CELEX: 52011PC0747
Language: en
Date: 2011-11-15
Title: Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EC) No 1060/2009 on credit rating agencies

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		52011PC0747
		
			Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EC) No 1060/2009 on credit rating agencies /* COM/2011/0747 final - 2011/0361 (COD) */
			
				
		
		
			
			   	EXPLANATORY MEMORANDUM
1.           CONTEXT OF THE PROPOSAL
Credit rating agencies are important
financial market participants and need to be subject to an appropriate legal
framework. Regulation (EC) No 1060/2009 on credit rating agencies[1]
(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.
An amendment to the CRA Regulation
(Regulation (EU) No 513/2011) entered into force on 1 June 2011, 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[2].
Whilst providing a good basis, a number of
issues related to credit rating activities and the use of ratings have not been
sufficiently addressed in the existing CRA Regulation. These relate notably to
the risk of overreliance on credit ratings by financial market participants,
the high degree of concentration in the rating market, civil liability of
credit rating agencies vis-à-vis investors, conflicts of interests with regard
to the issuer-pays model and CRAs' shareholder structure. The specifics of
sovereign ratings which became evident during the current sovereign debt crisis
are also not specifically addressed in the current CRA Regulation.
The European Commission pointed to these
open issues in its Communication of 2 June 2010 ("Regulating financial
services for sustainable growth")[3] and in a consultation
paper of the Commission services of 5 November 2010[4]
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 resolution on CRAs[5]. The report
supports the need to enhance the regulatory framework for credit rating
agencies and to take measures to reduce the risk of overreliance on ratings.
More specifically, the European Parliament supports, amongst others, enhanced
disclosure requirements for sovereign ratings, the establishment of a European
Rating Index, increased disclosure of information on structured finance
instruments and civil liability of credit rating agencies. The European
Parliament also regarded stimulation of competition as an important task and
considered that the establishment of an independent European Credit Rating
Agency should also be explored and assessed by the Commission.
At an informal ECOFIN meeting of 30 September
and 1 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 overreliance 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.
In addition, the European Securities
Committee and the European Banking Committee composed of representatives of
Member States' ministries of finance discussed the need to further strengthen
the regulatory framework for credit rating agencies at their meetings of 9
November 2010 and 19 September 2011.
At the international level, the Financial
Stability Board (FSB) issued in October 2010 principles to reduce authorities’
and financial institutions’ reliance on CRA ratings[6].
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 G20 Seoul Summit in November 2010.
The Commission has recently addressed the
question of overreliance on ratings by financial institutions in the context of
the reform of the banking legislation[7]. The Commission proposed
the introduction of a rule requiring banks and investment firms to assess themselves
the credit risk of entities and financial instruments in which they invest and
not to simply rely on external ratings in this respect. A similar provision is
proposed by the Commission in the draft amendment to the Directives on UCITS
and on managers of alternative investment funds[8], which are proposed
in parallel to this proposal for a Regulation.
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. 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.
The impact assessment identified the
following problems:
–                        
the requirements to use external credit ratings
in legislation, the excessive use of external ratings for internal risk
management by investors, the investment strategies directly linked to ratings
as well as the insufficient information on structured finance instruments
results in overreliance on external credit ratings leading to procyclicality
and "cliff" effects[9] in capital markets;
–                        
insufficient objectivity, completeness and
transparency on the sovereign rating process, together with the overreliance,
leads to "cliff" and contagion effects of sovereign rating changes;
–                        
high concentration in the credit rating market,
high barriers to entry into the market of credit ratings and lack of
comparability of ratings result in limited choice and competition in the credit
rating market;
–                        
insufficient right of redress for users of
ratings suffering losses due to an inaccurate rating issued by a CRA that
infringes the CRA Regulation;
–                        
potentially undermined independence of CRAs due
to conflicts of interest arising from the "issuer-pays" model,
ownership structure and long tenure of the same CRA; and
–                        
insufficiently sound credit rating methodologies
and processes.
The general objective of the proposal is to
contribute to reducing the risks to financial stability and restoring the
confidence of investors and other market participants in financial markets and
ratings quality. Different policy options were considered in order to address
the identified problems and thus reach the corresponding specific objectives:
–                        
to diminish the impact of "cliff"
effects on financial institutions and markets by reducing reliance on external
ratings;
–                        
to mitigate the risks of contagion effects
linked to sovereign ratings changes;
–                        
to improve credit rating market conditions,
since there is limited choice and competition in the credit rating market, with
a view to improving the quality of ratings;
–                        
to ensure a right of redress for investors,
since currently there is an insufficient right of redress for users of ratings who
have suffered losses due to a credit rating issued by a CRA that has infringed
the CRA Regulation; and
–                        
to improve the quality of ratings by reinforcing
the independence of CRAs and promoting sound credit rating processes and
methodologies. Currently, the independence of CRAs is potentially undermined
due to conflicts of interest arising from the "issuer-pays" model, the
ownership structure and long tenure of business relations with one and the same
CRA.
The preferred policy options are set out in
section 3.4. below and reflected in this proposal. These options are
expected to reduce overreliance by financial institutions on external ratings
by reducing the importance of external ratings in financial services
legislation. In addition, issuers' disclosure regarding the underlying asset
pools of structured finance products is expected to help investors to make
their own credit risk assessment, rather than leaving them to rely solely on
external ratings.
The transparency and quality of sovereign
ratings will be improved through verification of underlying information and
publication of the full research report accompanying the rating. Comparison of
ratings from distinct rating agencies, facilitated by promoting common
standards for rating scales and a European Rating Index (EURIX), is expected to
improve choice and optimise rating industry structure. Also, mandatory rotation
of CRAs would not only substantially reduce the familiarity threat to CRA
independence resulting from a long business relationship between a CRA and an
issuer, but would also have a significant positive effect on improving choice
in the rating industry by providing more business opportunities for smaller
CRAs.
In terms of investor protection, setting up
a right of redress for investors against CRAs should provide strong incentives
for CRAs to comply with legal obligations and to ensure high quality ratings.
Independence of ratings will be improved by introducing a requirement for
issuers to change CRA periodically and enhancing the independence requirements
on the ownership structure of CRAs. Also, a CRA should not be able to provide
solicited ratings for an issuer and its products simultaneously.
In addition, transparency and quality of
ratings would be improved by strengthening the rules on the disclosure of rating
methodologies, by introducing a process for the development and approval of
rating methodologies, including the requirement for CRAs to communicate and
justify the reasons for modifications to their rating methodologies and by
requiring CRAs to inform issuers sufficiently in advance of the publication of
a rating.
In terms of costs, there would be
additional costs for financial firms resulting from the requirements to enhance
internal risk management and the use of internal rating models for regulatory
purposes and for issuers due to enhanced disclosure requirements. CRAs will
also incur additional recurring compliance costs to mitigate risks of contagion
effects linked to sovereign ratings. However, measures to improve competition
would not significantly increase the costs for CRAs. The policy option related
to civil liability of CRAs towards investors is expected to cause compliance
costs due to the need to insure their civil liability or, in the absence of the
insurability, to create a financial buffer to cover potential claims from
investors. Finally, the preferred options dealing with CRA independence are not
expected to entail any significant costs.
3.           LEGAL ELEMENTS OF THE PROPOSAL
3.1.        Legal basis
The proposal is based on Article 114 TFEU.
3.2.        Subsidiarity and
proportionality
According to the principle of subsidiarity
(Article 5(3) of the TEU), 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 or effects of the proposed action, be
better achieved by the EU. The business of credit rating agencies is global.
Ratings issued by a credit rating agency based in one Member State are used and
relied upon by market participants throughout the EU. Failures or the lack of a
regulatory framework for credit rating agencies in one specific Member State
could adversely affect market participants and financial markets EU-wide.
Therefore, sound regulatory rules applicable throughout the EU are necessary to
protect investors and markets from possible shortcomings. Therefore any further
actions in the field of CRAs can best be achieved by EU action.
The proposed amendments are also
proportionate, as required by Article 5(4) of the TEU. The amendments do not
exceed what is necessary to achieve their objectives. The
conditions of independence of credit rating agencies are particularly enhanced:
issuers are required to regularly change the credit rating agency they pay to
issue credit ratings and to appoint different credit rating agencies to issue
credit ratings on them and on their debt instruments. These obligations,
although limiting business freedom, are proportionate to the objectives pursued
and take account of the regulatory environment. They only apply regarding a
service in the public-interest (credit ratings that can be used for regulatory
purposes) by certain regulated institutions (credit rating agencies) under certain
conditions (issuer-pays model) and, in the case of rotation, on a temporary
basis. Credit rating agencies are, however, not prevented from continuing to
provide credit rating services in the market: a credit rating agency which is
required to refrain from providing credit rating services to a particular
issuer would still be able to provide credit ratings to other issuers. In a
market context where the rotation rule applies across the board, business
opportunities will arise since all issuers would need to change credit rating
agency. Also, credit rating agencies may always issue unsolicited credit rating
on the same issuer, capitalising on their experience.
The amendments also foresee that investors
and large credit rating agencies are limited regarding some investment choices.
Investors holding a participation of at least 5% in a CRA are prevented to hold
more than 5% in any other CRA. This restriction is necessary to guarantee the
perception of independence of CRAs, which could be affected should the same
shareholders or members be significantly investing in different credit rating
agencies not belonging to the same group of credit rating agencies, even if
those shareholders or members are not in position to legally exercise dominant
influence or control. This risk is higher considering that EU registered CRAs
are unlisted, and therefore less transparent, companies. Nevertheless, in order
to ensure that purely economic investments in credit rating agencies are still
possible, the prohibition to simultaneously invest in more than one credit
rating agency is not to be extended to investments channelled through
collective investment schemes managed by third parties independent from the
investor and not subject to his or her influence. 
3.3.        Compliance with Articles
290 and 291 TFEU
On 23 September 2009, the Commission adopted proposals for Regulations
establishing EBA, EIOPA, and ESMA. In this respect the Commission wishes to
recall the Statements in relation to Articles 290 and 291 TFEU it made at the
adoption of the Regulations establishing the European Supervisory Authorities
according to which: "As regards the process for the adoption of regulatory
standards, the Commission emphasises the unique character of the financial
services sector, following from the Lamfalussy structure and explicitly
recognised in Declaration 39 to the TFEU. However, the Commission has serious
doubts whether the restrictions on its role when adopting delegated acts and
implementing measures are in line with Articles 290 and 291 TFEU."
3.4.        Explanation of the
proposal
Article 1 of this proposal amends the CRA
Regulation. References in the following sub-sections refer to the amended or
new articles in the CRA Regulation, unless specified.
3.4.1.     Extension of the scope of
application of the Regulation to cover rating outlooks
In addition to credit ratings, CRAs also publish
"rating outlooks" providing an opinion on the likely future direction
of a credit rating. The Commission proposal extends the scope of the rules on
credit ratings to also cover, where appropriate, "rating outlooks".
The amended text requests in particular that CRAs disclose the time horizon
during which a change of the credit rating is expected (cf. Annex I, Section D,
Part II, point 2(f)). The CRA Regulation is therefore specifically adapted in
different places: Articles 3, 6(1), 7(5), 8(2), and 10(1) and (2); in Annex I,
Section B, points 1, 3, and 7; Section C, points 2, 3 and 7; Section D, Part I,
points 1, 2, 4 and 5; and Section E, Part I, point 3. In addition, the
amendments described below are also adapted, where appropriate, to the
introduction of the “rating outlook” concept.
3.4.2.     Amendments in relation to
the use of credit ratings
The new Article 5a inserted in the CRA
Regulation requires certain financial institutions to make their own credit
risk assessment. They should therefore avoid relying solely or mechanistically
on external credit ratings for assessing the creditworthiness of assets.
Competent authorities should supervise the adequacy of these financial firms'
credit assessment processes including monitoring that financial firms do not
over-rely on credit ratings. This rule stems from the Financial Stability
Board's principles for reducing reliance on CRA Ratings of October 2010.
