As you will no doubt be aware, the EU Regulation on Credit Rating Agencies, as amended (known as "CRA III") attempts to increase competition between CRAs by requiring issuers of "structured finance instruments" (or their "related third parties") that intend to appoint two or more CRAs to rate an issuance (or entity), to consider appointing at least one CRA that has no more than 10% of the total market share (i.e. a "small CRA"), provided that that small CRA is capable of rating the relevant issuance or entity. If the issuer does not then appoint a small CRA, that fact must be documented. A Feature Piece in Edition 9 of this SCM Briefing noted that (amongst other things), the European Securities and Markets Authority (ESMA) had published its calculations of CRAs' market share (showing that 19 of the 22 currently-registered CRAs are "small" CRAs), which is helpful for structured finance issuers in meeting that obligation.

 In order to further promote competition in the CRA market (and since the provisions of CRA III requirethe European Commission to report to the European Council and Parliament on the feasibility of developing a network of smaller CRAs - see Recital 50), the Commission has now issued its Report on the feasibility of developing a network of smaller CRAs. The Report takes into account the views of a range of stakeholders on two possible types of network of small CRAs: an integrated network (which only a minority of participants support, due to issues over differing business models and objectives, differing market niches, methodologies and geographical scope, not to mention the size of the investment required for no clearly visible returns); and a co-operative network (which could take the form of a "forum" for small CRAs in which they could exchange information and co-operate on best practices and strategic issues, with costs limited to the organisation of meetings at which a structured dialogue with the European Commission would develop). The Report concludes that an assessment of the impact of CRA III on competitiveness should be carried out before the establishment of any form of cooperation between smaller CRAs can be properly assessed and the respective policy options proposed. The Commission proposes the establishment of an ongoing regulatory dialogue in the short-term, to provide a forum for the exchange of views on the state of the CRA market, and issues that affect smaller players. In light of the findings of the Report, Article 8d of CRA III (the obligation to consider using a small CRA) will be re-evaluated and may be amended (it would certainly be a helpful development if the burden placed on issuers of having to "consider" the use of a small CRA was removed from the legislation altogether).

At global level, the Financial Stability Board has also published its detailed Thematic Peer Review Report on Reducing Reliance on Credit Rating Agencies, which assesses the development of national Action Plans intended to propose alternative standards of creditworthiness before end-2015 as set out in its "Roadmap" (which sets a timeline for reducing reliance on CRA ratings). The FSB concludes that the stock-take of references to CRA ratings in laws and regulations has identified an "abundance" of references to CRA ratings, but that national authorities' progress towards removing them has been uneven to date, given their different starting points, and notes that the end-2015 deadline for removing reliance on ratings will likely be missed. Edition 7 of this Briefing noted that the European Supervisory Authorities (ESAs) consulted in late 2013 on the removal of mechanistic reliance on CRAs from EU legislation (in particular, the "mapping" of external credit ratings to the Capital Requirements Directive's "Credit Quality Steps"). The ESAs Final Report notes that the existing European Banking Authority Guidelines on this point will be replaced by a new set of Implementing Technical Standards (due to be delivered to the Commission by July 2014), on which a Consultation Paper has recently been released.

Useful links

European Commission Report on the feasibility of a network of smaller CRAs and accompanying Commission Staff Working Document containing detailed statistics

FSB Roadmap

FSB Thematic Peer Review Report on Reducing Reliance on Credit Rating Agencies

ESAs Final Report on Mechanistic Reliance on CRAs and Consultation Paper on draft Implementing Technical Standards on "mapping"