Brussels,

Regulating credit rating agencies

In the wake of the financial crisis, the EU adopted rules on credit rating agencies to restore market confidence and increase investor protection. These measures aimed to address the over-reliance on credit ratings and the failures of CRAs to properly assess risks in complex financial instruments, which contributed to the financial crisis.

Why Regulate Credit Rating Agencies?

Credit ratings are crucial for helping investors and lenders understand the risks associated with investments or financial instruments. However, over-reliance on these ratings can lead to a lack of independent risk assessment by investors. The financial crisis of 2008 exposed significant failings in the ratings of complex financial products, which led to substantial financial losses and destabilized the market. Similarly, during the euro area debt crisis, downgrades in credit ratings led to abrupt bond sell-offs and increased borrowing costs for affected countries.

Commission Measures

To address these issues, the EU introduced a regulatory framework for CRAs in three steps:
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  1. Initial Rules (2009):
    • Established a regulatory framework requiring CRAs to register and be supervised by national authorities.
    • Introduced measures to avoid conflicts of interest and ensure sound and transparent rating methodologies.
    • Legislation: Regulation (EC) No 1060/2009
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  1. Amendments (2011):
    • Transferred supervisory responsibilities to the European Securities and Markets Authority (ESMA).
    • Enhanced the regulatory oversight of CRAs.
    • Legislation: Regulation (EU) No 513/2011
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  1. Further Amendments (2013):
    • Addressed weaknesses related to sovereign debt ratings.
    • Increased transparency and accountability of CRAs.
    • Legislation: Regulation (EU) No 462/2013

Current Regulatory Framework

​The latest legislative package on CRAs includes:

  • Regulation (EU) No 462/2013: Aims to reduce over-reliance on credit ratings, increase transparency, improve the quality of the rating process, and reduce conflicts of interest.
  • Directive 2013/14/EU: Complements the regulation by addressing specific aspects related to sovereign debt ratings and market transparency.

International Cooperation

The CRA regulation allows CRAs established outside the EU to have their ratings recognized and used within the EU through two mechanisms:
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  • Equivalence Certification: For CRAs with no EU presence, ensuring their home country's regulatory regime is equivalent to the EU's.
  • Endorsement: For CRAs affiliated with EU-registered agencies, requiring them to comply with standards as stringent as those in the EU and be subject to effective supervision by ESMA.

Equivalence certification

Credit Rating Agencies (CRAs) established and supervised outside the EU, without any presence or affiliation in the EU, can be certified under the equivalence regime. This regime is specifically for CRAs that are not systemically important to the stability or integrity of EU financial markets. It allows these CRAs to provide ratings for financial entities and instruments established or issued in non-EU countries.

Certification Process
  1. Equivalence Decisions: The European Commission assesses and decides whether the regulatory and supervisory regimes of non-EU countries meet the standards of the EU CRA regulation.
  2. Application to ESMA: CRAs from countries with an equivalence decision can apply to the European Securities and Markets Authority (ESMA) for certification.
  3. Co-operation Arrangements: Certification requires a cooperation arrangement between ESMA and the relevant authority in the CRA's home country to ensure effective supervision and regulatory compliance.

​Benefits
  • Global Recognition: Enables non-EU CRAs to have their ratings recognized and used for regulatory purposes within the EU.
  • Market Integration: Facilitates the integration of global financial markets by allowing EU entities to use ratings from certified non-EU CRAs.