Also, in accordance with the new Article 5b,
ESMA, EBA and EIOPA should not refer to credit ratings in their guidelines,
recommendations and draft technical standards where such references have the
potential to trigger mechanistic reliance on credit ratings by competent
authorities or financial market participants. Moreover, they should adapt their
existing guidelines and recommendations accordingly, and by 31 December 2013 at
the latest.
Other amendments aim at addressing the risk
of over-reliance on credit ratings by financial market participants as regards structured finance instruments and at increasing the quality of the
credit ratings regarding such instruments:
–                        
Article 8a: this new article requires issuers
(or originators or sponsors) to disclose specific information on structured
finance products on an ongoing basis, in particular on the main elements of
underlying asset pools for structured finance products necessary for investors
to make their own credit assessment and thus avoid the need to rely on external
ratings. This information is to be disclosed through a centralised website
operated by ESMA;
–                        
Article 8b: this new article requires issuers
(or their related third parties) who solicit a rating to engage two credit
rating agencies, independent from each other, to issue two independent credit
ratings in parallel on the same structured finance instruments.
Finally, it should be noted that the
Commission is proposing in parallel amendments of Directive 2009/65/EC of the
European Parliament and of the Council of 13 July 2009 on coordination of laws,
regulations and administrative provisions relating to undertakings for
collective investment in transferable securities (UCITS)[10]
and Directive 2011/61/EU of the European Parliament and of the Council of 8
June 2011 on Alternative Investment Fund Managers to make sure that the
principle of avoiding over-reliance on credit ratings is also integrated into the
national legislation implementing those directives.
3.4.3.     Amendments in relation to the independence of CRAs 
This group of amendments establishes
stricter independence rules which aim at addressing conflicts of interests with
regard to the issuer-pays model and CRAs' shareholder structure:
–                        
Article 6a: this new article prevents any member
or shareholder of a CRA that holds a participation of at least 5% to hold 5% or
more in any other CRA, unless the CRAs in question are members of the same
group;
–                        
Article 6b: this new article introduces a
rotation rule for the CRAs engaged by the issuer (i.e. it does not apply to
unsolicited ratings) to either rate the issuer itself or its debt instruments.
The CRA engaged should not be in place for more than 3 years or for more than a
year if it rates more than ten consecutive rated debt instruments of the issuer.
However, this latter rule shall not lead to shortening the permitted period of
engagement to less than a year. Where the issuer solicits more than one rating
for itself or for its instrument, be it because of a legal obligation to do so
or voluntarily, only one of the agencies has to rotate. However, the maximum
duration for each of these CRAs is fixed at a period of six years. The former CRA
(or any other CRA belonging to the same group or having shareholder links with
the former CRA) should not be able to rate again the same issuer or its
instruments until an appropriate cooling off period has elapsed. This article also
foresees that the outgoing CRA provides the incoming CRA with a handover file
including relevant information;
This rotation rule is expected to significantly
mitigate the potential conflicts of interest issues relating to the issuer-pays
model. Moreover, the Commission will continue to monitor the appropriateness of
credit rating agencies' remuneration models and will submit a report thereon to
the European Parliament and the Council by 7 December 2012, as required by
Article 39 (1) of the Regulation. In this context, the Commission will also consider
more far going solutions to this issue as currently assessed in other
jurisdictions, including the US.
Article 6b does not apply to sovereign ratings;
–                        
Annex I, Section C, point 8 in relation to
Article 7(4): the rules on the internal rotation of staff within a CRA have
been adapted to take account of the new Article 6b. The new rules provide that
the lead rating analysts should not be involved in rating the same entity for
more than 4 years, thus preventing those analysts from moving to another CRA
with a client file. Rules on internal rotation rules are furthermore provided
for in the case a CRA provides unsolicited ratings or sovereign ratings;
–                        
Annex I, Section B, point 3: the Regulation
would prevent a CRA from issuing credit ratings (or would require that CRA to
disclose that the credit rating may be affected) where there are actual or
potential conflicts of interests created by the involvement of (in addition to
the CRA and its staff, already covered by the rules) persons who hold more than
10% of the capital or voting rights of the CRA, or are otherwise in a position
to exercise significant influence on the business activities of the CRA, in
certain situations, such as investment in the rated entity, being member of the
board of the rated entity etc; 
–                        
Annex I, Section B, point 4: persons who hold
more than 5% of the capital or voting rights of the CRA, or are otherwise in a
position to exercise significant influence on the business activities of the
CRA should not be allowed to provide consultancy or advisory services to the
rated entity regarding the corporate or legal structure, assets, liabilities or
activities of that rated entity.
3.4.4.     Amendments in relation to the disclosure of information
on methodologies of CRAs, credit ratings and rating outlooks
Another group of amendments strengthen the
rules on the disclosure of rating methodologies, with a view to promoting sound
credit rating processes and, in fine, improve rating quality:
–                        
Articles 8(5a), 8(6)(aa)
and 22a(3): these proposed provisions lay down procedures for the preparation
of new rating methodologies or the modification of existing ones. They require
the consultation of stakeholders on the new methodologies or the proposed
changes and on their justification. CRAs should furthermore submit the proposed
methodologies to ESMA for the assessment of their compliance with existing
requirements. The new methodologies may only be used once they have been
approved by ESMA. The rules also require the publication of the new
methodologies together with a detailed explanation;
–                        
Article 8(7): each CRA will be under the
obligation to correct errors in its methodologies or in their application, as
well as to inform ESMA, the rated entities and generally the public of such
errors;
–                        
Annex I, Section D, Part I, point 2a: the
requirement to provide guidance on methodologies and underlying assumptions
behind ratings is extended from structured finance products to all asset
classes. The guidance provided by the CRAs should be clear and easily
comprehensible.
Other disclosure obligations for CRAs are
also reinforced:
–                        
Annex I, Section D, Part I, point 3: this
provision deals with the information to be provided by CRAs to issuers on the
principal grounds on which the rating or an outlook is based in advance of the
publication of the rating or outlook, in order to give an opportunity to the
rated entity to detect any errors in the rating. The proposed rule requires
CRAs to inform issuers during the working hours of the rated entity and at
least a full working day before publication. This rule applies to all ratings,
whether solicited or not, and to outlooks;
–                        
Annex I, Section D, Part I, point 6: CRAs should
disclose information about all entities or debt instruments submitted to it for
their initial review or for preliminary rating. Thus, the new rule extends this
obligation beyond the ratings of structured finance products. This amendment
entails the corresponding deletion of point 4 in Part II of Section D of Annex
I.
3.4.5.     Amendments in relation to sovereign ratings
Rules applying specifically to sovereign
ratings (the rating of a State, a regional or local authority of a State or of
an instrument for which the issuer of the debt or financial obligation is a
State or a regional or local authority of a State) are particularly reinforced,
with a view to improving the quality of such ratings:
–                        
Article 8(5), new second subparagraph: CRAs are
required to assess sovereign ratings more frequently: every six months instead
of every twelve months;
–                        
Annex I, Section D: a new Part III on additional
obligations in relation to the presentation of sovereign ratings is added. CRAs
must in particular publish a full research report when issuing and amending
sovereign ratings, in order to improve transparency and enhance users’
understanding. Sovereign ratings should only be published after the close of
business and at least one hour before the opening of trading venues in the EU;
–                        
Annex I, Section E, Part III, points 3 and 7:
the rules on the publication of a transparency report by CRAs are strengthened
by requiring CRAs to be transparent as to the allocation of staff to the
ratings of different asset classes (i.e. corporate, structured finance,
sovereign ratings). CRAs should also provide disaggregated data on their
turnover, including data on the fees generated per different asset classes.
This information should allow assessing to what extent CRAs use their resources
for the issuance of sovereign ratings.
3.4.6.     Amendments in relation to
the comparability of credit ratings and fees for credit ratings
Enhancing competition in the credit rating
market and improving ratings quality is another objective of this proposal.
This objective is in particular pursued by the following amendments, which
promote the comparability of credit ratings and provide for more transparency
on fees charged for credit ratings:
–                        
Article 11a: this new article require CRAs to
communicate their ratings to ESMA, which would ensure that all available
ratings for a debt instrument are published in the form of a European Rating
Index (EURIX), freely available to investors;
–                        
Article 21(4a): this new paragraph empowers ESMA
to develop draft technical standards, for endorsement by the Commission, on a
harmonised rating scale to be used by CRAs. All ratings would need to follow
the same scale standards, ensuring that ratings can be compared more easily by
investors. This provision would make EURIX more useful for investors and other
stakeholders;
–                        
Annex I, Section B, point 3a: fees charged by
CRAs to their clients for the provision of ratings (and ancillary services)
should be non-discriminatory (i.e. based on actual cost and the transparency
pricing criteria) and not based on any form of contingency (i.e. not depend on
the result or outcome of the work performed). This new provision also aims at
avoiding conflicts of interest (e.g. rated entities could pay higher fees in
exchange of overly favourable ratings);
–                        
Annex I, Section E, Part II, points 2(a) and
2(aa): the amended point 2(a) requires CRAs to annually disclose to ESMA a list
of fees charged to each client, for individual ratings and any ancillary
service. The disclosure on fees is completed by the new provision on point 7 of
Part III of Section E of Annex I described above. The
new point 2 (aa) requires CRAs to also disclose to ESMA their pricing policy, including pricing criteria in relation to
ratings for different asset classes.
Finally, the proposed regulation requires
ESMA to undertake some monitoring activities regarding market concentration
(cf. Article 21(5)) and the Commission to prepare a report on this issue
(Article 39(4)).
3.4.7.     Amendments in relation to
the civil liability of credit rating agencies vis-à-vis
investors
Although this proposal for a Regulation
also contains provisions aiming at reducing the risk of excessive reliance on
external credit ratings (see section 3.4.2 of this explanatory memorandum),
credit ratings, whether issued for regulatory purposes or not, will in the
foreseeable future continue to have an impact on investment decisions. Hence,
CRAs have an important responsibility towards investors in ensuring compliance with
the rules of the CRA Regulation. This is reflected in the proposed Article 35a of
the CRA Regulation which will render a CRA liable in case it infringes,
intentionally or with gross negligence, the CRA Regulation, thereby causing
damage to an investor having relied on a credit rating of such CRA, provided
the infringement in question affected the credit rating.
3.4.8.     Other amendments
The text of the Regulation is also adapted
to clarify some obligations with regard to "certified" CRAs
established in third countries. Thus, Articles 5(8), 11(2), 19(1) and 21(4)(e) of
the CRA Regulation are amended accordingly.
The list of infringements in Annex III and
Article 36a(2) of the CRA Regulation have also been adapted following the other
changes to the Regulation.
In order to bring the CRA Regulation in
line with the terminology of the Lisbon Treaty, references to the
"Community" are replaced by references to the "Union".
3.4.9      The question of the
European Rating Agency
This proposal is not aimed at setting up a
European credit rating agency. As requested by the European Parliament in its
report on credit rating agencies of 8 June 2011 this option was assessed in
detail in the impact assessment accompanying this proposal. The impact
assessment found that even if a publicly funded CRA may have some benefits it
terms of increasing the diversity of opinions in the rating market and
providing an alternative to the issuer pays model, it would be difficult to
address concerns relating to conflicts of interest and its credibility,
especially if such CRA would rate sovereign debt. However, these findings
should by no means discourage other actors from setting up new credit rating
agencies. The Commission will monitor to what extent new private entrants in
the credit rating market will provide for more diversity.
A number of measures in the current
proposal should contribute to more diversity and choice in the credit rating
industry:
–                        
the proposed rotation rule will require regular
changes of credit rating agencies which should open up the CRA market for new
entrants; and
–                        
the proposed prohibition for large credit rating
agencies to acquire other CRAs over a period of ten years.
The Commission is also exploring ways
whether and to what extent Union funds could be used to promote the creation of
networks of smaller CRAs which would allow them to pool resources and generate
efficiencies of scale.
4.           BUDGETARY IMPLICATION
The Commission's proposal has no impact on
the European Union budget. In particular, tasks that would be entrusted to ESMA
as mentioned in the proposal would not entail additional EU funding.
