
CRAs.  Moreover,  where  thresholds  exist  above  which  additional  regulations  are 
applicable,  these  are  seen  as  potential  barriers  to  expansion  for  small  CRAs 
(particularly in  the context of corporate bonds  but  also  for SFIs). Overall a  balance 
has  to  be  found  between  the  proportionality  of  the  standards  that  should  apply  to 
smaller CRAs and the necessity to ensure the quality and transparency of the ratings 
they produce. 

The  recent  adoption  of  the  Implementing  Technical  Standards  (ITSs)  on  ECAI 
mapping39 by  the  Commission,  following  ESAs'  technical  advice,  will  finally  allow 
European  banks  and  insurers  to  use  smaller  CRAs  in  the  regulatory  capital 
frameworks.  This  mapping  might  create  some  future  opportunities  for  the  use  of 
smaller CRA and could stimulate market development.   

On the market dynamics related barriers, the main obstacle for new entrants – besides 
the fact that there seems to be insufficient demand for additional CRAs - is the highly 
reputational nature of the credit rating market. Therefore, new entrants – that usually 
have low to zero reputation among investors – find it difficult to compensate for their 
lack  of  historical  track-records,  as  well  as  their  insufficient  geographical  coverage. 
Moreover,  new  entrants  must  establish  a  customer  base  to  overcome  the  "network 
effects" in the industry, which favour bigger CRAs to the detriment of small CRAs 
since  the  ratings  of  the  biggest  CRAs  facilitate  the  access  to  the  market  for  rated 
products. 

37   The consultation document and the results of the Call for Evidence are available at  
http://ec.europa.eu/finance/consultations/2015/financial-regulatory-framework-
review/index_en.htm 
38   E.g. to have an independent review board made up of full-time employees, a full-time compliance 
officer,  reporting  and  disclosure  requirements,  requirement  to  inform  rated  entities  before  the 
formal release of ratings. 

39 Commission  Implementing  Regulation  (EU)  laying  down  implementing  technical  standards 
with regard to the mapping of credit assessments of external credit assessment institutions for 
credit risk in accordance with Articles 136(1) and 136(3) of Regulation (EU) No 575/2013 of the 
European  Parliament  and  of  the  Council;  Commission  Implementing  Regulation  (EU)  laying 
down  implementing  technical  standards  with  regard  to  the  allocation  of  credit  assessments  of 
external credit assessment institutions to an objective scale of credit quality steps in accordance 
with  Directive  2009/138/EC  of  the  European  Parliament  and  of  the  Council  and  Commission 
Implementing Regulation (EU) on laying down implementing technical standards with regard to 
the mapping of credit assessments of external credit assessment institutions for securitisation in 
accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council. 

13 

 
 
 
 
 
 
 
                                                        
Fees  

The 2013 amendments to the CRA Regulation introduced a provision requiring fees 
charged to CRAs' clients for the provision of credit ratings and ancillary services to 
not be discriminatory and based on actual costs. 

In  response  to  the  call  for  evidence,  some  insurers  argued  that  CRAs  seem  to  be 
charging  market  participants  additional  costs  (up  to  80%  higher)  for  the  use  of  the 
credit  rating  information  in  their  reporting  to  National  Competent  Authorities, 
leading  to  an  increase  in  Solvency  II  implementation  costs  (as  reported  by  The 
Association of Mutual Insurers and Insurance Cooperatives in Europe).  

Under the CRA Regulation, ESMA has the power to supervise CRAs to ensure that 
fees  charged  to  client  are  not  discriminatory  and  based  on  actual  cost.  The 
Commission invites ESMA to ensure strict compliance with the CRA Regulation of 
fees charged to insurers. 

Expected developments in the CRA market 

In  the  following  years,  a  number  of  measures  will  be  introduced  with  a  view  to 
increasing  competition  in  the  CRA  market,  namely  the  European  Rating  Platform  - 
which will improve visibility for credit ratings issued by smaller CRAs and enhance 
the comparability of ratings of the same instrument by different CRAs. The mappings 
of external credit ratings recently adopted in the context of CRR and Solvency II are 
also intended to ensure a fair treatment of ratings issued by all CRAs, independently 
of  their  size,  while  allowing  prudential  supervisors  to  ensure  that  systemically 
important CRAs are subject to effective safeguards.  

