Credit rating agencies (CRAs) issue opinions on an issuer of debt’s ability to repay on a timely basis. This can be either an issuer rating on an issuer’s general credit worthiness, or an instrument rating on a specific debt obligation (e.g. bond, note, or loan). CRAs, which are recognised in EU as External Credit Assessment Institutions (ECAIs) under the CRD IV framework are involved in assessing the risks associated with assets held by financial institutions (such as banks) which are subject to capital adequacy requirements.
The CRA regulation was introduced in EU law through a series of legislative acts:
- Regulation (EC) No 1060/2009 (CRA I) on credit rating agencies, which introduced a legally binding registration and surveillance system for credit rating agencies that issue ratings intended for use for regulatory purposes
- Regulation (EU) 513/2011 (CRA II) on credit rating agencies amending Regulation (EU) 1060/2009 by transferring supervisory responsibilities from the credit rating agencies to ESMA
- Regulation (EU) 462/2013 (CRA III) amending Regulation (EC) 1060/2009 on credit rating agencies along with Directive 2013/14/EU (together with CRA III, the CRA III Framework) amending the UCITS IV and the AIFM Directive in respect of excessive reliance on credit ratings came into force on 20 June 2013.
Of particular interest is an expansion of the scope of obligations imposed by the CRA III Framework to include obligations on issuers, sponsors and originators of structured instruments. These include a dual rating requirement, an obligation to consider approaching a “smaller CRA” and finance disclosure requirements. These disclosure requirements now look likely to be repealed and recast by the Securitisation Regulation. The main areas of focus for the EU legislative authorities were the rotation of CRAs over the life of a transaction (rules now restricted to re-securitisations), improving the transparency of the debt rating process and increasing the frequency with which sovereign debt ratings in particular are re-assessed and the introduction of a uniform regime for civil liability of CRAs in respect of investors.
ESMA must also publish a list of registered and certified CRAs, together with their total market share, to assist with compliance with the obligation to consider appointing a smaller credit rating agency contained in Article 8d of the CRA Regulation. The current ESMA market share list was published on the 16 December 2016.