It should also be noted that Article 19 of
the CRA Regulation[11] provides that ESMA's
expenditure necessary for the registration and supervision of CRAs according to
the Regulation shall be fully covered by fees charged to the credit rating
agencies.
2011/0361 (COD)
Proposal for a
REGULATION OF THE EUROPEAN PARLIAMENT
AND OF THE COUNCIL
amending Regulation (EC) No 1060/2009 on
credit rating agencies
(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 114 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 Bank[12],
Having regard to the opinion of the
European Economic and Social Committee[13],
Acting in accordance with the ordinary
legislative procedure,
Whereas:
(1)              
Regulation (EC) No 1060/2009 of the European
Parliament and of the Council of 16 September 2009 on credit rating
agencies[14] requires credit rating
agencies to comply with rules of conduct in order to mitigate possible
conflicts of interest, ensure high quality and sufficient transparency of
ratings and the rating process. Following the amendments introduced by
Regulation (EU) No 513/2011 of the European Parliament and of the Council[15],
the European Securities and Markets Authority (ESMA) has been empowered to
register and supervise credit rating agencies. This amendment complements the
current regulatory framework for credit rating agencies. Some of the issues
addressed (conflicts of interests due to the issuer-pays model, disclosure for
structured finance instruments) had been identified, but not fully resolved by
the existing rules. The need to review transparency and procedural requirements
specifically for sovereign ratings was highlighted by the current sovereign
debt crisis.
(2)              
The European Parliament issued a resolution on
credit ratings agencies on 8 June 2011 calling for enhanced regulation on
credit rating agencies[16]. At an informal ECOFIN
meeting of September 30 and October 1, 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.
(3)              
At the international level the Financial
Stability Board (FSB) endorsed on 20 October 2010 principles to
reduce authorities’ and financial institutions’ reliance on CRA ratings. Those
principles were endorsed by the G20 Seoul Summit in November 2010.
(4)              
The relevance of rating outlooks
for investors and issuers and their effects on markets are comparable
to the relevance and effects of credit ratings. Therefore, all the requirements
of Regulation (EC) No 1060/2009 which aim at ensuring that rating actions are
free from conflicts of interest, accurate and transparent should also apply to
rating outlooks. According to current supervisory practice a number of requirements of the
Regulation apply to rating outlooks. This Regulation introduces a definition of
rating outlooks and clarifies which specific provisions apply to such outlooks.
This should clarify the rules and provide legal certainty. The
definition of rating outlooks according to this Regulation should also
encompass opinions regarding the likely direction of a credit rating in the
short term, commonly referred to as credit watches.
(5)              
Credit rating agencies are important
participants in the financial markets. As a consequence, the independence and
integrity of credit rating agencies and their credit rating activities are of
particular importance to guarantee their credibility vis-à-vis market
participants, in particular investors and other users of ratings. Regulation
1060/2009 provides that credit rating agencies have to be registered and
supervised as their services have considerable impact on the public interest.
Credit ratings, unlike investment research, are not mere opinions about a value
or a price for a financial instrument or a financial obligation. Credit rating
agencies are not mere financial analysts or investment advisors. Credit ratings
have regulatory value for regulated investors, such as credit institutions,
insurance companies and other institutional investors. Although the incentives
to excessively rely on credit ratings are being reduced, credit ratings still
drive investment choices, notably because of information asymmetries and for
efficiency purposes. In this context, credit rating agencies must be
independent and perceived as such by market participants.
(6)              
Regulation (EC) No 1060/2009 already provided a first
round of measures to address the question of independence and integrity of
credit rating agencies and their credit rating activities. The objectives of
guaranteeing the independence of credit rating agencies and of identifying,
managing and, to the extent possible, avoiding any conflict of interest that
could arise were already underlying several provisions of that Regulation in
2009. Whilst providing a sound basis, the existing rules do not appear to have had
a sufficient impact in this regard. Credit rating agencies still are not perceived
as sufficiently independent actors. The selection and remuneration of the
credit rating agency by the rated entity (issuer-pays model) engenders inherent
conflicts of interest, which are insufficiently addressed by the existing
rules. Under this model, there are incentives for credit rating agencies to
issue complacency ratings on the issuer in order to secure a long-standing
business relationship guaranteeing revenues or in order to secure additional
work and revenues. Moreover, relationships between the shareholders of credit
rating agencies and the rated entities may cause conflicts of interest which
are not sufficiently dealt with by the existing rules. As a result, credit
ratings issued under the issuer-pays model may be perceived as the credit ratings
that suit the issuer rather than the credit ratings needed by the investor. Without
prejudice to the conclusions of the report to be submitted by the Commission on
the issuer-pays model by December 2012 pursuant to Article 39(1) of Regulation
(EC) No 1060/2009, it is essential to reinforce the conditions of independence
applying to credit rating agencies in order to increase the level of
credibility of credit ratings issued under the issuer-pays model.
(7)              
The credit rating market shows that, traditionally,
credit rating agencies and rated entities enter into long-lasting
relationships. This raises the threat of familiarity, as the credit rating
agency may become too sympathetic to the desires of the rated entity. In those
circumstances, the impartiality of credit rating agencies over time could
become questionable. Indeed, credit rating agencies mandated and paid by a
corporate issuer are incentivised to issue overly favourable ratings on that
rated entity or its debt instruments in order to maintain the business
relationship with such issuer. Issuers are also subject to incentives that
favour long-lasting relationships, such as the lock-in effect: an issuer may
refrain from changing credit rating agency as this may raise concerns of
investors regarding the issuer's creditworthiness. This problem was already
identified in Regulation (EC) No 1060/2009, which required credit rating
agencies to apply a rotation mechanism providing for gradual changes in
analytical teams and credit rating committees so that the independence of the
rating analysts and persons approving credit ratings would not be compromised.
The success of those rules, however, was highly dependant on a behavioural
solution internal to the credit rating agency: the actual independence and professionalism
of the employees of the credit rating agency vis-à-vis the commercial interests
of the credit rating agency itself. These rules were not designed to provide
sufficient guarantee towards third parties that the conflicts of interest
arising from the long-lasting relationship would effectively be mitigated or
avoided. It therefore appears necessary to provide for a structural response
having a higher impact on third parties. This could be achieved effectively by
limiting the period during which a credit rating agency can continuously
provide credit ratings on the same issuer or its debt instruments. Setting out
a maximum duration of the business relationship between the issuer which is
rated or which issued the rated debt instruments and the credit rating agency
should remove the incentive for issuing favourable ratings on that issuer.
Additionally, requiring the rotation of credit rating agencies as a normal and
regular market practice should also effectively address the lock-in effect,
where an issuer refrains from changing credit rating agency as this would raise
concerns of investors regarding the issuer's creditworthiness. Finally, the
rotation of credit rating agencies should have positive effects on the rating
market as it would facilitate new market entries and offer existing credit
rating agencies the opportunity to extend their business to new areas.
(8)              
Regular rotation of credit rating agencies
issuing credit ratings on an issuer or its debt instruments should bring more
diversity to the evaluation of the creditworthiness of the issuer that selects
and pays that credit rating agency. Multiple and different views, perspectives
and methodologies applied by credit rating agencies should produce more diverse
credit ratings and ultimately improve the assessment of the creditworthiness of
the issuers. For this diversity to play a role and to avoid complacency of both
issuers and credit rating agencies, the maximum duration of the business
relationship between the credit rating agency and the issuer paying must be
restricted to a level guaranteeing regular fresh looks at the creditworthiness
of issuers. Therefore, a time period of three years would seem appropriate,
also considering the need to provide certain continuity within the credit
ratings. The risk of conflict of interest increases in situations where the
credit rating agency frequently issues credit ratings on debt instruments of
the same issuer within a short period of time. In those cases, the maximum
duration of the business relationship should be shorter to guarantee similar results.
Hence, the business relationship should stop after a credit rating has rated
ten debt instruments of the same issuer. However, in order to avoid imposing a
disproportionate burden on issuers and credit rating agencies, no requirement
to change credit rating agency within the first 12 months of the business relationship
should be imposed. Where an issuer mandates more than one credit rating agency,
either because as an issuer of structured finance instruments he is obliged to
do so, or on a voluntary basis, it should be sufficient that the strict
rotation periods only apply to one of the credit rating agencies. However, also
in this case, the business relationship between the issuer and the additional
credit rating agencies should not exceed a period of six years.
(9)              
The rule requiring rotation of credit rating
agencies needs to be enforced in a credible manner to be meaningful. The
rotation rule would not achieve its objectives if the outgoing credit rating
agency were allowed to provide rating services to the same issuer again within
a too short period of time. Therefore, it is important to provide for an
appropriate period within which such credit rating agency may not be mandated
by the same issuer to provide rating services. That period should be
sufficiently long to allow the incoming credit rating agency to effectively
provide its rating services to the issuer, to ensure that the issuer is truly
exposed to a new scrutiny under a different approach and to guarantee that the
credit ratings issued by the new credit rating agency provide enough
continuity. That period should allow that an issuer cannot rely on comfortable
arrangements with only two credit rating agencies that would replace each other
on a continuous basis, as this could lead to maintaining the familiarity
threat. Hence, the period during which the outgoing credit rating agency should
not provide rating services to the issuer should generally be set at four
years.
(10)          
The change of credit rating agency inevitably increases
the risk that knowledge about the rated entity acquired by the outgoing rating
agency is lost. As a result, the incoming credit rating agency would have to
make considerable efforts to acquire the knowledge necessary to carry out its
work. However, a smooth transition should be ensured by establishing a
requirement on the outgoing credit rating agency to transfer relevant
information on the rated entity or instruments to the incoming credit rating
agency.
(11)          
Requiring issuers to regularly change the credit
rating agency they mandate to issue credit ratings is proportionate to the
objective pursued. This requirement only applies to certain regulated
institutions (registered credit rating agencies) which provide a service
affecting the public interest (credit ratings that can be used for regulatory
purposes) under certain conditions (issuer-pays model). The privilege of having
its services recognised as playing an important role in the regulation of the
financial services market and being approved to carry out this function,
entails the need to respect certain obligations in order to guarantee
independence and the perception of independence in all circumstances. A credit
rating agency which is prevented from providing credit rating services to a
particular issuer would still be allowed to provide credit ratings to other
issuers. In a market context where the rotation rule applies to all players,
business opportunities will arise since all issuers would need to change credit
rating agency. Moreover, credit rating agencies may always issue unsolicited
credit ratings on the same issuer, capitalising on their experience.
Unsolicited ratings are not constrained by the issuer-pays model and therefore
are less affected by potential conflicts of interests. For issuers, the maximum
duration of the business relationship with a credit rating agency or the rule
on the employment of more than one credit rating agency also represents a
restriction on their freedom to conduct their own business. However, this
restriction is necessary on public-interest grounds considering the
interference of the issuer-pays model with the necessary independence of credit
rating agencies to guarantee independent credit ratings that can be used by
investors for regulatory purposes. At the same time, these restrictions do not
go beyond what is necessary and should rather be seen as an element increasing
the issuer's creditworthiness towards other parties, and ultimately the market.
(12)          
One of the specificities of sovereign ratings is
that the issuer-pays model generally does not apply. Instead, the majority of
ratings are produced as unsolicited ratings, providing the basis for both solicited
and unsolicited ratings of the financial institutions of the country concerned.
It is therefore not necessary to require the rotation of credit rating agencies
issuing sovereign ratings.
