The EU Regulation on Credit Rating Agencies as amended (known as the "CRA III Regulation" or simply "CRA III"), attempts to remove "mechanistic reliance on credit ratings" (see in particular new Article 5b(1) which aims to prevent the European Supervisory Authorities (the European Securities and Market Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA)) from referring to credit ratings in their guidelines, recommendations and technical standards, where such references would trigger sole or mechanistic reliance on credit ratings by competent authorities or financial market participants, by 31 December 2013). In addition, Article 5ba of CRA III clarifies that the European Commission is reviewing references to credit ratings in EU law with a view to eliminating them by 1 January 2020. The three European Supervisory Authorities (ESAs) have now released a Joint Consultation Paper which seeks views on their plans for the revision and removal of rating references from their guidelines as required by Article 5b(1). The ESAs start by defining "sole or mechanistic reliance" ("when an action or omission is the consequence of any type of rule solely based on credit ratings (or credit rating outlooks) without any additional discretion") and list a set of provisions that the ESAs regard as requiring revision (the "mapping" of credit quality steps in the Capital Requirements Directive's Standardised Approach to external credit ratings, including for securitisation transactions, and the requirements in ESMA's Money Market Guidelines for managers to use credit ratings to assess the credit quality of money market instruments) and those that do not (as they are not considered to give rise to sole or mechanistic reliance), such as the use of credit ratings to track rating migrations and downgrades for stress testing purposes, setting risk management targets, risk-mitigation techniques, capital adequacy assessments, and determining proxy spreads. The ESAs plan to adopt a final report based on responses (required by 5 December 2013), and publish the report, containing final guidelines, by the end of 2013. CRA III took effect on 21 June 2013 (although not all of its provisions entered into force on that date, and several sets of Regulatory Technical Standards and Implementing Technical Standards are still required to bring it fully into force).
ESA's Joint Consultation Paper