13 July 2016

ESMA consults on the validation and review of CRAs’ methodologies guidelines

The purpose of the draft guidelines is to clarify ESMA’s expectations regarding how CRAs should validate and review their methodologies. ESMA aims to achieve a consistent application of validation and review measures across CRAs through the demonstration of the discriminatory power, predictive power and historical robustness of their methodologies. The draft guidelines also identify the measures that CRAs should implement when validating and reviewing their methodologies with limited quantitative evidence.

The CP is accompanied by a Feedback Statement which outlines the main issues that were highlighted in response to the Discussion Paper on these guidelines published in December 2015. The initial proposals have not been substantially altered and this consultation focuses on the changes that have been made in response to the feedback received.  

ESMA has decided to consult on guidelines on the validation and review of CRAs’ methodologies based on its supervisory experience of CRAs’ application of Articles 8(3) and 8(5) of the CRA Regulation and Articles 7 and 8 of the RTS on rating methodologies, and the views expressed to ESMA following the Discussion Paper. The proposed guidelines on the validation and review of the CRAs’ methodologies (Proposed Guidelines) reflect discussions with various stakeholders, including industry participants (mainly through feedback given to the relevant Discussion Paper and Open Hearing).

ESMA is of the view that guidelines on how CRAs should meet Articles 8(3) and 8(5) of the CRA Regulation will help to ensure the consistent application of validation and review measures for demonstrating the discriminatory power, predictive power and historical robustness of methodologies, as well as to identify measures that CRAs should implement when validating and reviewing methodologies with limited quantitative evidence.

The consultation paper does not revisit the feedback sought during the Discussion Paper phase. The consultation paper and the questions in it focus only on areas where ESMA proposes a further change to its views included in the Discussion Paper.

ESMA is seeking feedback from users of credit ratings and CRAs. The consultation closes on 22 August 2016.

Full consultation paper

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