According to the preamble, the European Credit Rating Agency Regulation ((EC) No 1060/2009) is intended to mitigate possible conflicts of interest and ensure high quality and sufficient transparency of ratings and the rating process. The Council of Europe has recently published what may be the final form of the second amendment to the rating agency regulation commonly known as CRA III with confirmation that it will assent to the amending regulation becoming effective if the European Parliament passes it at its first reading. This has been awaited with great trepidation by the structured finance industry. There are at least three areas of special concern in CRA III: rating agency rotation, public disclosure and civil liability of rating agencies:-

  • On rotation, the proposal is not as bad as some had feared. The rotation requirement in Article 6b is limited to new re-securitisations (basically securitisations of securitisations such as CDOs but there is some controversy over the scope of this term) and references originators not issuers. Where a rating agency rates a new re-securitisation it may not rate any other re-securitisations with underlying assets of any originator which are held in that re-securitisation for a period of four years. In other words, rating agencies will not be required to revolve on a given re-securitisation, they will however be limited as to the other re-securitisations they can rate in the four years following their rating of a re-securitisation.
  • On public disclosure, Article 8a continues to be very problematic. It requires the issuer, originator and sponsor of a securitisation established in the European Union to make joint public disclosure including as to the performance of underlying assets regardless of whether the securitisation is public or indeed rated. This is broader in scope than the disclosure obligations in Article 122a (for example, it applies not just to credit institution originators but to all originators) and it is not clear why a regulation on credit rating agencies has been used to impose these obligations. ESMA is to develop technical standards as to what must be published. The information will be published on a website set up by ESMA.
  • Article 8b requires rated securitisations to be rated by at least two credit rating agencies.
  • The civil liability regime set out in the new Article 35a of the regulation is not limited to structured finance but may have enormous repercussions on the willingness of credit rating agencies to provide ratings. It is limited to intentional and/or grossly negligent breaches of the standards set out in the regulation but this will clearly be very carefully scrutinised by rating agencies as they appraise their business models.