26 June 2018

ESMA publishes responses to its Consultation on the “as stringent as” notion in the CRA Regulation

U.S. Chamber of Commerce

U.S. Chamber of Commerce is generally concerned with the proposed revisions to ESMA’s long-standing endorsement guidelines as we believe they may disrupt the ability of Credit Ratings Agencies (CRAs) to endorse non-European Union (EU) credit ratings into the EU. It believes that this may have unintended effects on the functioning of international (and thus transatlantic) capital markets.

The proposed new guidelines could heavily hamper European financial institutions’ ability to use credit ratings from the U.S. and other non-EU jurisdictions for regulatory purposes and non-EU issuers’ ability to raise capital from EU financial markets. The ESMA consultation paper acknowledges that a large proportion of credit ratings endorsed into the EU originate from the U.S. Therefore, endorsed ratings from the U.S. will be most heavily and disproportionately impacted.

Moreover, U.S. Chamber of Commerce is concerned that the guidelines appear to have emerged without evidence to justify changes to the existing endorsement framework, which has worked effectively for a number of years. The existing approach to endorsement respects the fact that shared concerns identified at the international level in the framework of the International Organization of Securities Commissions (IOSCO) can be effectively addressed without the need for identical legislation in two or more jurisdictions.

It thus urges ESMA to identify the robust rules and practices of CRAs in jurisdictions such as the U.S. abiding by equivalent rules to those in the EU to be deemed “as stringent as”. This will ensure that credit ratings from the U.S. can continue to be endorsed into the EU without disruption and so that negative impacts on investors and issuers may be avoided. Importantly, ESMA should adopt an approach whereby the same outcome can be achieved albeit through different means.

U.S. Chamber of Commerce also takes the view that the proposals have an extraterritorial reach, as they would allow ESMA to export EU rules to the U.S. that have nothing to do with making sure that a rating product coming into the EU is of good quality. It believes that endorsement/equivalence should focus on the outcome of the regulatory framework and standards in order to ensure the quality and governance of the product. It should not be a question of whether every rule in the regulatory system of a third country matches the EU’s exactly.

Full U.S. Chamber of Commerce response

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A.M. Best Europe - Rating Services Limited

There remains a fundamental concern that the changes ESMA is seeking to introduce are inconsistent with the settled interpretation of the law provided by the European Commission.  AMBERS shares these concerns and remains of the opinion that the justification for such a severe change of direction has yet to be clearly articulated.  In addition, evidence has yet to be provided to clearly demonstrate that the existing endorsement regime is resulting in sub-standard ratings being endorsed into the EU.  The Final Report published by ESMA in November 2017 suggests that changes are needed to enhance ESMA’s supervision of endorsed ratings.  However, AMBERS does not believe there is any evidence to support the conclusion that there are deficiencies in the existing supervisory regime or that ESMA’s supervisory efforts in respect of endorsed ratings have been hampered by a reluctance of CRAs to provide information in response to a specific request for such information.

In its response to the original CP regarding changes to the endorsement regime, AMBERS stated that it believed the proposals outlined would serve to undermine the utility of the endorsement regime and would lead to significant additional burdens and costs whilst having limited material benefit.  At a high level, the proposals outlined in the guidelines published on 27 March 2018 do little to address these concerns.  Nevertheless, whilst AMBERS continues to question the validity and benefits of the proposed changes,  AMBERS provides below, its responses to the specific questions asked regarding the detail of the proposal.

Full AMBERS response

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Rating-Agentur Expert RA GmbH

Currently there is a lack of transparency regarding the fees paid for the rating services and their distribution. For instance, it is often not clear whether the fees were paid to the CRA which is based in the EU or the third country CRA, or third party and how those fees are distributed between legal entities of a group. Therefore, it should be clearly stated whether the rating is endorsed or not, both on the website of the endorsing CRA and on the ERP. Some additional indication of the party receiving fees would also be beneficial.

it is very important to provide a clear indication of the solicitation status of the published ratings. Also, the definition of unsolicited ratings that is used by a third country CRA shall be disclosed on the CRA’s website, so that the rating users can have a clear picture of what is considered by the CRA as an unsolicited rating and whether this definition corresponds with the CRA Regulation.

Full Rating-Agentur Expert RA GmbH response

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Consultation paper

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