(13)          
The independence of a credit rating agency
vis-à-vis a rated entity is also affected by possible conflict of interests of
any of its significant shareholders with the rated entity: A shareholder of a
credit rating agency could be a member of the administrative or supervisory
board of a rated entity or a related third party. The rules of Regulation (EC)
No 1060/2009 addressed this type of situation only as regards the conflicts of
interest caused by rating analysts, persons approving the credit ratings or
other employees of the credit rating agency. The Regulation was, however,
silent as regards potential conflicts of interest caused by shareholders or
members of credit rating agencies. With a view to enhancing the perception of
independence of credit rating agencies vis-à-vis the rated entities, it is
appropriate to extend the existing rules applying to conflicts of interest
caused by employees of the credit rating agencies also to those caused by
shareholders or members holding a significant position within the credit rating
agency. Hence, the credit rating agency should abstain from issuing credit
ratings, or should disclose that the credit rating may be affected, where a shareholder
or member holding 10% of the voting rights of that agency is also a member of
the administrative or supervisory board of the rated entity or has invested in
the rated entity. Moreover, where a shareholder or member is in a position to
significantly influence the business activity of the credit rating agency, that
person should not provide consultancy or advisory services to the rated entity
or a related third party regarding its corporate or legal structure, assets,
liabilities or activities.
(14)          
The rules on independence and prevention of
conflicts of interest, could become ineffective if credit rating agencies were
not independent from each other. A sufficiently high number of credit rating
agencies, unconnected with both the outgoing credit rating agency in case of
rotation and with the credit rating agency providing credit rating services in
parallel to the same issuer, is necessary for a workable application of those
rules. In the absence of sufficient choice of credit rating agencies for the
issuer in the current market, the implementation of these rules aimed at
enhancing independence conditions would risk becoming ineffective. Therefore,
it is appropriate to require a strict separation of the outgoing agency from
the incoming credit rating agency in case of rotation as well as of the two
credit rating agencies providing rating services in parallel to the same
issuer. The credit rating agencies concerned should not be linked to each other
by control, by being part of the same group of credit rating agencies, by being
shareholder or member of or being able to exercise voting rights in any of the
other agencies, or by being able to appoint members of the administrative,
management or supervisory boards of any of the other credit rating agencies.
(15)          
The perception of independence of credit rating
agencies would be particularly affected should the same shareholders or members
be investing in different credit rating agencies not belonging to the same
group of credit rating agencies, at least if this investment reaches a certain
size that could allow these shareholders or members to exercise a certain
influence on the agency's business. Therefore, in order to ensure the
independence (and the perception of independence) of credit rating agencies, it
is appropriate to provide for stricter rules regarding the relations between
the credit rating agencies and their shareholders. For this reason, no person should
simultaneously hold a participation of 5% or more in more than one credit
rating agency, unless the agencies concerned belong to the same group.
(16)          
The objective of ensuring sufficient
independence of credit rating agencies entails that investors should not hold
simultaneously investments of 5 % or more in more than one credit rating
agency. Directive 2004/109/EC of the European Parliament and of the Council of
15 December 2004 on the harmonisation of transparency requirements in relation
to information about issuers whose securities are admitted to trading on a
regulated market[17] requests that those
persons controlling 5% of the voting rights in a listed company results should
disclose it to the public, because, inter alia, of the interest for
investors to know about changes in the voting structure of such company. 5% of
the voting rights is considered therefore to be a major holding capable of
influencing the voting structure in a company. It is therefore appropriate to
use the 5% level for the purposes of restricting the simultaneous investment in
more than one credit rating agency. This measure cannot be considered
disproportionate, given that all registered credit rating agencies in the Union
are non-listed undertakings therefore not subject to the transparency and
procedural rules that apply to listed companies in the EU. Often unlisted
undertakings are governed by shareholders' protocols or agreements and the
number of shareholders or members is usually low. Therefore, even a minority
position in an unlisted credit rating agency could be influential.
Nevertheless, in order to ensure that purely economic investments in credit
rating agencies are still possible, this limitation to simultaneously
investments in more than one credit rating agency should not be extended to
investments channelled though collective investment schemes managed by third
parties independent from the investor and not subject to his or her influence.
(17)          
The new rules limiting the duration of the
business relationship between an issuer and the credit rating agency would
significantly reshape the credit rating market in the Union, which today
remains largely concentrated. New market opportunities would arise for small
and mid-size credit rating agencies, which would need to develop to take up
those challenges in the first years following the entry into force of the new
rules. Those developments are likely to bring new diversity into the market.
The objectives and the effectiveness of the new rules would, however, be
largely jeopardised if, during these initial years, large established credit
rating agencies would prevent their competitors from developing credible
alternatives by acquiring them. Further consolidation in the credit rating
market driven by large established players would result in a reduction of the
number of available registered credit rating agencies, thus creating selection
difficulties for issuers at the moment in which they regularly need to appoint
one or more new credit rating agencies and disturbing the smooth functioning of
the new rules. More importantly, further consolidation driven by large
established credit rating agencies would particularly prevent the emergence of more
diversity in the market.
(18)          
The effectiveness of the rules on independence
and prevention of conflict of interest which require that credit rating
agencies should not provide for a long period of time credit rating services to
the same issuer could be undermined if credit rating agencies where allowed to
become directly or indirectly shareholders or members of other credit rating
agencies.
(19)          
It is important to ensure that modifications to
the rating methodologies do not result in less rigorous methodologies. For that
purpose, issuers, investors and other interested parties should have the
opportunity to comment on any intended change of rating methodologies. This
will help them to understand the reasons behind new methodologies and for the
change in question. Comments provided by issuers and investors on the draft
methodologies may provide valuable input for the credit rating agencies in
defining the methodologies. Moreover, ESMA should verify and confirm the
compliance of new rating methodologies with Article 8(3) of Regulation (EC)
No 1060/2009 and the relevant regulatory technical standard before
methodologies are applied in practice. ESMA should verify that the proposed
methodologies are rigorous, systematic, continuous and subject to validation
based on historical experience, including back-testing. However, this
verification process should not grant ESMA any power to judge the appropriateness
of the proposed methodology or the content of the credit ratings issued following
the application of the methodologies.
(20)          
Due to the complexity of structured finance
instruments, credit rating agencies have not always succeeded in ensuring a
sufficiently high quality of credit ratings issued on such instruments. This
has led to a loss of market confidence in this type of credit ratings. In order
to regain confidence it would be appropriate to require issuers or their
related third parties to engage two different credit rating agencies for the
provision of credit ratings on structured finance instruments, which could lead
to different and competing assessments. This could also reduce the
over-reliance on a single credit rating.
(21)          
Directive xxxx/xx/EU of the European Parliament
and of the Council of […] on the access to the activity of credit institutions
and the prudential supervision of credit institutions and investment firms[18]
has introduced a provision requiring banks and investment firms to assess the
credit risk of entities and financial instruments in which they invest
themselves and not to simply rely in this respect on external ratings. This
rule should be extended to other financial firms regulated under Union law,
including investment managers. Member States should not be entitled to impose
rules that allow stricter reliance of these investors on external ratings.
(22)          
Furthermore, the investors' possibilities to
make an informed assessment of the credit worthiness of structured finance
instruments would be improved if investors were provided with sufficient information
on these instruments. This will reduce investors' dependence on credit ratings.
Moreover, disclosing relevant information on structured finance instruments is
likely to reinforce the competition between credit rating agencies, because it
could lead to an increase in the number of unsolicited ratings.
(23)          
Investors, issuers and other interested parties
should have access to up to date rating information on a central webpage. A
European Rating Index (EURIX) established by ESMA should allow investors to
easily compare all ratings that exist with regard to a specific rated entity
and provide them with average ratings. In order to enable investors to compare
ratings on the same entity issued by different credit rating agencies it is
necessary that credit rating agencies use a harmonised rating scale, to be
developed by ESMA and adopted by the Commission as a regulatory technical
standard. The use of the harmonised rating scale should only be mandatory for
the publication of the ratings on the EURIX webpage while credit rating agencies
should be free to use their own rating scales when publishing the ratings on
their own websites. The mandatory use of a harmonised rating scale should not
have a harmonising effect on methodologies and processes of credit rating
agencies, but should be limited to making the rating outcome comparable. It is
important that the EURIX webpage shows, in addition to an aggregate rating
index, all available ratings per instrument in order to allow investors to
consider the whole variety of opinions before taking their own investment
decision. The aggregate rating index may help investors to get a first
indication of the creditworthiness of an entity. The EURIX should help smaller
and new credit rating agencies to gain visibility. The European Rating Index would
complement the information on historical performance data to be published by
credit rating agencies in ESMA's central repository. The European Parliament
supported the establishment of such European Rating Index in its resolution on
credit rating agencies of 8 June 2011[19].
(24)          
Credit ratings, whether issued for regulatory
purposes or not, have a significant impact on investment decisions. Hence,
credit rating agencies have an important responsibility towards investors in
ensuring that they comply with the rules of Regulation (EC) No 1060/2009 so
that their ratings are independent, objective and of adequate quality. However,
in the absence of a contractual relationship between the credit rating agency
and the investor, investors are not always in a position to enforce the
agency's responsibility towards them. Therefore, it is important to provide for
an adequate right of redress for investors who relied on a credit rating issued
in breach of the rules of Regulation (EC) No 1060/2009. The investor should be
able to hold the credit rating agency liable for any damage caused by an infringement of that Regulation which had an impact on
the rating outcome. Infringements
which do not impact the rating outcome, such as breaches of transparency
obligations, should not trigger civil liability claims.
(25)          
Credit rating agencies should only be held
liable if they infringe intentionally or with gross negligence any obligations
imposed on them by Regulation (EC) No 1060/2009. This standard of fault means
that credit rating agencies should not face liability claims if they neglect
individual obligations under the Regulation without disregarding their duties
in a serious way. This standard of fault is appropriate because the activity of
credit rating involves a certain degree of assessment of complex economic
factors and the application of different methodologies may lead to different
rating results, non of which can be qualified as incorrect.
(26)          
It is important to provide investors with an
effective right of redress against credit rating agencies. As investors do not
have close insight in internal procedures of credit rating agencies a partial reversal
of the burden of proof with regard to the existence of an infringement and the
infringement's impact on the rating outcome seems to be appropriate if the
investor has made a reasonable case in favour of the existence of such an
infringement. However, the burden of proof as regards the existence of a damage
and the causality of the infringement for the damage, both being closer to the
sphere of the investor, should fully be on the investor.
(27)          
Regarding matters concerning the civil liability
of a credit rating agency and which are not covered by this regulation, such
matters should be governed by the applicable national law determined by the relevant
rules of International Private Law. The competent court to decide on a claim
for civil liability brought by an investor should be determined by the relevant
rules on International Jurisdiction.
(28)          
The fact that institutional investors including
investment managers are obliged to carry out their own assessment of the
creditworthiness of assets should not prevent courts from finding that an
infringement of this Regulation by a credit rating agency has caused damage to
an investor for which that credit rating agency is liable. While this
Regulation will improve the possibilities of investors to make an own risk
assessment they will continue to have more limited access to information than
the credit agencies themselves. Furthermore, in particular smaller investors
often will lack the capability to critically review an external rating provided
by a credit rating agency.
(29)          
In order to further mitigate conflicts of
interest and facilitate fair competition in the credit rating market, it is
important to ensure that the fees charged by credit rating agencies to
customers are not discriminatory. Differences in fees charged for the same type
of service should only be justifiable by a difference in the actual costs in
providing this service to different customers. Moreover, the fees charged for
rating services to a given issuer should not depend on the results or outcome
of the work performed or on the provision of related (ancillary) services.
Furthermore, in order to allow for the effective supervision of those rules, credit
rating agencies should disclose to ESMA the fees received from each of their clients
and their general pricing policy.
(30)          
In order to contribute to the issuance of up to
date and credible sovereign ratings and to facilitate users' understanding, it
is important to regularly review ratings. It is also important to increase the
transparency about the research work carried out, the staff allocated to the
preparation of ratings and the underlying assumptions behind the credit ratings
made by credit rating agencies in relation to sovereign debt.
(31)          
The current rules already provide for ratings to
be announced to the rated entity 12 hours before their publication. In
order to avoid that this notification takes place outside working hours and to
leave the rated entity sufficient time to verify the correctness of data
underlying the rating, it should be clarified that the rated entity should be
notified a full working day before publication of the rating or of a rating
outlook.