2. Impact and assessment of CRA Regulation provisions concerning competition 

The  general  aim  of  the  2013  amendments  to  CRA  Regulation  with  regard  to 
competition  was  to  increase  competition  between  CRAs  and  encourage  the  use  of 
smaller CRAs. In particular, these amendments introduced a mandatory double rating 
for SFIs (Article  8c), an incentive to appoint at least one small CRA in the case of 
double rating (Article  8d),  general and periodic disclosures (Article  11(2)) and the 
establishment of a European Rating Platform (ERP) (Article 11(a)). 

Article 8c 
Under Article 8c, issuers are required to solicit double credit ratings for SFIs in order 
to ensure an independent second rating.  

This  provision  could  impact  the  market  only  if  the  second  rating  is  published  or 
known  to  investors;  in  that  case  investors  and  issuers  would  be  able  to  compare 
ratings  of  the  same  financial  instrument  and,  as  a  consequence,  CRAs'  reputational 
costs would increase as large differences between ratings from different CRAs might 
raise doubts about the quality of the ratings themselves. 

Moreover, if investors are aware that issuers are required to obtain the second rating, 
then  even  if  there  is  no  legal  requirement  to  publish  it,  investors  might  request  it. 

14 

 
 
 
 
 
 
 
 
 
 
 
 
 
Therefore financial  instruments, for which the second  rating is  not  disclosed,  might 
be perceived as lower quality.  

Overall, the number of CRAs rating SFIs has increased, which means that issuers do 
seek  additional  ratings  not  only  from  large  CRAs  -  which  already  rated  SFIs  -  but 
also  from  small  CRAs.  Therefore  this  measure  seems  to  be  beneficial  for  the 
structured finance market segment.  

Article 8d 
Under Article 8d, where an issuer or related third party intends to appoint at least 2 
CRAs to an issuance or entity, the issuer or related third party is required to consider 
appointing  at  least  one  credit  rating  agency  with  less  than  10%  market  share, 
provided  that  the  issuer  or  related  third  party  considers  it  as  capable  of  rating  the 
relevant issuance or entity, and that one of these smaller CRAs is available to provide 
a rating. In addition, where an issuer or related third party does not intend to appoint 
at least one smaller CRA, this should be documented. 

This  measure  has  yet  to  be  fully  implemented  and  enforced  at  national  level.  As  a 
consequence,  is  not  yet  possible  to  assess  the  impact  of  Article  8d.  Moreover,  the 
number  of  entities  and  instruments  which  have  multiple  ratings  cannot  yet  be 
identified through the CEREP40 database (but ERP will allow investors to see which 
CRAs have issued a credit rating on a particular entity or instrument). 

Small  CRAs  might  not  have  sufficient  experience  and  reputation  for  issuers  to 
voluntarily  choose  them  for  the  second  rating  (and  such  a  second  rating  is  not 
mandatory  unless  the  issuance  is  a  SFI).  The  impact  depends  on  whether  issuers 
would choose to solicit the second rating from a smaller CRA or whether they would 
choose to explain why they do not.  

Moreover, there might be a lack of incentive for individual issuers to change CRAs 
under the "comply or explain" provision, as Article 8d is not mandatory. In order to 
improve  the  effectiveness  of  this  provision,  ESMA  has  approved  the  mandate  for  a 
temporary  Task  Force  on  information  to  be  documented  and  reported  when 
considering the appointment of multiple CRAs in order to assist Sectoral Competent 
Authorities in their supervisory responsibilities under Article 8d and 8c of the CRA 
Regulation41. 

