01 February 2016

ECA: EU supervision of credit rating agencies – well established but not yet fully effective

This report examines whether ESMA has successfully established itself as the credit rating agencies watchdog for the EU. ECA concludes that while ESMA has laid down good foundations, its rules and guidelines are not yet complete and significant risks remain to be addressed in the future.

ESMA’s online central repository (CEREP) has no equivalent in other regulatory jurisdictions. Through this database, ESMA provides harmonised and readily accessible information on all registered and certified CRAs’ ratings performance. However, we are con­cerned about the adequacy of the summary statistics disclosed and the checks carried out by ESMA regard­ing the data reported to CEREP.

ESMA should:

(a) adequately document its assessment of all the regulatory requirements regarding the credit rating methodologies during the registration process;

(b) enhance the traceability of the risk identification process, maintain a log of the changes to the risk level and document the prioritisation of risks together with reasons.

ESMA should also follow up all the high risk areas, which would benefit from further supervisory work;

(c) continuously update its supervisory manual and supervisory handbook in order to incorporate knowledge and experience gained.

ESMA should establish internal guidance for the effective documentation of the investigations so as to demonstrate and ensure that all conclu­sions are supported by adequate analyses of the evidence;

The implementation of a dedicated supervisory IT tool would improve knowledge sharing, clarify the ownership of tasks, facilitate the review of the work done, and improve communication within the supervisory teams;

(d) examine all important aspects of the design and implementation of CRA methodologies which have not yet been covered;

(e) examine in a structured manner the systems put in place by the CRAs for dealing with conflicts of interest and in particular those relating to rating analysts’ trading activities and financial transac­tions. In addition, ESMA should test the accuracy of the information received from the CRAs on conflicts of interest;

(f) consider developing additional guidance on disclosure requirements in order to improve the overall disclosure practices of credit rating agencies;

(g) monitor and improve the information content of CEREP disclosures based on best practices for disclosing ratings performance; and

(h) publish all applicable legislation and relevant documents and make the website more user-friendly.

Full report

Related press release

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