(32)          
In view of the specificities of sovereign
ratings and in order to reduce the risk of volatility, it is appropriate to
require credit rating agencies to only publish these ratings after the close of
business of the trading venues established in the Union and at least one hour
before their opening.
(33)          
Technical standards in financial services should
ensure and adequate protection of depositors, investors and consumers across
the Union. As a body with highly specialised expertise, it would be efficient
and appropriate to entrust ESMA, with the elaboration of draft regulatory and
implementing technical standards which do not involve policy choices, for
submission to the Commission.
(34)          
The Commission should adopt the draft regulatory
technical standards developed by ESMA regarding the content of the handover
file when a credit rating agency is replaced by another credit rating agency,
the content, frequency and presentation of the information to be provided by
issuers on structured finance instruments, harmonisation of the standard rating
scale to be used by credit rating agencies, the presentation of the
information, including structure, format, method and timing of reporting, that
credit rating agencies should disclose to ESMA in relation to EURIX and the
content and format of the periodic reporting on fees charged by credit rating
agencies for the purposes of ongoing supervision by ESMA. The Commission should
adopt those standards by means of delegated acts pursuant to Article 290 of the
Treaty and in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.
(35)          
Regulation (EU) No 1060/2009 allows ratings
issued in third countries to be used for regulatory purposes if they are issued
by credit rating agencies certified in accordance with Article 5 or endorsed by
credit rating agencies established in the Union in accordance with Article 4
(3) of that Regulation. Certification requires that the Commission has adopted
an equivalence decision regarding the third country's regulatory regime for
credit rating agencies and endorsement requires that the conduct of the third
country credit rating agency fulfils requirements which are at least as
stringent as the relevant EU rules. Some of the provisions introduced by this
Regulation should not apply for the equivalence and endorsement assessments:
This is the case for those provisions that only establish obligations on
issuers but not on credit rating agencies. In addition, articles that relate to
the structure of the rating market within the EU rather than establishing rules
of conduct for credit rating agencies should not be considered in this
context.. In order to grant third countries sufficient time to upgrade their
regulatory frameworks regarding the remaining new substantive provisions, the
latter should only apply for the purpose of the equivalence and endorsement assessments
as of 1 June 2014. It is important to recall in this respect that a third
country regulatory regime does not have to have identical rules as those
provided for in this Regulation. As already spelled out in Regulation No
1060/2009, in order to be considered equivalent to or as stringent as the EU
regulatory regime it should be sufficient that the third country regulatory
regime achieves the same objectives and effects in practice. 
(36)          
Since the objectives of this Regulation, namely to
reinforce the independence of credit rating agencies, to promote sound credit
rating processes and methodologies, to mitigate the risks associated to
sovereign ratings, to reduce the risk of over-reliance on credit ratings by
market participants, and to ensure a right of redress for investors, cannot be
sufficiently achieved at the Member State level and can therefore, by reason of
the pan-Union structure and impact of the credit rating activities to be
supervised, 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 European Union. In accordance with the principle of
proportionality, as set out in that Article, this Regulation does not go beyond
what is necessary in order to achieve those objectives.
(37)          
Regulation (EC) No 1060/2009 should therefore be
amended accordingly,
HAVE ADOPTED THIS REGULATION:
Article 1
Amendments to Regulation (EC) No 1060/2009
Regulation (EC) No 1060/2009 is amended as
follows:
(1)          Article 1 is replaced by the
following:
"Article 1
Subject matter
This Regulation introduces a common regulatory
approach in order to enhance the integrity, transparency, responsibility, good
governance and reliability of credit rating activities, contributing to the
quality of credit ratings issued in the Union, thereby contributing to the
smooth functioning of the internal market while achieving a high level of
consumer and investor protection. It lays down conditions for the issuing of
credit ratings and rules on the organisation and conduct of credit rating
agencies, including their shareholders and members, to promote credit rating
agencies' independence, the avoidance of conflicts of interest and the enhancement
of consumer and investor protection.
This Regulation also lays down obligations for
issuers, originators and sponsors established in the Union regarding structured
finance instruments."
(2)          in the first paragraph of Article
2, "Community" is replaced by "Union";
(3)          Article 3(1) is amended as
follows: 
(a)     in point (g), "Community" is
replaced by "Union";
(b)     in point (m), "Community" is
replaced by "Union";
(c)     the following points are added:
'(s)     "issuer" means issuer as
defined in point (h) of Article 2 (1) of Directive2003/71/EC;
(t)      "originator" means originator
as defined in point (41) of Article 4 of Directive 2006/48/EC;
(u)     "sponsor" means a sponsor as
defined in point (42) of Article 4 of Directive 2006/48/EC;
(v)     "sovereign rating" means:
(i)      a credit rating where the entity
rated is a State or a regional or local authority of a State,
(ii)      a credit rating where the issuer of
the debt or financial obligation, debt security or other financial instrument
is a State or a regional or local authority of a State;
(w)    "rating outlook" means an
opinion regarding the likely direction of a credit rating over the short and
medium term.';
(4)          Article 4 is amended as follows:
(a)     in the second subparagraph of
paragraph 1, "Community" is replaced by "Union";
(b)     in paragraph 2, "Community"
is replaced by "Union";
(c)     paragraph 3 is amended as follows:
(i)      in the introductory sentence,
"Community" is replaced by "Union";
(ii)      point (b) is replaced by the
following: 
'the credit rating agency has verified and is
able to demonstrate on an ongoing basis to the European Supervisory Authority
(European Securities and Markets Authority) established by Regulation (EU) No
1095/1060 of the European Parliament and of the Council (*) (ESMA), that the
conduct of the credit rating activities by the third-country credit rating
agency resulting in the issuing of the credit rating to be endorsed fulfils
requirements which are at least as stringent as the requirements set out in
Articles 6 to 12, with the exception of Articles 6a, 8a, 8b and 11a.
(*)           OJ L 331, 15.12.2010, p.84.';
(d)     in paragraph 4, "Community"
is replaced by "Union";
(5)          Article 5 is amended as follows:
(a)     in paragraph 1, "Community"
is replaced by "Union";
(b)     in paragraph 6, point (b) of the
second subparagraph is replaced by the following:
'(b)    credit rating agencies in that third
country are subject to legally binding rules which are equivalent to those set
out in Articles 6 to 12 and Annex I, with the exception of Articles 6a,
8a, 8b and 11a; and';
(c)     paragraph 8 is replaced by the
following:
'Articles 20, 23b and24 shall apply to
certified credit rating agencies and to credit ratings issued by them.';
(6)          the following Articles 5a and 5b
are inserted:
''Article 5a
Over-reliance on credit ratings by financial
institutions
Credit institutions, investment firms,
insurance and reinsurance undertakings, institutions for occupational
retirement provisions, management and investment companies, alternative
investment fund managers and central counterparties as defined in Regulation
(EU) No xx/201x of the European Parliament and of the Council of xx xxx 201x on
OTC derivatives, central counterparties and trade repositories[20]
shall make their own credit risk assessment and shall not solely or
mechanistically rely on credit ratings for assessing the creditworthiness of an
entity or financial instrument. Competent authorities in charge of supervising
these undertakings shall closely check the adequacy of undertakings credit
assessment processes.
Article 5b
Reliance on credit ratings by the European
Supervisory Authorities and the European Systemic Risk Board
The European Supervisory Authority (European
Banking Authority) established by Regulation (EU) No 1093/2010 of the European
Parliament and of the Council (*) (EBA), the European Supervisory Authority
(European Insurance and Occupational Pensions Authority) established by
Regulation (EU) No 1094/2010 of the European Parliament and of the Council (**)
(EIOPA) and ESMA shall not refer to credit ratings in their guidelines,
recommendations and draft technical standards where such references have the
potential to trigger mechanistic reliance on credit ratings by competent
authorities or financial market participants. Accordingly, and at the latest by
31 December 2013, EBA, EIOPA and ESMA shall review and remove where appropriate
all references to credit ratings in existing guidelines and recommendations.
The European Systemic Risk Board (ESRB) established
by Regulation (EU) No 1092/2010 of the European Parliament and of the
Council of 24 November 2010 on European Union macro-prudential oversight of the
financial system and establishing a European Systemic Risk Board (***) shall
not refer to credit ratings in its warnings and recommendations where such
references have the potential to trigger mechanistic reliance on credit ratings.
* OJ L , , p. .
** OJ L 331, 15.12.2010, p.48.
*** OJ L 331, 15.12.2010, p. 1.';
(7)          Article 6(1) is replaced by the
following:
'1.      A credit rating agency shall take all
necessary steps to ensure that the issuing of a credit rating or a rating
outlook is not affected by any existing or potential conflict of interest or
business relationship involving the credit rating agency issuing the credit
rating or the rating outlook, its managers, rating analysts, employees, any
other natural person whose services are placed at the disposal or under the
control of the credit rating agency, or any person directly or indirectly
linked to it by control.';
(8)          the following Articles 6a and 6b
are inserted:
'Article 6a
Conflicts of interest concerning investments in
credit rating agencies
1. A shareholder or a member of a credit rating
agency holding at least 5% of the capital or the voting rights in that agency shall
not
(a)     hold 5% or more of the capital of any
other credit rating agency. This prohibition does not apply to holdings in
diversified collective investment schemes, including managed funds such as
pension funds or life insurance, provided that the holdings in diversified
collective investment schemes do not put him or her in a position to exercise
significant influence on the business activities of those schemes;
(b)     have the right or the power to
exercise 5% or more of the voting rights in any other credit rating agency;
(c)     have the right or the power to appoint
or remove members of the administrative, management or supervisory body of any
other credit rating agency;
(d)     be member of the administrative,
management or supervisory body of any other credit rating agency;
(e)     have the power to exercise, or
actually exercise, dominant influence or control over any other credit rating
agency.
2. This Article does not apply to investments
in other credit rating agencies belonging to the same group of credit rating
agencies.
Article 6b
Maximum duration of the contractual relationship
with a credit rating agency
1. Where a credit rating agency has entered
into a contract with an issuer or its related third party for the issuing of credit
ratings on that issuer, it shall not issue credit ratings on that issuer for a
period exceeding three years.
2. Where a credit
rating agency has entered into a contract with an issuer or its related third
party for the issuing of credit ratings on the debt instruments of that issuer,
the following shall apply:
(a)     when those
credit ratings are issued within a period exceeding an initial period of twelve
months but shorter than three years, the credit rating agency shall not issue
any further credit ratings on those debt instruments from the moment that ten
debt instruments have been rated;
(b)     when at least ten
credit ratings are issued within an initial period of twelve months, that
credit rating agency shall not issue any further credit ratings on those debt
instruments after the end of that period;
(c)     when less than
ten credit ratings are issued, the credit rating agency shall not issue any
further credit ratings on those debt instruments from the moment a period of 3
years have elapsed.
3. Where an issuer has entered into a contract
regarding the same matter with more than one credit rating agency, the
limitations set out in paragraphs 1 and 2 shall only apply to one of these
agencies. However, none of these agencies shall have a contractual relationship
with the issuer exceeding a period of six years.
4. The credit rating agency referred to in
paragraphs 1 to 3 shall not enter into a contract with the issuer or its
related third parties for the issuing of credit ratings on the issuer or its
debt instruments for a period of four years from the end of the maximum
duration period of the contractual relationship referred to in
paragraphs 1 to 3.
The first subparagraph shall also apply to:
(a)     a credit rating agency belonging to
the same group of credit rating agencies as the credit rating agency referred
to in paragraphs 1 and 2;
(b)     a credit rating agency which is a
shareholder or member of the credit rating agency referred to in paragraphs 1
and 2;
(c)     a credit rating agency in which the
credit rating agency referred to in paragraph 1 and 2 is a shareholder or
member.
5. Paragraphs 1 to 4shall not apply to
sovereign ratings.
6. Where following the end of the maximum
duration period of the contractual relationship, pursuant to the rules in
paragraphs 1 and 2, a credit rating agency is replaced by another credit rating
agency, the exiting credit rating agency shall provide the incoming credit
rating agency with a handover file. Such file shall include relevant
information concerning the rated entity and the rated debt instruments as may
reasonably be necessary to ensure the comparability with the ratings carried
out by the exiting credit rating agency.