Finally,  the  use  and  effectiveness  of  the  market  share  calculation  required  by  the 
Article has raised concerns as they are calculated not only on the basis of revenues 
from  credit  ratings,  but  also  on  the  revenues  from  ancillary  services.  Such 
calculations  may  also  be  misleading  due  to  the  absence  of  a  clear  definition  of 
ancillary services. Small CRAs and new entrants claimed indeed a lack of awareness 
regarding the implementation of such Article and called for guidance to be issued at 
EU or Member State level. 

40 The CEREP database collects data on credit ratings issued by registered and certified CRAs, and on 
credit  ratings endorsed  by registered  CRAs,  as well  as on  credit ratings issued in  a  third  country  by 
CRAs not certified or registered in the EU but belonging to the same group. Some of the information 
within the CEREP database is available to the public through the ESMA website. 
41   See  also  Q&A,  Guidance  and  other  ESMA  tool,  as  well  as  a  common  reporting  template  with 

related instructions. 

15 

 
 
 
 
 
 
 
 
 
                                                        
Article 11(2) 
Under  Article  11(2),  CRAs  are  required  to  report  data  about  the  credit  ratings  that 
they  issue  –  including  unsolicited  ratings  -  to  ESMA's  Central  Repository  (the 
CEREP database). This is in order to enable investors to compare data between CRAs 
and to examine the performance of the ratings issued by a single CRA. 

Article 11(2) might benefit sophisticated investors more than trusting ones because, 
even  if  all  information  is  publicly  available,  comparing  CRAs'  performance  still 
requires time and skills.  

Publishing  such  data  can  increase  the  visibility  of  small  CRAs  and  help  them 
overcome the reputational barrier to entry.  

Article 11a 
Under  Article  11a,  CEREP  will  be  incorporated  in  the  European  Rating  Platform 
("ERP"), a website operated by ESMA which will publish all available credit ratings 
issued by registered and certified CRAs. 

The  ERP  has  been  established  in  order  to  increase  the  amount  of  information 
available  to  investors  and  to  provide  visibility  to  smaller  CRAs,  as  publishing  all 
ratings  on  a  website  might  increase  investors'  awareness  and  trust  towards  small 
CRAs.  However,  the  use  of  different  methodologies  between  CRAs  does  not  allow 
simple comparisons among the ratings.  

It should also be noted that "investor-paid ratings" – which are exclusively produced 
for  and  disclosed  to  investors  for  a  fee  -  are  not  included  in  the  ERP  so  as  not  to 
undermine such business models.  

The ERP has not become fully operational yet and therefore it is too soon to assess its 
impact  on  competition.  As  visibility  and  reputation  are  very  important  in  the  rating 
industry,  the  effects  of  this  provision  on  competition  should  be  further  monitored 
once the platform is fully implemented.  

3. Overall assessment 

It appears that small CRAs and new entrants are not yet issuing a significant number 
of credit ratings in all asset classes and there seems to be little competition amongst 
CRAs, considering the frequent fee increases and the high fees charged by the largest 
CRAs.  

However, it must also be highlighted that the credit rating market is a special market, 
mainly  driven  by  reputation  amongst  investors  and  issuers.  Given  the  highly 
reputational nature of the market, measures that force the selection of CRAs beyond 
what  would  be  chosen  by  issuers  and  valued  by  investors  can  lead  to  unintended 
consequences  while  having  limited  effectiveness  in  promoting  additional  market 
entry.  

The CRA Regulation created a positive framework for enhancing competition in the 
CRA sector.  

16 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
in 

the  demand  for  small  CRAs  for  SFI  ratings.  Moreover, 

Overall,  Article  8c,  in  conjunction  with  Article  8d,  11(2)  and  11a  might  lead  to  an 
increase 
the 
implementation  of  Articles  11a  and  11(2)  -  which  make  the  information  about  the 
second  rating  publicly  accessible  –  might  favour  the  impact  of  Article  8c,  through 
which investors may be able to put more pressure on CRAs to compete on quality.  

