Rating & Benchmarks [EU]

Credit rating agencies

SUMMARY OF:

Regulation (EC) No 1060/2009 on credit rating agencies

WHAT IS THE AIM OF THE REGULATION?

It seeks to regulate the activity of credit rating agencies to protect investors and European financial markets against the risk of malpractice.
Its aim is to guarantee the independence and integrity of the credit rating process and to improve the quality of the ratings issued.
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;
avoiding conflicts of interest; and
better consumer and investor protection.
Since the regulation was amended by Regulation (EU) 2017/2402 (Simpler, more transparent and more standardised securitisation) on common rules for securitisation*, it also lays down obligations for issuers and related third parties established in the EU regarding securitisation instruments. Regulation (EU) 2017/2402 replaced the original regulation’s wording ‘structured instruments’ by ‘securitisation instruments’.
KEY POINTS

Registration, rules of conduct and supervision

To be registered in the EU, credit rating agencies must:

avoid conflicts of interest: for example, credit rating analysts must not rate an organisation in which they have a holding;
ensure the quality of their ratings and rating methods;
ensure a high degree of transparency: for example, by publishing an annual transparency report.
Since July 2011, the European Securities and Markets Authority (ESMA) has been responsible for registering credit rating agencies and has exclusive supervisory powers in relation to such agencies.

Over-reliance on credit ratings

Directive 2013/14/EU amended the regulation to require financial institutions and investors to carry out their own evaluation of credit risks, and not to rely solely or automatically on external ratings in order to evaluate the creditworthiness of an organisation or financial instrument.
Ratings of the sovereign debt of EU countries

Credit rating agencies must set up a schedule of dates on which they will rate EU countries; countries will be rated at least every 6 months.
To avoid market disruption, ratings may only be published after EU stock exchanges have closed, and at least 1 hour before they reopen.
Investors and EU countries must be informed of the facts and assumptions behind each rating.
Responsibility of credit rating agencies

A credit rating agency may be held liable if it infringes the regulation, either intentionally or through gross negligence, thereby causing damage to an investor or an issuer.
Independence and preventing conflicts of interest

A rotation rule requires issuers of complex securitisation instruments to change agency every 4 years.
Credit rating agencies must disclose situations where a shareholder holds 5% or more of the agency’s capital or voting rights and 5% or more of an organisation rated by that agency. If both these holdings reach or exceed 10%, the credit rating agency is not entitled to rate the entity.
It is forbidden to hold 5% or more of the capital or voting rights of more than one credit rating agency, unless these agencies belong to the same group.
All available ratings are published on a European rating platform by ESMA.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 7 December 2009 with the exception of rules on:

references to credit rating in prospectuses (Article 4(1)) which have applied since 7 December 2010; and
credit rating agencies established in non-EU countries (Article 4(3) points (f), (g) and (h) which have applied since 7 June 2011.
BACKGROUND

The EU regulation on credit rating agencies is one of the initiatives taken by the EU in response to the commitments made at the G20 Washington Summit in November 2008.

For more information, see:

Credit rating agencies (European Securities and Markets Authority)
Regulating credit rating agencies (European Commission).
KEY TERMS

Securitisation: transactions that enable a lender or other originator of assets — for example, a credit institution — to refinance a set of loans or assets (e.g. mortgages, car leases, consumer loans, credit cards) by converting them into securities. The lender or originator organises a portfolio of its loans into different risk categories, tailored to the risk versus reward requirements of investors. Returns to investors are generated from the cash flows of the underlying loans.
MAIN DOCUMENT

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, pp. 1-31)

Successive amendments to Regulation (EC) No 1060/2009 have been incorporated into the original document. This consolidated version is of documentary value only.

RELATED DOCUMENTS

Report from the Commission to the European Parliament and the Council on alternative tools to external credit ratings, the state of the credit rating market, competition and governance in the credit rating industry, the state of the structured finance instruments rating market and on the feasibility of a European Credit Rating Agency (COM(2016) 664 final, 19.10.2016)

Commission Delegated Regulation (EU) 2015/1 of 30 September 2014 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to regulatory technical standards for the periodic reporting on fees charged by credit rating agencies for the purpose of ongoing supervision by the European Securities and Markets Authority (OJ L 2, 6.1.2015, pp. 1-23)

Commission Delegated Regulation (EU) 2015/2 of 30 September 2014 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to regulatory technical standards for the presentation of the information that credit rating agencies make available to the European Securities and Markets Authority (OJ L 2, 6.1.2015, pp. 24-56)

Report from the Commission to the Council and the European Parliament on the feasibility of a network of smaller credit rating agencies (COM(2014) 248 final, 5.5.2014)

Directive 2013/14/EU of the European Parliament and of the Council of 21 May 2013 amending Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision, Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) and Directive 2011/61/EU on Alternative Investment Funds Managers in respect of over-reliance on credit ratings (OJ L 145, 31.05.2013, pp. 1-3)

See consolidated version.

