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ECRA
The endorsement regime is widely used by group of CRAs, as about 71% of all ratings usable for regulatory purposes in the EU are being endorsed by EU registered CRAs. ECRA therefore understands that ESMA has a strong interest in ensuring that endorsed ratings are prepared under a framework as stringent as the European Union one. It thinks that the proposed guidelines will substantially increase the administrative burden on endorsing CRAs and therefore expect that these CRAs will provide to you detailed responses.
Given the expectation that CRAs based outside of the EU having their ratings endorsed in the EU need to adhere to European standards, the proposed guideline effectively means that the European Union framework on Credit Rating Agencies is being exported to other jurisdictions.
Given that the CRA regulation provides for two separate frameworks for ratings issued in third countries, ECRA appreciates that ESMA is carrying out both assessments in parallel. We call on the European Commission to quickly endorse ESMAs technical advice on Third country equivalence so that the “certification regime” can operate continuously.
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S&P Global Ratings
As a general comment, S&P Global Ratings notes that the proposed new guidelines (“Proposed Guidelines”) signal a significant departure from the endorsement guidelines issued by ESMA in May 2011 (the “2011 Guidelines”) with respect to article 4 of Regulation (EC) 1060/2009 on Credit Rating Agencies, as amended (the “EU CRA Regulation”). We understand ESMA’s task to reassess third-country regimes for endorsement purposes by June 2018 in light of Recital 48 and article 2.1(a) of Regulation (EU) 462/2013 (“CRA3”). However, the Proposed Guidelines would add a significant and disproportionate regulatory burden on credit rating agencies (“CRAs”) by requiring that third-country CRAs comply with internal requirements which are “at least as stringent as” the relevant provisions of the EU CRA Regulation (“EU Rules”) and by increasing the level of monitoring and reporting to ESMA. Together with the proposed narrowing of the permissible “objective reasons” to endorse credit ratings, this new approach and the additional costs and burden it would impose on endorsing CRAs risks putting into question the free-of-charge endorsement of non-EU credit ratings carried out by S&P Global Ratings on a voluntary basis for the benefit of users of credit ratings in the EU.
S&P Global Ratings questions the need for ESMA to depart from its current approach to endorsement, by effectively shifting the regulatory burden of the “as stringent as” test from ESMA onto endorsing CRAs, without a rigorous cost-benefit and impact analysis on CRAs and EU users of credit ratings (as was carried out in respect of the 2011 Guidelines including consultation with EBA and EIOPA). In our experience, the endorsement process over the last six years under the 2011 Guidelines has been functioning well and we have not seen any evidence that the current approach has been failing the objectives of the EU CRA Regulation or generating complaints from the users of endorsed ratings for example. Changing the current practice by now requiring full global alignment with the EU Rules would not only add significant costs for CRAs, but arguably also limit the effect and purpose of the International Organization of Securities Commissions (“IOSCO”) Code of Conduct Fundamentals for CRAs.
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Moody's
ESMA’s change in approach with regard to the assessment of third-country legal and supervisory frameworks will reduce stability and certainty in the endorsement process. By delegating the “as stringent as” assessment to endorsing CRAs, we believe the new approach could result in inconsistent interpretation of regulatory requirements, and might inadvertently foster regulatory arbitrage.
Second, the proposed updated guidelines could be interpreted as exporting EU regulatory requirements globally, which would potentially result in conflicting requirements across jurisdictions. This scenario puts CRAs in the difficult position of reconciling these conflicts without regulatory guidance.
Third, the change in approach creates uncertainty, and will result in difficult interpretative and operational challenges for CRAs and the users of credit ratings. For example, it is not clear whether CRAs should measure third-country CRA compliance directly against the CRA Regulation or local policy and procedure. It is also unclear how CRAs should address differences or gaps between the CRA Regulation and third-country CRA policies and procedures and the third-country regulation on which they are based.
Fourth, the proposed updated guidelines create redundancies with respect to internal controls. Rather than fully leverage existing internal control functions at third-country CRAs, the new approach appears to discount their role in the process. The endorsing CRA is tasked with examination of individual endorsed credit ratings, as opposed to focusing on efforts to monitor the third-country CRA process.
Fifth, the new approach creates uncertainty with respect to regulatory accountability. The proposed guidelines introduce the possibility of concurrent jurisdiction, conflicting enforcement, and different outcomes for the same credit rating or set of credit ratings.
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Fitch Ratings
Currently, the determination of the endorseability of ratings from any given third country is based solely on the legal regime for CRAs in that country: ESMA makes a determination that this legal regime is “as stringent as” the specified provisions in the EU CRA Regulation, and enters into a cooperation agreement with the relevant supervisor in this legal regime, thereby allowing an EU-registered CRA to endorse ratings from that country. Now, ESMA is proposing to switch to an approach whereby ESMA makes a determination that the third-country legal regime meets only a “minimum standards” test. Given that, ESMA adds an additional requirement: the EU-registered CRA can only endorse ratings from that country if the endorsing CRA determines that (i) the policies and procedures applicable to the third-country CRA are “carried out to ensure that they meet the requirements in Article 4(3)(b) of the [EU] CRA Regulation” and (ii) the endorsing CRA checks that the ratings to be endorsed were produced in accordance with those policies and procedures.