In addition, the CRA Regulation has given greater visibility to CRAs operating in the 
EU,  for  example  through  registration  with  ESMA  and  the  public  disclosure  of 
information  about  credit  ratings  issued.  Moreover,  increased  transparency  measures 
have  raised  awareness  of  the  existence  of  small  CRAs.  Finally,  the  issuance  –  and 
publication  -  of  unsolicited  ratings  appears  to  be  an  effective  tool  to  increase 
visibility of small CRAs and allow them to build a reputation. 

In  conclusion,  while  there  are  some  measures  which  are  in  the  process  of  being 
implemented,  the  Commission  does  not  expect  a  rapid  change  in  the  oligopolistic 
rating industry. However, the analysis and ESMA's Technical Advice show that more 
time is needed in order to fully assess the impact of the recently introduced measures 
of the CRA Regulation on competition in the CRA market.  

III. Impact and assessment of CRA provisions concerning governance  

Considering that the current credit rating market is still being dominated by three big 
CRAs and new CRAs have to face various barriers to market entry, it is of the utmost 
importance to  ensure  the  good  conduct  of  CRAs,  in  particular  of  incumbent  CRAs, 
and  high  quality  ratings.  This  can  only  be  achieved  through  proper  regulatory 
constraints which in the end will also be beneficial to the production of high quality 
ratings and therefore market stability. 

The  recent  financial  crisis  highlighted  -  inter  alia  -  issues  around  the  quality  and 
independence  of  credit  ratings.  In  particular,  there  were  concerns  over  potential 
conflict of interests between issuers and credit rating agencies due to the issuer pays 
remuneration  model  and  the  strong  and  longstanding  relations  between  issuers.  In 
addition,  there  were  concerns  about  the  independence  of  CRAs  when  rating 
instruments issued by their shareholders and the independence and qualifications of 
rating analysts. Moreover, following the financial crisis, there was a need to enhance 
transparency on structured finance products, in order to enable investors to carry out 
their own assessment of the creditworthiness of these complex products. To address 
these issues, a number of provisions were introduced in the last revision of the CRA 
Regulation  on  conflicts  of  interest  (1),  SFIs  (2)  and  remuneration  models  (3).  The 
objective  of  this  section  is  to  identify  if  these  provisions  are  effective  or  if  there  is 
any need for further improvement.  

1. Conflict of interests 

The CRA Regulation provides for several provisions dealing with the avoidance and 
management  of  situations  of  conflict  of  interests.  The  overall  aim  is  to  ensure  the 
independence  of  CRAs  and  consequently  the  quality  of  their  ratings  as  well  as  to 
strengthen  the  investors’  confidence  in  the  functioning  of  the  financial  market  in 
general.  

17 

 
 
 
 
 
 
 
 
 
 
 
The  establishment  of  independent  non-executive  directors  (INEDS)  in  the  CRA 
Regulation  has  been  a  key  factor  in  ensuring  the  effectiveness  of  internal  control 
systems  and the identification  of conflict  of interests. By appointing persons  to  this 
function,  it is  very important  to  ensure minimum standards  of knowledge and  good 
repute. ESMA has expressed its wish to be more proactive in this regard in order to 
ensure consistently high levels of governance across CRAs. 

The CRA Regulation sets internal rules and procedures for analysts and other persons 
involved in the credit rating process in order to identify and manage any conflict of 
interest arising during the rating process. These provisions are complemented by the 
detailed requirements in Annex I of the CRA Regulation. Exemption rules for small 
CRAs  help  to  ensure  that  the  impact  of  the  CRA  Regulation  on  CRAs  of  different 
size is proportionate.  

Shareholders’  pressure  on  CRAs  has  the  potential  to  undermine  their  independence 
where  a  CRA  rates  its  own  shareholders  or  financial  instruments  issued  by  the 
shareholders.  This  is  mitigated  through  shareholding  limitation  provisions  which 
ensure  the  CRAs  independence  and  the  quality  of  their  ratings.  The  practical 
application  of  these  provisions  remains  unclear,  however,  as  there  is  currently  no 
common definition on the term “shareholder” at a European level.  