The exiting rating agency shall be able to
demonstrate to ESMA that such information has been provided to the incoming
credit rating agency.
7. ESMA shall develop draft regulatory
technical standards to specify technical requirements on the content of the
handover file referred to in paragraph 5.
ESMA shall submit those
draft regulatory technical standards to the Commission by 1 January 2013.
Power is delegated to the Commission to adopt
the regulatory technical standards referred to in this paragraph in accordance
with the procedure laid down in Articles 10 to 14 of Regulation (EU) No 1095/2010.
(9)          Article 7(5) is replaced by the
following:
'5.      Compensation and performance
evaluation of rating analysts and persons approving the credit ratings or rating
outlooks shall not be contingent on the amount of revenue that the credit
rating agency derives from the rated entities or related third parties.';
(10)        Article 8 is amended as follows:
(a)     paragraph 2 is replaced by the
following:
'2.         A credit rating agency shall adopt,
implement and enforce adequate measures to ensure that the credit ratings and
the rating outlooks it issues are based on a thorough analysis of all the
information that is available to it and that is relevant to its analysis according
to the applicable rating methodologies. It shall adopt all necessary measures
so that the information it uses in assigning credit ratings and rating outlooks
is of sufficient quality and from reliable sources.';
(b)     in paragraph 5, a second subparagraph is
added:
'Sovereign ratings shall be reviewed at least
every six months.';
(c)     the following paragraph 5a is
inserted:
'5a. A credit rating agency that intends to
change or use any new rating methodologies, models or key rating assumptions
shall publish the proposed changes or proposed new methodologies on its website
inviting stakeholders to submit comments for a period not shorter than one
month, together with a detailed explanation of the reasons for and the
implications of the proposed changes or proposed new methodologies.
After expiry of the consultation period
referred to in the first subparagraph, the credit rating agency shall notify
ESMA of the intended changes or proposed new methodologies.';
(d)     paragraph 6 is amended as follows:
(i)      the introductory sentence is replaced
by the following:
'6. When methodologies, models or key
assumptions used in credit rating activities are changed following the decision
of ESMA referred to in paragraph 3 of Article 22a, a credit rating agency
shall:';
(ii)      the following point (aa) is inserted:
'(aa)   immediately publish on its website the
new methodologies together with a detailed explanation thereof;';
(e)     the following paragraph 7 is added:
'7. Where a credit rating agency becomes aware
of errors in its methodologies or in their application it shall immediately:
(a)     notify those errors to ESMA and all
affected rated entities;
(b)     publish those errors on its website;
(c)     correct those errors in the
methodologies; and
(d)     apply the measures referred to in
points (a) to (c) of paragraph 6.';
(11)        the following Articles 8a and 8b
are inserted:
'Article 8a
Information on structured finance instruments
1. The issuer, the originator and the sponsor
of a structured finance instrument established in the Union shall disclose to
the public, in accordance with paragraph 4, 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 and
any collateral supporting a securitisation exposure as well as any information
that is necessary to conduct comprehensive and well informed stress tests on
the cash flows and collateral values supporting the underlying exposures.
2. The obligation to disclose information
according to paragraph 1 shall not extend to the provision of such information
that would breach statutory provisions governing the
protection of confidentiality of information sources or the processing of
personal data.
3. ESMA shall develop draft regulatory
technical standards to specify:
(a)     the information that the persons
referred to in paragraph 1 shall disclose in order to comply with the obligation
resulting from paragraph 1;
(b)     the frequency with which such
information shall be updated;
(c)     the presentation of the information by
means of a standardised disclosure template.
ESMA shall submit those draft regulatory
technical standards to the Commission by 1 January 2013.
Power is delegated to the Commission to adopt
the regulatory technical standards referred to in the first subparagraph in
accordance with the procedure laid down in Articles 10 to 14 of Regulation (EU)
No 1095/2010.
4. ESMA shall set up a webpage for the
publication of the information on structured finance instruments in accordance
with paragraph 1.
Article 8b
Double credit rating of structured finance
instruments
1. Where an issuer or a related third party
intends to solicit a credit rating of a structured finance instrument, it shall
mandate at least two credit rating agencies. Each credit rating agency shall
provide its own independent credit rating.
2. The credit rating agencies mandated by an
issuer or its related third parties referred in paragraph 1 shall comply with
the following conditions:
(a)     the credit rating agencies shall not
belong to the same group of credit rating agencies;
(b)     none of the credit rating agencies
shall be a shareholder or member of any of the other credit rating agencies;
(c)     none of the credit rating agencies
shall have the right or the power to exercise voting rights in any of the other
credit rating agencies;
(d)     none of the credit rating agencies
shall have the right or the power to appoint or remove members of the
administrative, management or supervisory body of any of the other credit
rating agencies;
(e)     none of the members of the
administrative, management or supervisory body in a credit rating agency is a
member of the of the administrative, management or supervisory body of any of
the other credit rating agencies;
(f)      none of the credit rating agencies
shall have the power to exercise, or actually exercises, dominant influence or
control over any of the other credit rating agencies.';
(12)        Article 10(1) and (2) are replaced
by the following:
'1. A credit rating agency shall disclose any
credit rating or rating outlook, as well as any decision to discontinue a
credit rating, on a non-selective basis and in a timely manner. In the event of
a decision to discontinue a credit rating, the information disclosed shall
include full reasons for the decision.
The first subparagraph shall also apply to
credit ratings that are distributed by subscription.
2. Credit rating agencies shall ensure that
credit ratings and rating outlooks are presented and processed in accordance
with the requirements set out in Section D of Annex I. ';
(13)        Article 11(2) is replaced by the
following:
'2. Any registered and any certified credit
rating agency shall make available in a central repository established by ESMA
information on its historical performance data including the ratings transition
frequency and information about credit ratings issued in the past and on their
changes. A credit rating agency shall provide information to that repository on
a standard form as provided for by ESMA. ESMA shall make that information accessible
to the public and shall publish summary information on the main developments
observed on an annual basis.';
(14)        the following Article 11a is
inserted:
'Article 11a
European Rating Index
1. Any registered and any certified credit
rating agency shall, when issuing a credit rating or a rating outlook, submit
to ESMA rating information, including the rating and outlook of the rated
instrument, information on the type of rating, the type of rating action, and
date and hour of publication. The rating submitted shall be based upon the
harmonised rating scale referred to in point (a) of Article 21(4a).
2. ESMA shall establish a European Rating Index
which will include all credit ratings submitted to ESMA pursuant to paragraph 1
and an aggregated rating index for any rated debt instrument. The index and
individual credit ratings shall be published on ESMA’s website.';
(15)        in paragraph 1 of Article 14,
"Community" is replaced by "Union";
(16)        Article 18(2) is replaced by the
following:
"2. ESMA shall communicate to the
Commission, to EBA, to EIOPA, the competent authorities and the sectoral
competent authorities, any decision under Articles 16, 17 or 20."
(17)        Article 19(1) is replaced by the
following:
'1. ESMA shall charge fees to the credit rating
agencies in accordance with this Regulation and the regulation on fees referred
to in paragraph 2. Those fees shall fully cover ESMA's necessary expenditure
relating to the registration, certification and supervision of credit rating
agencies and the reimbursement of any costs that the competent authorities may
incur carrying out work pursuant to this Regulation, in particular as a result
of any delegation of tasks in accordance with Article 30';
(18)        Article 21 is amended as follows:
(a)     paragraph 4 is amended as follows:
(i)      the introductory sentence is replaced
by the following: 
'ESMA shall develop draft regulatory technical
standards to specify:'
(ii)      point (e) is replaced by the
following:
'(e)     the content and format of ratings
data periodic reporting to be requested from registered and certified credit
rating agencies for the purpose of ongoing supervision by ESMA.'
(iii)     the following subparagraphs are
added after point (e):
'ESMA shall submit those draft regulatory
technical standards to the Commission by 1 January 2012.
Power is delegated to the Commission to adopt
the regulatory technical standards referred to in the first subparagraph in
accordance with the procedure laid down in Articles 10 to 14 of Regulation (EU)
No 1095/2010.'
(b)     the following paragraph 4a is inserted:
'4a. ESMA shall develop draft regulatory
technical standards to specify:
(a)     a harmonised standard rating scale to
be used, in accordance with Article 11a, by registered and certified credit
rating agencies, which will be based upon the metric to measure credit risk and
the number of rating categories and cut off values for each rating category; 
(b)     the content and the presentation of
the information, including structure, format, method and timing of reporting
that credit rating agencies shall disclose to ESMA in accordance with
Article 11a (1); and
(c)     the content and format of periodic
reporting on fees charged by credit rating agencies to be requested from the
credit rating agencies for the purpose of ongoing supervision by ESMA.
ESMA shall submit those draft regulatory
technical standards to the Commission by 1 January 2013.
Power is delegated to the Commission to adopt
the regulatory technical standards referred to in the first subparagraph in
accordance with the procedure laid down in Articles 10 to 14 of Regulation (EU)
No 1095/2010.';
(c)     a new subparagraph is added to
paragraph 5:
'That report shall also assess the market
concentration levels, the risks arising from high concentration, and the impact
on the overall stability of the financial sector.';
(19)        Article 22a is amended as follows:
(a)     the title of the Article is replaced
by the following:
'Examination of rating methodologies';
(b)     the following paragraph 3 is added:
'3. ESMA shall also verify that any intended
changes to rating methodologies notified by a credit rating agency in
accordance with Article 8(5a) comply with the criteria laid down in
Article 8(3) as specified in the regulatory technical standard referred to
in point (d) of Article 21(4). The credit rating agency may only apply the new
rating methodology after ESMA has confirmed the methodology's compliance with
Article 8(3).
[ESMA shall be able to exercise the powers
referred to in the first subparagraph from the date of entry into force of the
regulatory technical standard referred to in point (d) of Article 21(4) of
Regulation 1060/2009.]
Where the regulatory technical standard
referred to in point (d) of Article 21(4) is not in force, ESMA shall not be
able to exercise the power referred to in the first subparagraph.';
(20)        The following Title IIIa is
inserted after Article 35:
'TITLE IIIa
CIVIL LIABILITY OF CREDIT RATING AGENCIES
Article 35a
Civil liability
1. Where a credit rating agency has committed
intentionally or with gross negligence any of the infringements listed in Annex III
having an impact on a credit rating on which an investor has relied when
purchasing a rated instrument, such an investor may bring an action against
that credit rating agency for any damage caused to that investor.
2. An infringement shall be considered to have
an impact on a credit rating if the credit rating that has been issued by the
credit rating agency is different from the rating that would have been issued had
the credit rating agency not committed that infringement.
3. A credit rating agency acts with gross
negligence if it seriously neglects duties imposed upon it by this Regulation.
4. Where an investor establishes facts from
which it may be inferred that a credit rating agency has committed any of the
infringements listed in Annex III, it will be for the credit rating agency to prove
that it has not committed that infringement or that that infringement did not
have an impact on the issued credit rating.
