ESMA Calls on Ratings Agencies to Sharpen Up

The European Securities and Markets Authority (ESMA) has issued its verdict on the way that credit rating agencies (CRA) conduct surveillance of their structured finance credit ratings.

ESMA’s investigation ran from October 2013 and September 2014, and was prompted by the continued relevance of structured finance products and the high outstanding volume in issuance.

It focused on the four largest CRAs providing credit ratings on these finance instruments in the European Union (EU ) – DBRS Ratings, Fitch Ratings, Moody’s Investors Services and Standard & Poor’s (S&P) – which account for almost 100% of the total outstanding credit ratings on EU structured finance instruments.

ESMA identified several shortcomings in areas affecting the surveillance of structured finance ratings for the CRAs investigated. ESMA also identified weaknesses on the level of disclosure and transparency which could be detrimental to investor protection.

“ESMA’s investigation has found shortcomings in CRAs’ processes for the surveillance of structured finance credit ratings which could affect the quality of the ratings,” said Steven Maijoor, ESMA chair.

“These concerns centred on information quality controls, the application of CRAs’ methodologies and the related disclosure as well as the timely completion of the credit ratings annual review. Issues were also identified in relation to the role and independence of the internal review function.

“The high volume of issued structured finance instruments and renewed interest in securitisation as an alternative funding source make the results of this review all the more timely.

“All registered CRAs should take note of the problems identified and ensure that they properly incorporate the requirements and objectives of the CRA Regulation into their working practices in order to ensure the quality of credit ratings and maintain investor confidence. The good practices identified in the Report can help with that improvement.”

ESMA has requested that CRAs put in place the remedial action plans to solve the concerns identified. ESMA will follow up with each of the CRAs subject to this investigation. Likewise, ESMA will monitor all other registered CRAs as part of its on-going supervision.


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