The CRA Regulation provides for a set of requirements related to knowledge, skills 
and behaviour of ratings analysts and other employees of a CRA who are involved in 
the  rating  process.  By  establishing  a  gradual  rotation  mechanism  for  those  people, 
independence  of  ratings  can  be  ensured.  However,  due  to  staff  rotation,  costs  of 
transferring an analyst to another portfolio might arise.  

ESMA’s  current  work  on  guidelines  on  the  validation  and  review  of  Credit  Rating 
Agencies’ methodologies42 could give further clarity on the internal compliance and 
risk  procedures  of  a  CRA  and  thus  a  clearer  definition  of  the  notion  “rating 
methodology” taking into account the 2015 IOSCO Code43 definition.  

The  current  level  of  sanctions  does  not  seem  to  be  proportionate  to  the  turnover  of 
CRAs, especially to the large ones. The possible fines that can be imposed by ESMA 
at present do not have a deterrent or dissuasive effect in practice44. The Commission 
will therefore further reflect on the sanctioning regime of the CRA Regulation that is 
different from the regimes under more recent European legislation.  

42  See  the  consultation  paper  on  ESMA’s  website 
news/esma-news/esma-consults-validation-and-review-cras%E2%80%99-methodologies-
guidelines.  
43  IOSCO Code of Conduct Fundamentals for Credit Rating Agencies Final Report 2015 available at 

  https://www.esma.europa.eu/press-

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD482.pdf  

44   In  comparison,  the  U.S.  Securities  and  Exchange  Commission  (SEC)  imposed  in  January  2015 
aggregated penalties of US $77 million for a series of federal securities law violations by Standard 
& Poor’s,  https://www.sec.gov/news/pressrelease/2015-10.html  

18 

 
 
 
 
 
 
 
 
 
 
 
 
                                                        
2. Provisions related to SFIs and potential extension to other financial products  

The CRA Regulation provision on mandatory rotation between a CRA and an issuer 
(Article 6b) is limited to the issuing of re-securitisations complemented by a cooling 
off-period of maximum four years during which a CRA is not allowed to issue ratings 
on  re-securitisations  with  underlying  assets  from  the  same  originator.  Potentially 
burdensome effects for small CRAs are softened by an exemption.  

Article 8b of the CRA Regulation requires the establishment by ESMA of a website 
for  the  purposes  of  disclosure  of  information  on  SFIs.  ESMA  recently  announced 
that, due to a number of difficulties faced in the preparatory work for the setup of the 
website,  it  is  unlikely  that  it  will  be  available  to  reporting  entities  by  the  legal 
deadline of 1 January 2017.  

Both Article 6b and Article 8b have yet to be implemented and applied in practice. In 
conjunction with the mandatory double credit rating provision for SFIs in Article 8c, 
it  appears  that  there  is  currently  not  sufficient  choice  among  CRAs  rating  different 
asset  classes  to  allow  competition  to  work  effectively.  Given  the  above,  a  potential 
extension  of  the  mandatory  rotation  mechanism  and  the  disclosure  provisions  of 
information on SFIs to other financial products appear to be premature at this stage as 
there is currently insufficient data available to analyse the impact of these provisions 
on  the  credit  rating  practice.  The  Commission  will  continue  to  monitor  market 
developments as the relevant provisions of the CRA Regulation become applicable. 

3. Alternative remuneration models 

There has been little change observed in the rating industry since the implementation 
of the CRA Regulation concerning remuneration models, especially in the ratings for 
corporate  bonds  and  SFIs.  The  dominant  and  most  frequently  used  remuneration 
model  in  the  CRA  market  is  the  issuer-pays  model,  where  the  CRAs  are  paid  by 
issuers who wish to solicit credit ratings for their investment products.  