5. The civil liability referred to in paragraph
1 shall not be excluded or limited in advance by agreement. Any clause in such
agreements excluding or limiting the civil liability in advance shall be deemed
null and void.';
(21)        Article 36a is amended as follows:
(a)     in paragraph 2, points (a) to (e) are
replaced by the following:
'(a)     for infringements referred to in
points 1 to 5, 11 to 15, 19, 20, 23, 26a to 26d, 28, 30, 32, 33, 35, 41, 43, 50
and 51 of Section I of Annex III, the fines shall amount to at least EUR 500
000 and shall not exceed EUR 750 000;
(b)     for the infringements referred to in
points 6 to 8, 16 to 18, 21, 22, 24, 25, 27, 29, 31, 34, 37 to 40, 42, 45 to
49a, 52 and 54 of Section I of Annex III, the fines shall amount to at
least EUR 300 000 and shall not exceed EUR 450 000;
(c)     for the infringements referred to in
points 9, 10, 26, 26e, 36, 44 and 53 of Section I of Annex III, the fines shall
amount to at least EUR 100 000 and shall not exceed EUR 200 000;
(d)     for the infringements referred to in
points 1, 6, 7 and 8 and 9 of Section II of Annex III, the fines shall amount
to at least EUR 50 000 and shall not exceed EUR 150 000;
(e)     for the infringements referred to in
points 2, 3a, 3b, 4, 4a and 5 of Section II of Annex III, the fines shall
amount to at least EUR 25 000 and shall not exceed EUR 75 000;';
(b)     in paragraph 2, points (g) and (h) are
replaced by the following:
'(g)     for the infringements referred to in
points 1 to 3a and 11 of Section III of Annex III, the fines shall amount to at
least EUR 150 000 and shall not exceed EUR 300 000;
(h)     for the infringements referred to in
points 4, 4a, 4b, 4c, 6, 8 and 10 of Section III of Annex III, the fines shall
amount to at least EUR 90 000 and shall not exceed EUR 200 000;';
(22)        in Article 38a, paragraph 1 is
replaced by the following:
'1. The power to adopt delegated acts referred
to in the third subparagraph of Article 5(6), Article 19(2), Article 23e(7)and
Article 37 shall be conferred on the Commission for a period of four years from
1 June 2011. The Commission shall draw up a report in respect of the delegated
power at the latest six months before the end of the four-year period. The
delegation of power shall be automatically extended for periods of an identical
duration, unless the European Parliament or the Council revokes it in
accordance with Article 38b.';
(23)        in Article 38b, paragraph 1 is
replaced by the following:
'1. the delegation of power referred to in the
third subparagraph of Article 5(6), Article 19(2), Article 23e(7)and Article 37
may be revoked at any time by the European Parliament or by the Council.';
(24)        Article 39 is amended as follows:
(a)     paragraph 1 is replaced by the
following:
'By 7 December 2012, the Commission shall make
an assessment of the application of this Regulation, including an assessment of
the reliance on credit ratings in the Union, the impact on the level of
concentration in the credit rating market, the cost and benefits of impacts of
the Regulation and of the appropriateness of the remuneration of the credit
rating agency by the rated entity (issuer-pays model), and submit a report
thereon to the European Parliament and the Council';
(b)     the following paragraph 4 is added:
'4. By 1 July 2015, the Commission shall assess
the situation in the credit rating market, in particular the availability of
sufficient choice in order to comply with the requirements set out in Articles
6b and 8b. The review shall also assess the need to extend the scope of the
obligations in Article 8a to include other financial products, including
covered bonds';
(25)        Annex I is amended in accordance
with Annex I to this Regulation;
(26)        Annex II is amended in accordance
with Annex II to this Regulation;
(27)        Annex III is amended in accordance
with Annex III to this Regulation.
Article 2
Entry into force
This Regulation shall enter into force on the
day following that of its publication in the Official Journal of the
European Union.
However,
points (7), (9), (10), (12), (13) and (25) of Article 1 of this Regulation
shall apply from 1 June 2014 for the purposes of the assessment referred
to in Article 4(3)(b) and in point (b) of the second subparagraph of Article
5(6) of Regulation (EC) No 1060/2009 as to whether third country
requirements are at least as stringent as the requirements set out in Articles
6 to 12 of that Regulation.
Point
(8) of Article 1 of this Regulation in relation to Article 6a(1)(a) of
Regulation (EC) No 1060/2009 shall apply from [1 year after the entry into
force of this Regulation] as regards any shareholder or member of a credit
rating agency which on 15 November 2011 held 5% or more of the capital of more
than one credit rating agency.
This Regulation shall be binding
in its entirety and directly applicable in all Member States.
Done at Brussels,
For the European Parliament                       For
the Council
The President                                                 The
President
ANNEX I
Annex I to Regulation (EC) 1060/2009 is
amended as follows:
(1)          Section B is amended as follows:
(a)     point 1 is replaced by the following:
'1.         A credit rating agency shall
identify, eliminate or manage and disclose, clearly and prominently, any actual
or potential conflicts of interest that may influence the analyses and
judgments of its rating analysts, employees, or any other natural person whose
services are placed at the disposal or under the control of the credit rating
agency and who are directly involved in credit rating activities and persons
approving credit ratings and rating outlooks.';
(b)     point 3 is amended as follows:
(i)      the introductory sentence of the
first subparagraph is replaced by the following:
'3.           A credit rating agency shall not
issue a credit rating or a rating outlook in any of the following
circumstances, or shall, in the case of an existing credit rating or rating
outlook, immediately disclose where the credit rating or rating outlook is
potentially affected by the following:'
(ii)      the following point (aa) is inserted
after point (a):
'(aa)   a shareholder or member of a credit
rating agency holding, directly or indirectly, 10% or more of either the
capital or the voting rights of that credit rating agency or being otherwise in
a position to exercise significant influence on the business activities of the
credit rating agency, directly or indirectly owns financial instruments of the
rated entity or a related third party or has any other direct or indirect
ownership interest in that entity or party, other than holdings in diversified
collective investment schemes, including managed funds such as pension funds or
life insurance, which do not put him in a position to exercise significant
influence on the business activities of the scheme;';
(iii)     the following point (ba) is inserted
after point (b):
'(ba)   the credit rating is issued with
respect to a rated entity or a related third party which directly or indirectly
holds 10% or more of either the capital or the voting rights of that credit
rating agency;';
(iv)     the following point (ca) is inserted
after point (c):
'(ca)   a shareholder or member of a credit
rating agency holding, directly or indirectly, 10% or more of either the
capital or the voting rights of that credit rating agency or being otherwise in
a position to exercise significant influence on the business activities of the
credit rating agency, is a member of the administrative or supervisory board of
the rated entity or a related third party;';
(v)     the second subparagraph is replaced by
the following:
'A credit rating agency shall also immediately
assess whether there are grounds for re-rating or withdrawing the existing
credit rating or credit outlook.';
(c)     the following point 3a is inserted:
'3a.       A credit rating agency shall ensure
that fees charged to its clients for the provision of rating and ancillary
services are not discriminatory and are based on actual costs. Fees charged for
rating services shall not depend on the level of the credit rating issued by
the credit rating agency or on any other result or outcome of the work
performed.';
(d)     in point 4, the first subparagraph is
replaced by the following:
'4.         Neither a credit rating agency nor
any person holding, directly or indirectly, at least 5% of the capital or
voting rights of the credit rating agency or otherwise in a position to
significantly influence the business activities of the credit rating agency
shall provide consultancy or advisory services to the rated entity or a related
third party regarding the corporate or legal structure, assets, liabilities or
activities of that rated entity or related third party.';
(e)     point 7 is amended as follows:
(i)      point (a) is replaced by the
following:
'(a)     for each credit rating and rating
outlook decision, the identity of the rating analysts participating in the
determination of the credit rating or rating outlook, the identity of the
persons who have approved the credit rating or rating outlook, information as
to whether the credit rating was solicited or unsolicited, and the date on
which the credit rating action was taken;';
(ii)      point (d) is replaced by the
following:
'(d)    the records documenting the
established procedures and methodologies used by the credit rating agency to
determine credit ratings and rating outlooks;';
(iii)     point (e) is replaced by the
following:
'(e)     the internal records and files,
including non-public information and work papers, used to form the basis of any
credit rating and rating outlook decision taken;';
(2)          Section C is amended as follows:
(a)     in point 2, the introductory sentence
is replaced by the following:
'2.         No person referred to in point 1
shall participate in or otherwise influence the determination of a credit
rating or rating outlook of any particular rated entity if that person:';
(b)     in point 3, point (b) is replaced by
the following:
'(b)    do not disclose any information about
credit ratings, possible future credit ratings or rating outlooks of the credit
rating agency, except to the rated entity or its related third party;';
(c)     point 7 is replaced by the following:
'7.         A person referred to in point 1
shall not take up a key management position with the rated entity or its
related third party within six months of the credit rating or rating outlook.'
(d)     point 8 is replaced by the following:
'8.         For the purposes of Article 7(4):
(a)     credit rating agencies shall ensure
that the lead rating analysts shall not be involved in credit rating activities
related to the same rated entity or its related third parties for a period
exceeding four years;
(b)     credit rating agencies others than
those mandated by an issuer or its related third party and all credit rating
agencies issuing sovereign ratings shall ensure that:
(i)      the rating analysts shall not be
involved in credit rating activities related to the same rated entity or its
related third parties for a period exceeding five years; 
(ii)      the persons approving credit ratings
shall not be involved in credit rating activities related to the same rated
entity or its related third parties for a period exceeding seven years.
The persons referred to points (a) and (b) of
the first subparagraph shall not be involved in credit rating activities
related to the rated entity or related third parties referred to in those
points within two years of end of the periods set out in those points.';
(3)          the title of Section D is
replaced by the following:
'Rules on the presentation of credit ratings
and rating outlooks';
(4)          Part I of Section D is amended as
follows:
(a)     point 1 is replaced by the following:
'1.         A credit rating agency shall ensure
that any credit rating and rating outlook states clearly and prominently the
name and job title of the lead rating analyst in a given credit rating activity
and the name and position of the person primarily responsible for approving the
credit rating or rating outlook.';
(b)     point 2 is amended as follows:
(i)      point (a) is replaced by the
following:
'(a)     all substantially material sources,
including the rated entity or, where appropriate, a related third party, which
were used to prepare the credit rating or rating outlook are indicated together
with an indication as to whether the credit rating or rating outlook has been
disclosed to that rated entity or its related third party and amended following
that disclosure before being issued;';
(ii)      points (d) and (e) are replaced by
the following:
'(d)    the date at which the credit rating
was first released for distribution and when it was last updated including any
rating outlooks is indicated clearly and prominently;
(e)     information is given as to whether the
credit rating concerns a newly issued financial instrument and whether the
credit rating agency is rating the financial instrument for the first time;
and';
(iii)     the following point (f) is added:
'(f)     in case of a rating outlook, the time
horizon is provided during which a change of the credit rating is expected.';
(c)     the following point 2a is inserted:
'2a.       A credit rating agency shall
accompany the disclosure of methodologies, models and key rating assumptions
with guidance which explains assumptions, parameters, limits and uncertainties
surrounding the models and rating methodologies used in credit ratings,
including simulations of stress scenarios undertaken by the agency when
establishing the ratings, credit rating information on cash-flow analysis it
has performed or is relying upon and, where applicable, an indication of any
expected change in the credit rating. Such guidance shall be clear and easily
comprehensible.';
(d)     point 3 is replaced by the following:
'3.         The credit rating agency shall
inform the rated entity during working hours of the rated entity and at least a
full working day before publication of the credit rating or the rating outlook.
This information shall include the principal grounds on which the rating or
outlook is based in order to give the entity an opportunity to draw attention
of the credit rating agency to any factual errors.';
(e)     the first subparagraph of point 4 is
replaced by the following:
'4.         A credit rating agency shall state
clearly and prominently when disclosing credit ratings or rating outlooks any
attributes and limitations of the credit rating or rating outlook. In
particular, a credit rating agency shall prominently state when disclosing any
credit rating or rating outlook whether it considers satisfactory the quality
of information available on the rated entity and to what extent it has verified
information provided to it by the rated entity or its related third party. If a
credit rating or an outlook involves a type of entity or financial instrument
for which historical data is limited, the credit rating agency shall make
clear, in a prominent place, such limitations.';
(f)      the first subparagraph of point 5 is
replaced by the following:
'5.         When announcing a credit rating or
a rating outlook, a credit rating agency shall explain in its press releases or
reports the key elements underlying the credit rating or the rating outlook.';
(g)     the following point 6 is added:
'6.         A credit rating agency shall
disclose on its website, on an ongoing basis, information about all entities or
debt instruments submitted to it for their initial review or for preliminary
rating. Such disclosure shall be made whether or not issuers contract with the
credit rating agency for a final rating.';
(5)          points 3 and 4 of Part II of
Section D are deleted;
(6)          in Section D, the following Part
III is added:
'III. Additional obligations in relation to sovereign
ratings 
1. Where a credit rating agency issues a
sovereign rating or a related rating outlook, it shall accompany the rating or
rating outlook with a detailed research report explaining all the assumptions,
parameters, limits and uncertainties and any other element taken into account
in determining that rating or outlook. That report shall be clear and easily
comprehensible.