It would appear that the third-country CRA is now expected to “top up” its policies and procedures to make them consistent with the EU CRA Regulation, regardless of what is actually required under the laws and regulations applicable to CRAs in that country. However, this is the complete opposite of the settled interpretation of the law provided by the Commission, and later applied by CESR and, indeed, ESMA up until today. For example, at paragraph 22 of ESMA’s existing guidelines, ESMA states that “the requirements ‘as stringent as the requirements set out in Articles 6 to 12’ of the [EU CRA] Regulation must be established by law or regulation, and not on a self-imposed basis. In fact, it seems inconsistent to require a third country to have a regulatory system which provides for authorization/registration and supervision of the CRAs, when the requirements ‘as stringent as’ could be met on a self-imposed basis”. In the same document, at paragraph 24, ESMA explains as follows: “The [EU CRA] Regulation does not envisage admissibility of a dual system of compliance with its requirements whereby local legal/regulatory duties in a third country would be ‘topped up’ by policies and procedures voluntarily followed by the third country CRA or the EU-registered, endorsing CRA. Therefore, the requirements as stringent as those set out in Articles 6 to 12 may only be established in law or regulation of that third-country in order to satisfy the condition laid down in Article 4(3)(b)”.
Fitch does not understand the legal basis on which ESMA can change the settled interpretation of the EU CRA Regulation. Moreover, there is no reference at all in Article 4 to a “minimum standards test”.
ESMA provides a practical (not a legal) explanation for the change. ESMA refers to three apparent “unintended consequences” of the current approach. The first such consequence is that it was difficult for the endorsing CRA to demonstrate and verify fulfillment of the “as stringent as” requirement because expertise with respect to the third country laws/regulations would sit with the third-country CRA, not the endorsing CRA. However, in Fitch’s view, ESMA’s conclusion is incorrect: under Article 4, the third-country CRA must be part of the group of companies to which the endorsing CRA belongs, therefore the knowledge of what is required by the third country CRA laws/regulations – and thus what is reflected in the third-country CRA’s policies and procedures – can be and is easily shared within the CRA group.
The second unintended consequence given by ESMA is that the current approach has limited ESMA’s ability to monitor and assess compliance of the third-country CRA. However, ESMA has ample powers under the EU CRA Regulation to request and receive information from the endorsing CRA (see Article 4(3)(d)) as well as the third-country supervisor via the relevant cooperation agreement (between such supervisor and ESMA). Indeed, given that ESMA is not supervising the third-country CRA, but simply monitoring and assessing the actions of the third-country CRA (see Article 4(3)(c)), ESMA does not require extensive information. Moreover, Fitch notes that part of ESMA’s assessment of the third-country regime involves a determination of the effectiveness of supervision and enforcement in the third country.
The third stated consequence, which ESMA claims “was not foreseen by the legislator”, is that the “requirements imposed on endorsed ratings have in practice been nearly indistinguishable from those imposed on credit ratings entering the EU market through the equivalence regime”. However, rather than this being an “unforeseen consequence”, this approach was the deliberate choice of ESMA’s predecessor, CESR – presumably with the full knowledge and consent of the Commission. In CESR/10-347, dated 4 June 2010 (CESR’s Guidance on Registration Process, Functioning of Colleges, Mediation Protocol, Information set out in Annex II, information set for the application for Certification and for the assessment of CRAs systemic importance), Section IV(4)(A) raises the question: “Should endorsed ratings and ratings issued by certified CRAs be subject to different requirements?” Based on Recitals 13 and 14 of the EU CRA Regulation, CESR responds to this question as follows: “Therefore, CESR considers that there would be no objective reasons to set different requirements for the third country CRAs depending on the mechanism used. The requirements according to which the ratings are produced should achieve the same objectives irrespective of the route the foreign CRA has to follow. This would ensure a level playing field for all rating agencies.”
Fitch notes, with respect to the last point, that ESMA attempts, in the CP at paragraphs 147-148, on the basis of what ESMA calls a “slight difference in wording”, to justify a different approach to endorsement and certification. ESMA states that it may “accept a lower level of effectiveness and enforcement powers”, with respect to the third country supervisor, when assessing that third country’s supervision and enforcement. It is unclear to Fitch why ESMA is taking this approach. Also, by the very fact of deciding that there is a difference – when there should be none – ESMA opens the door for requiring more from the endorsing CRA (i.e., the “top-up” regime described above).
Fitch therefore believes that there is no legal, practical or textual basis for ESMA reversing the past seven years’ legal interpretation and practice with respect to endorsement, and strongly urges ESMA to reconsider its proposed new approach.
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