Other  examples  of  remuneration  models  are  the  Skin-in-the-game  model  -  where 
investors  produce  ratings  for  projects  they  partially  fund  by  holding  the  issued 
instruments, or where CRAs are remunerated in the instruments they rate which they 
would hold to maturity 45 and the Platform-pays model introducing an intermediary in 
the  market  in  order  to  fund  and  produce  the  rating.  The  Pay-for-performance 
compensation-model requires each CRA to pay a fixed percentage of its revenue to a 
common  fund,  which is  then  paid  out  to  the  best  performing  CRA  that  provides  an 
incentive for CRAs to improve the accuracy of their ratings, while potentially leading 
to  uncertainty  concerning  the  effectiveness  of  the  incentive  mechanism.  Credit 
ratings  could  also  be  produced  by  non-profit  organisations  or  be  funded  by 
governments.  Government  involvement  in  the  allocation  of  CRAs  to  issuers  could 
raise  the  risk  of  segmenting  markets  along  national  lines  and  could  also  potentially 
trigger conflict of interests within the industry, especially with regard to the issuance 
of sovereign and sub-sovereign ratings.  

45   The  model  is  based  on  the  assumption  that  the  entity  producing  the  rating  –  which  is  also  an 

investor in the securities being rated – has a clear interest in the accuracy of the rating.  

19 

 
 
 
 
 
 
 
 
 
 
                                                        
in 

identified 

the  Commission’s  2011  Impact  Assessment,  all  potential 
As 
remuneration models could entail possible conflict of interest. The CRA Regulation 
therefore does not mandate the use of one particular remuneration model as there is 
no essential need to favour one model over another.  

Currently,  alternative  remuneration  models  are  hardly  used  as  stand-alone  solutions 
in  practice  as  CRAs  tend  to  use  hybrid  models  instead.  Credit  ratings  are  issued  to 
some clients under the issuer pays model and others under the investor pays model or 
on a subscription basis.  ESMA’s analysis concludes that this flexibility in the choice 
of the remuneration model should be maintained so that market players remain free to 
choose the most suitable model with regard to their market strategy.  

4. Overall Assessment 

Given  the  analysis  above,  the  provisions  of  the  CRA  Regulation  on  governance 
appear  to  have  a  predominantly  preventive  nature  while  making  an  important 
contribution to ensure the independence of CRAs.  Although, according to ESMA's 
Technical Advice, some provisions might create implementation costs for CRAs by 
imposing  changes  on  IT  systems,  training,  compliance  and  legal  procedures,  the 
recent  framework  on  CRAs'  governance  is  expected  to  bring  benefits  overall  in  the 
long-term.  

Although changes might not be immediately visible in the credit rating practice, the 
provisions  are  effective  in  giving  regulators  the  necessary  tools  to  supervise  CRAs 
that do not comply with the governance provisions of the CRA Regulation. However, 
the sanctioning regime in the CRA Regulation may need revision to ensure that it is 
credible and proportionate as a deterrent.    

IV.  Appropriateness  and  feasibility  of  supporting  a  European  credit  rating 
agency  

Due to  issues  relating  to procyclicality  in  the publication of ratings revealed  by the 
recent  EU  sovereign  debt  crisis,  the  CRA  Regulation  was  amended  in  2013  by 
introducing  additional  measures  to  increase  the  transparency  of  sovereign  debt 
ratings. Article 8a of the CRA Regulation requires now CRAs to publish annually a 
calendar  where  the  dates  for  the  publication  of  their  respective  sovereign  credit 
ratings have to be set.  

In addition to that, the Commission analysed in a report of 201546 the appropriateness 
of the development of a European creditworthiness assessment and whether there are 
sufficient  and  adequate  sources  of  information  for  investors  allowing  them  to  carry 
out their own credit risk assessment of sovereigns. In its report the Commission came 
to  the  conclusion  that  the  introduction  of  such  a  European  creditworthiness 
assessment would add little additional value to the already existing information that is 
provided  by  various  sources  of  the  fiscal  and  macro-economic  surveillance  regime 

46   Report from the Commission to the European Parliament and the Council on the appropriateness of 
the  development  of  a  European  creditworthiness  assessment  for  sovereign  debt,  Brussels, 
23.10.2015, 
http://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52015DC0515 

COM(2015), 

available 

at 

20 

 
 
 
 
 
 
 
 
 
 
                                                        
(e.g. the reports issued in the context of the European Semester). There would also be 
no improvement of information achieved for institutional investors since they already 
have  sufficient  data  through  public  and  private  channels.  Furthermore,  investors 
operating  in  the  global  sovereign  bond  market  tend  to  rely  more  on  information 
provided by international institutions such as the International Monetary Fund (IMF) 
or the World Bank. 