2. A research report accompanying a change
compared to the previous sovereign rating or related rating outlook shall
include the following elements:
(a)     A detailed evaluation of the changes
of the quantitative assumption justifying the reasons for the rating change and
their relative weight. The detailed evaluation should include a description of
the following elements: per capita income, GDP Growth, inflation, fiscal
balance, external balance, external debt, an indicator for economic development,
an indicator for default and any other relevant factor taken into account. This
should be complemented with the relative weight of each factor;
(b)     A detailed evaluation of the changes
of the qualitative assumption justifying the reasons for the rating change and
their relative weight;
(c)     A detailed description of the risks,
limits and uncertainties related to the rating change; and
(d)     A summary of meeting minutes of the
rating committee that decided of the rating change.
3. Where a credit rating agency issues
sovereign ratings or related rating outlooks, it shall publish these ratings or
outlooks only after the close of business of trading venues established in the
Union and at least one hour before their opening. Point 3 of Section D.I.
remains unaffected.';
(7)          Part I of Section E is amended as
follows: 
(a)     point 3 is replaced by the following:
'3.         the policy of the credit rating
agency concerning the publication of credit ratings and other related
communications including rating outlooks;';
(b)     point 6 is replaced by the following:
'6.         any material modification to its systems, resources or procedures;
(8)          the first subparagraph of point 2
of Part II of Section E is amended as follows:
(a)     point (a) is replaced by the
following:
'(a)     list of fees charged to each client
for individual rating and any ancillary services;'
(b)     the following point (aa) is inserted:
'(aa)   its pricing policy, including the fees
structure and pricing criteria in relation to ratings for different asset
classes;';
(9)          Part III of Section E is amended
as follows:
(a)     point 3 is replaced by the following:
'3.         statistics on the allocation of its
staff to new credit ratings, credit rating reviews, methodology or model
appraisal and senior management, and on the allocation of staff to rating
activities with regard to the different asset classes (corporate - structured
finance - sovereign);';
(b)     point 7 is replaced by the following:
'7. financial information on the revenue of the
credit rating agency, including total turnover, divided into fees from credit
rating and ancillary services with a comprehensive description of each,
including the revenues generated from ancillary services provided to clients of
rating services and the allocation of fees to ratings of different asset
classes. Information on total turnover shall also include a geographical
allocation of that turnover to revenues generated in the Union and revenues
worldwide;'.
ANNEX II
In point 1 of Annex II to Regulation (EC)
1060/2009, "Community" is replaced by "Union".
ANNEX III
Annex III to Regulation (EC) 1060/2009 is
amended as follows:
(1)          Part I is amended as follows:
(a)     points 19, 20 and 21 are replaced by
the following:
'19. The credit rating agency infringes Article
6(2), in conjunction with point 1 of Section B of Annex I, by not identifying,
eliminating or managing and disclosing, clearly or prominently, any actual or
potential conflicts of interest that may influence the analyses or judgments of
its rating analysts, employees, or any other natural person whose services are
placed at the disposal or under the control of the credit rating agency and who
are directly involved in the issuing of a credit rating or persons approving
credit ratings and rating outlooks. 
20. The credit rating agency infringes Article
6(2), in conjunction with the first paragraph of point 3 of Section B of Annex
I, by issuing a credit rating or rating outlook in any of the circumstances set
out in the first paragraph of that point or, in the case of an existing credit
rating, by not disclosing immediately that the credit rating or rating outlook
is potentially affected by those circumstances. 
21. The credit rating agency infringes Article
6(2), in conjunction with the second paragraph of point 3 of Section B of Annex
I, by not immediately assessing whether there are grounds for re-rating or
withdrawing an existing credit rating or rating outlook.';
(b)     the following new points 26a to 26f are
inserted:
'26a. The credit rating agency which entered
into a contract with an issuer or its related third party for the issuing of
credit ratings on the issuer infringes Article 6b(1) by issuing credit ratings
on this issuer for a period exceeding three years.
26b. The credit rating agency which entered
into a contract with an issuer or its related third party for the issuing of
credit ratings on the debt instruments of the issuer infringes Article 6b(2) by
issuing credit ratings on at least ten debt instruments of the same issuer
during a period exceeding 12 months or by issuing credit ratings on the debt
instruments of the issuer for a period exceeding 3 years. 
26c. The credit rating agency which entered
into a contract with an issuer alongside at least one more credit rating agency
infringes Article 6b(3) by having a contractual relationship with the issuer
for a period exceeding six years.
26d. The credit rating agency which entered
into a contract with an issuer or its related third party for the issuing of
credit ratings on the issuer or its debt instruments of the issuer infringes
Article 6b(4) by not respecting the prohibition to issue credit ratings on the
issuer or its debt instruments for a period of four years from the end of the maximum
duration period of the contractual relationship referred to in paragraphs1 to 3
of Article 6b.
26e. The credit rating agency which entered
into a contract with an issuer or its related third party for the issuing of
credit ratings on the issuer or its debt instruments of the issuer infringes
Article 6b(6) by not making available at the end of the maximum duration period
of the contractual relationship with the issuer or its related third party a
handover file with the required information to an incoming credit rating agency
contracted by the issuer or its related third party to issue credit ratings on
this issuer or its debt instruments.';
(c)     point 33 is replaced by the following:
'The credit rating agency infringes Article
7(3), in conjunction with point 2 of Section C of Annex I, by not ensuring that
a person referred to in point 1 of that Section does not participate in or
otherwise influence the determination of a credit rating or rating outlook as
set out in point 2 of that Section.';
(d)     point 36 is replaced by the following:
'36. The credit rating agency infringes Article
7(3), in conjunction with point 7 of Section C of Annex I, by not ensuring that
a person referred to in point 1 of that Section does not take up a key
management position with the rated entity or its related third party within six
months of the credit rating or rating outlook.';
(e)     points 38, 39 and 40 are replaced by
the following:
'38. The credit rating agency infringes Article
7(4), in conjunction with point (i) of point (b) of the first paragraph of
point 8 Section C of Annex I, by not ensuring that, where it provides
unsolicited credit ratings, a rating analyst is not involved in credit rating
activities related to the same rated entity or its related third parties for a
period exceeding five years.
39. The credit rating agency infringes Article
7(4), in conjunction with point (ii) of point (b) of the first paragraph of
point 8 of Section C of Annex I, by not ensuring that, where it provides
unsolicited credit ratings, a person approving credit ratings is not involved
in credit rating activities related to the same rated entity or its related
third parties for a period exceeding seven years.
40. The credit rating agency infringes Article
7(4), in conjunction with the second paragraph of point 8 of Section C of Annex
I, by not ensuring that a person referred to in points (a) and (b) of the first
paragraph of that point is not involved in credit rating activities related to
the rated entity or related third parties referred to in those points within
two years of the end of the periods set out in those points.';
(f)      point 42 is replaced by the
following:
'The credit rating agency infringes Article
8(2) by not adopting, implementing or enforcing adequate measures to ensure
that the credit ratings and rating outlooks it issues are based on a thorough
analysis of all the information that is available to it and that is relevant to
its analysis according to its rating methodologies.'; 
(g)     point 46 is replaced by the following:
'The credit rating agency infringes the first
sentence of the first subparagraph of Article 8(5) by not monitoring its credit
ratings other than sovereign ratings or by not reviewing its credit ratings
other than sovereign ratings or methodologies on an ongoing basis and at least
annually.'
(h)     the following point 46a is inserted:
'46a.     The credit rating agency infringes
the second subparagraph of Article 8(5) in conjunction with the first sentence
of the first subparagraph of Article 8(5) by not monitoring its sovereign
ratings or by not reviewing its sovereign ratings on an ongoing basis and at
least every 6 months.';
(i)      the following point 49a is inserted:
'49a. The credit rating agency infringes point
(c) of Article 8(7) in conjunction with point (c) of Article 8(6) by not re-
rating a credit rating where errors on the methodologies or in their
application affected the issuance of that credit rating.';
(2)          Part II is amended as follows:
(a)     the following points 3a and 3b are inserted:
'3a. The credit rating agency infringes the
second subparagraph of Article 8(5a) by not notifying ESMA of the intended
changes to the rating methodologies, models or key assumptions or of the proposed
new methodologies, models or key assumptions.
3b. The credit rating agency infringes point
(a) of Article 8(7) by not notifying ESMA of discovered errors in its
methodologies or in their application.';
(b)     the following point 4a is inserted:
'4a. The credit rating agency infringes Article
11a(1) by not making available the required information or by not providing
that information in the required format as referred to in that paragraph.'; 
(3)          Part III, is amended as follows:
(a)     the following point 3a is inserted:
'3a. The credit rating agency infringes the
first subparagraph of Article 8(5a) by not publishing on its website the
proposed changes to the methodologies, models or key rating assumptions or the proposed
new methodologies, models or key rating assumptions together with a detailed
explanation of the reasons for and the implications of the proposed changes.';
(b)     the following points 4a, 4b and 4c are
inserted:
'4a. The credit rating agency infringes point
(aa) of Article 8(6), where it intends to use new methodologies, by not
publishing immediately on its website the new methodologies together with a
detailed explanation thereof.
4b. The credit rating agency infringes point
(a) of Article 8(7) by not notifying affected rated entities of discovered
errors in its methodologies or in their application. 
4c. The credit rating agency infringes point
(b) of Article 8(7) by not publishing on its website discovered errors in its
methodologies or in their application.';
(c)     points 6 and 7 are replaced by the
following:
'6. The credit rating agency infringes Article
10(2), in conjunction with point 1 or 2, 2a, the first paragraph of point 4 or
points 5 or 6, of Part I of Section D of Annex I, or Parts II or III of Section
D of Annex I, by not providing the information as required by those provisions
when presenting a credit rating or a credit outlook.
7. The credit rating agency infringes Article
10(2), in conjunction with point 3 of Part I of Section D of Annex I, by not
informing the rated entity during working hours of the rated entity and at
least a full working day before publication of the credit rating or the rating
outlook.
[1]               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.
[2]               Regulation (EU) No 513/2011 of the European
Parliament and of the Council of 11 May 2011 amending Regulation (EC) No
1060/2009 on credit rating agencies, OJ L 145, 31.5.2011.
[3]               COM(2010)301 final.
[4]               Available at http://ec.europa.eu/internal_market/consultations/2010/cra_en.htm.
[5]               http://www.europarl.europa.eu/oeil/FindByProcnum.do?lang=en&procnum=INI/2010/2302.
[6]               http://www.financialstabilityboard.org/publications/r_101027.pdf
.
[7]               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.
[8]               Commission proposal of 15 November 2011 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, COM(2011) xxx
final. 
[9]               "Cliff effects" are sudden actions that are
triggered by a rating downgrade under a specific threshold, where downgrading a
single security can have a disproportionate cascading effect.
[10]             OJ L 302, 17.11.2009, p.32.
[11]             “1. ESMA shall charge fees to the credit rating
agencies in accordance with this Regulation and the regulation on fees referred
to in paragraph.             
2. Those fees shall fully cover ESMA’s necessary expenditure relating to the
registration and supervision of credit rating agencies and the reimbursement of
any costs that the competent authorities may incur carrying out work pursuant
to this Regulation, in particular as a result of any delegation of tasks in
accordance with Article 30.”
[12]               OJ C , , p.
[13]               OJ C , , p. 
[14]               OJ L 302, 17.11.2009, p.1.
[15]               OJ L 145, 31.5.2011, p.30.
[16]               2010/2302/INI.
[17]               OJ L 390, 31.12.2004, p.38.
[18]               OJ C , , p.
[19]               2010/2302(INI).
[20]               OJ L … , p.