On 30 September ESMA published technical advice on reducing sole and mechanistic reliance on external credit ratings. The Technical Advice provides a background to steps taken so far to reduce reliance on credit ratings by market participants, ESMA’s views in respect of the use of ratings across certain member states, the views of market participants on credit ratings and potential alternative indicators, the role of ratings within collateral assessment frameworks and some working examples of alternatives to credit ratings.

Although some steps have already been taken to mitigate reliance on ratings by financial market participants there still remain instances of references to ratings within national and EU sectoral legislation. In particular, CRR and Solvency II contain references to ratings in a number of critical areas, most notably capital requirement calculations. While these references remain, reducing reliance on ratings for these entities will remain challenging.

Outside of EU legislation it should be noted that credit ratings remain a factor within the collateral assessment frameworks of some central banks in the EU. Procedures reducing mechanistic reliance on ratings within these frameworks are a desirable objective.

It may not be practical to completely remove references to ratings within EU legislation and as such the focus of any future initiatives should be on the mitigation of mechanistic reliance on ratings rather than their removal altogether.

One particular set of alternative indicators that could be used to mitigate reliance on credit ratings are market-based indicators such as information based on the pricing of fixed income securities and credit default swaps. For smaller market participants mitigation of reliance on a particular rating could be achieved by the publication of credit rating data on the forthcoming European Ratings Platform.