CONCLUSION 

External  credit ratings continue to  play an important  role in some parts  of the EU's 
regulatory  framework  for  the  financial  sector,  especially  for  banks  and  insurance 
companies.  However,  the  Commission  is  of  the  view  that  there  are  currently  no 
feasible  alternatives  that  could  entirely  replace  external  credit  ratings.  Against  this 
background,  supervisors  should  continue  to  promote  the  mitigation  of  mechanistic 
reliance  on  credit  ratings  by  ensuring  that  market  participants  use  alternative  tools, 
such as those referred to in Section I.2, as a complement to external credit ratings. On 
its side, the Commission will continue to monitor the developments in the market. 

As for competition, the Commission will also continue monitoring the development 
of  the  market  in  response  to  the  implementation  of  the  CRA  Regulation  before 
considering the adoption of further measures. This is particularly relevant as some of 
the provisions are still in the process of implementation and would require some time 
to assess the benefits.  

Ensuring that the regulatory framework is proportionate and does not impose undue 
costs  is  a  pre-requisite  to  promoting  market  entry  and  greater  competition  in  the 
market  for  CRAs.  As  a  follow-up  to  its  Call  for  Evidence,  the  Commission  will 
continue  to  monitor  the  application  of  the  CRA  Regulation  on  smaller  CRAs,  in 
particular the issue of proportionality.  

More  generally,  the  Commission  will  seek  to  avoid  and  further  reduce  regulatory 
barriers to market entry, as it recently did by amending the draft ITSs on the mapping 
of  credit  ratings  proposed  by  the  ESAs.  It  will  also  promote  the  broadest  possible 
acceptance of smaller CRAs, including in the context of the ESCB's European Credit 
Assessment Framework (ECAF).  

Notwithstanding  these  efforts  to  stimulate  greater  competition,  recent  developments 
suggest that the market for credit ratings may remain a highly concentrated oligopoly 
for  the  foreseeable  future.  In  this  context,  it  is  essential  to  ensure  that  incumbent 
CRAs  are  subject  to  a  robust  regulatory  framework  backed-up  by  a  credible 
sanctioning regime with proportionate levels of fines that act as an effective deterrent. 
Moreover,  effective  internal  governance  and  compliance  procedures  play  an 
especially important role to ensure the quality of external credit ratings in a  market 
characterised  by  limited  competitive  market  pressure  and  the  CRA  Regulation 
introduced important requirements to strengthen these arrangements.  

With  regard  to  SFIs,  it  is  too  early  to  assess  the  impact  of  the  CRA  Regulation,  as 
certain  relevant  provisions  have  not  yet  been  applied  in  practice.  In  this  context,  it 
does not seem appropriate at the moment to consider extending the respective CRA 
Regulation provisions to other financial products. 

21 

 
 
 
 
 
 
 
 
 
 
As regards the reporting obligation in Article 39b para 2 subpara 2 CRA Regulation, 
and  considering  the  Commission’s  2015  report  on  the  appropriateness  of  the 
development  of  a  European  creditworthiness  assessment  for  sovereign  debt,  the 
Commission  considers  there  to  be  no  need  at  present  for  a  European  credit  rating 
agency specialized in sovereign debt or a European credit rating foundation for other 
credit  ratings.  In  addition,  the  establishment  of  such  common  agencies  would  be 
likely to add more costs than any additional value to the rating market in practice. 

In general, the provisions of the CRA Regulation are considered to have a long-term 
positive impact on the credit rating market. There is currently no evidence related to 
potential negative consequences for CRAs or issuers. Since not all provisions of the 
CRA  Regulation  have  yet  been  implemented,  the  credit  rating  market  needs  to  be 
further monitored for an assessment of the full impact of this legislative framework.  

22