Commission Delegated Regulation (EU) No 946/2012 of 12 July 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to rules of procedure on fines imposed to credit rating agencies by the European Securities and Markets Authority, including rules on the right of defense and temporal provisions (OJ L 282, 16.10.2012, pp. 23-26)

Commission Delegated Regulation (EU) No 447/2012 of 21 March 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council on credit rating agencies by laying down regulatory technical standards for the assessment of compliance of credit rating methodologies (OJ L 140, 30.5.2012, pp. 14-16)

Commission Delegated Regulation (EU) No 449/2012 of 21 March 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to regulatory technical standards on information for registration and certification of credit rating agencies (OJ L 140, 30.5.2012, pp. 32-52)

Commission Delegated Regulation (EU) No 272/2012 of 7 February 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to fees charged by the European Securities and Markets Authority to credit rating agencies (OJ L 90, 28.3.2012, pp. 6-10)

Ensuring accuracy and integrity of benchmarks

SUMMARY OF:

Regulation (EU) 2016/1011 on indices used as financial benchmarks

WHAT IS THE AIM OF THE REGULATION?

It sets common European Union (EU) standards to prevent manipulation of benchmarks* that could affect the price of financial instruments, or financial contracts such as loans or mortgages.

KEY POINTS

Administrators * responsible for overseeing financial benchmarks must:
apply robust governance arrangements and clear organisational structures;
identify, prevent, or manage any potential conflicts of interest;
ensure their staff have the necessary skills, knowledge and experience, and are effectively managed and supervised;
maintain permanent and effective oversight of all aspects of the benchmarks under their responsibility;
operate controls to ensure benchmarks comply with the legislation;
have a system in place to record input data, phone or electronic communications and complaints received and investigated;
subject any outsourcing to strict conditions;
publish clear guidelines for different types of input data and the methodology used for calculating benchmarks;
develop a code of conduct stipulating the responsibilities of contributors inputting the data.
The regulation establishes 3 separate regimes progressively increasing the level of regulation and supervision depending on a benchmark’s importance:
non-significant benchmarks do not fall into either of the 2 categories below and are subject to less onerous rules;
significant benchmarks are used as a reference for financial instruments, financial contracts or investment funds with a total average value of at least €50 billion or fulfil certain other criteria;
critical benchmarks are used as a reference for financial instruments, financial contracts or investment funds with a total value of at least €500 billion or fulfil certain other criteria.
Specific arrangements exist for commodity benchmarks*, interest rate benchmarks and regulated data benchmarks*.
The European Securities and Markets Authority (ESMA) establishes and maintains a public register of all authorised or registered administrators.
Various schemes exist to provide access to the EU market for financial benchmarks and administrators from outside the EU.
EU countries’ competent authorities have the power to apply appropriate administrative sanctions and other measures for an infringement.
The European Commission, by 1 January 2020, is to report to the European Parliament and the Council of the European Union on the way the system is functioning.
FROM WHEN DOES THE REGULATION APPLY?

It applies from 1 January 2018 except for certain articles which took effect on 30 June 2016. These involve largely preparatory work such as the development by ESMA of regulatory technical standards but also the identification and supervision of critical benchmarks.

BACKGROUND

Benchmarks are used to price financial instruments and financial contracts or to measure the performance of investment funds. Well-known examples of benchmarks are the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR) used for interbank interest rates. Benchmarks are also used for oil price assessments, stock market indexes and the level of personal mortgage payments.
For more information, see:
‘Benchmarks’ on the European Commission’s website
Press release ‘European Commission adopted implementing decision on EURIBOR benchmark’ on the European Commission’s website.
* KEY TERMS

Benchmark: a figure which is made public and used to price payments under financial instruments or financial contracts or to measure the performance of an investment fund.

Administrator: an individual or company/organisation with control over a benchmark.

Commodity benchmark: often based on data from non-supervised entities (e.g. commodity producer organisations). Their administrators are therefore required to take steps to ensure that benchmarks are provided on a fair, reasonable, transparent and non-discriminatory basis to all users.

Regulated data benchmark: benchmarks determined from input data that is provided by regulated venues, energy exchanges and emission allowance auctions.

MAIN DOCUMENT

Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (OJ L 171, 29.6.2016, pp. 1-65)

Rating & Benchmarks [EU]

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