Pending EU legislation amending the regulation of
credit rating agencies would introduce several provisions on
mandatory rotation for rating analysts and credit rating agencies with the aim
of achieving greater competition in that sector, said Stephen Maijoor, Chair of
the European Securities and Markets Authority. In recent remarks, he noted that
the regulatory framework for rating agencies will probably be soon amended by
the CRA 3 Regulation, which is currently being negotiated at the European
Parliament and at the Council. Since July 1, 2011 ESMA has been the exclusive regulator
of credit rating agencies in the EU.
The CRA 3 legislation also includes a proposal for a
new disclosure platform to be run by ESMA to improve the level of transparency
of the credit rating market. As regards the prevention of conflicts of
interest, the proposed legislation states that rating agencies must not issue
credit ratings when their major shareholders have interests in the rated
entity, or when the rated entities are major rating agency shareholders
themselves. The legislation also provides that EU Member States must ensure
civil liability for the infringements of the CRA Regulation made with intent or
through gross negligence.
With regard to current CRA Regulation, Chairman
Maijoor noted that ESMA conducted a first round of on-site inspections of the
three main rating agencies in December of
2011. This was done in order to get a better understanding of the rating
process and to assess the regulatory compliance by rating agencies in this
area.
An ESMA report with the main findings of these
initial examinations, issued on March 22, 2012, identified several shortcomings
and areas for improvement that apply, to a varying extent, to all three credit
rating agencies relating to such topics as transparency and disclosure of
rating methodologies and ratings, controls over IT systems, the recording of
core internal processes, and the resources devoted to internal control
functions and analytical business lines. ESMA is now following-up on the
observations through risk mitigation plans for each individual rating agency,
said the Chair.
As part of its on-going regulation, ESMA is required
to ensure that methodologies are rigorous, systematic, continuous, and subject
to validation based on historical experience, including back testing. However,
the CRA Regulation prevents ESMA from interfering with the content of credit ratings
or methodologies. This also applies to the European Commission and any public
authority of a Member
State