Edition 12 of this SCM Briefing noted that the European Commission had adopted three Delegated Regulations under the EU Regulation on Credit Rating Agencies (CRAs), as amended (CRA III), which require the provision of additional information on "structured finance instruments" (SFIs) by transaction parties, and the disclosure and reporting of certain information by CRAs to the European Securities and Markets Authority (ESMA). The Delegated Regulations, taking the form of three Regulatory Technical Standards (RTS) were published in final form in the Official Journal of the EU on 6 January 2015 (see "useful links" below for access to the underlying instruments, and details of their effective dates).
Continuing the efforts to establish the necessary infrastructure for the disclosures required by these RTS, during 2015 ESMA will be working on developing the European Rating Platform (ERP, or "the SFIs website" as it is referred to in the relevant RTS), the new platform for the collection of individual rating data to which issuers of SFIs must submit information on an ongoing basis. Having created additional reporting burdens for the industry by significantly expanding the information that CRAs (and structured finance transaction parties) will be required to provide to ESMA (and to the market), further changes to the CRA III framework were likely to be resisted at this stage. However, the publication by ESMA of a Call for Evidence on Competition, Choice and Conflicts of Interest in the CRA Industry, which requested comment (by 31 March 2015) on the provision of Technical Advice to the European Commission under Articles 39(4) and 39(5) of CRA III, sought input from corporate and sovereign issuers, CRAs themselves and investors, on whether existing provisions in CRA III have met their objectives (such as the rule requiring at least two CRAs to be appointed in structured finance transactions and the requirement for mandatory CRA rotation in re-securitisations), and whether new rules are necessary in other areas (such as requiring additional disclosures beyond those introduced for SFIs and measures to stimulate competition). ESMA's Technical Advice is due to be provided to the European Commission in September 2015, with the Commission's opinion expected in January 2016.
Under the RTS, the disclosure requirements will apply to all types of securitisations, regardless of whether the transaction involves listed and/or rated securities, meaning that private and bilateral transactions are within scope. However, ESMA indicated in its Final Advice accompanying the RTS that the disclosure requirements should not apply to private and bilateral transactions, and that it would undertake further work to consider the specific issues involved in those transactions. It then issued a fairly brief Call for Evidence seeking input that will assist ESMA in defining 'private' and 'bilateral' transactions in structured finance instruments and establish whether the two categories should be kept separate, and to assess whether the disclosure requirements in the RTS should be used in their entirety for private and bilateral transactions or if they should be adapted or more proportionately applied (e.g. to protect trade secrets). Responses to the Call for Evidence are requested (particularly from issuers, originators and sponsors of structured finance instruments, investors in securitisation markets, and other market intermediaries, with specific questions set out for each group) by 20 May 2015, and ESMA will draft a Consultation Paper based on responses, for publication in the fourth quarter of 2015.
Separately from the information required to be submitted to ESMA / the SFIs website under the RTS, CRAs must also make periodic submissions to ESMA, covering a wide range of matters such as financial revenues and costs, headcount and staff turnover, complaints and compliance, internal audit and risk management and IT strategy. A new set of Guidelines published by ESMA set out the information that CRAs should provide to ESMA in their quarterly and semi-annual reports, and these will become effective two months after the publication of the texts (as translated into all the official languages of the EU) on ESMA's website.
At international level, as we reported in Edition 9 of this SCM Briefing, the International Organisation of Securities Commissions (IOSCO) has been reviewing its Code of Conduct Fundamentals for CRAs (the "Code", which pre-dated the introduction of CRA III by several years) to ensure it remains relevant in the context of, and operates in harmony with, CRA legislation. IOSCO has now released its Final Report setting out the revised version of the Code, which contains strengthened provisions on conflicts of interest, transparency, governance, training and risk management measures, and improved clarity around key terminology and definitions. The Code reflects an international standard for CRA self-governance and, although it is not explicitly stated, compliance with the Code (on a voluntary basis) appears to be required with immediate effect (from end-March 2015).
RTS on Disclosure Requirements for Structured Finance Instruments (taking effect from 1 January 2017)
RTS on the Presentation of Information that CRAs Make Available to ESMA (under which CRAs should submit their first reports to ESMA/the ERP by 1 January 2016, covering data on all outstanding ratings issued by 21 June 2015)
RTS on the Reporting of Periodic Fees Charged by CRAs for ESMA's Supervision (under which ESMA will report the fee information to the market within nine months of the RTS taking effect, which is 20 days after its publication in the OJ (which took place on 6 January 2015))
European Securities and Markets Authority Call for Evidence on Competition, Choice and Conflicts of Interest in the CRA Industry
European Securities and Markets Authority Final Report: Guidelines on Periodic Information to be submitted to ESMA by CRAs
European Securities and Markets Authority Call for Evidence on Private and Bilateral Transactions for SFIs
International Organisation of Securities Commissions Final Report: Code of Conduct Fundamentals for CRAs