European Union: EU Regulation of Credit Rating Agencies approved

Last Updated: 4 May 2009
Article by Edmund Parker, Miles Bake and Kevin Hawken

Originally published 24 April 2009

Keywords: European Regulation on Credit Rating Agencies, asset-backed securities, behavioural standards, External Credit Assessment Institution, Capital Requirements Directive, CESR, structured finance, credit institutions, disclosure,

The European Regulation on Credit Rating Agencies was approved yesterday.

First some background: in the credit crunch's early days, as complex financial structures started unravelling, many journalists and politicians pointed fingers at credit rating agencies ("CRAs"), accusing them of being the prime culprits.  "How can that ever have been rated AAA?", commentators cried as various asset-backed securities slid below investment grade.  Regulators, too, formed the view that that the importance of ratings to investors' decisions meant that CRAs should be regulated in some way.  This belief was magnified because credit ratings are deeply embedded in the European regulatory architecture. Following consultation and the EU legislative process, this has crystallised into The European Regulation on Credit Rating Agencies (the "Regulation").

The Regulation:

The Regulation aims to set behavioural standards for CRAs, such as increasing transparency and improving their standards of corporate governance.  The Regulation also puts in place a regime for registering and regulating CRAs and subjecting them to supervision.  The aim is that ratings will be qualitatively better than under current standards – "independent, objective and of adequate quality", as the Regulation puts it.1 

Main points and analysis:

1. Scope of Regulation:  Credit institutions (i.e. banks) may only use, "for regulatory purposes", ratings which have been issued by a CRA that is registered within the EU, or satisfies the equivalence criteria in the Regulation.2  "Regulatory purposes" includes for the calculation of regulatory capital.  For this reason, a CRA, unless it is registered, or meets the equivalence criteria, shall not be recognised as an External Credit Assessment Institution for the purposes of the Capital Requirements Directive (meaning that its ratings cannot be used when calculating the risk-weighting of assets).3

Analysis:  The fact that banks are required to use the ratings of registered CRAs only for regulatory purposes - and not for wider purposes - represents a favourable outcome for the banking industry.  Earlier drafts of the Regulation included a potentially much wider scope of banking activities requiring use of Regulation-compliant CRA ratings.  By linking the use of ratings under the Regulation to regulatory purposes (meaning compliance with European Community law), the scope is more certainly defined.

2. Registration and supervision of CRAs:  The Regulation establishes a mechanism for CRAs to be registered with their home member states' competent authorities, and for their EU affiliates to be supervised through a "college of supervisors" co-ordinated and moderated through the Committee of European Banking Supervisors ("CESR"). It applies to CRAs that are "legal persons established in the Community".4 CRAs will be required to pay a proportionate registration and supervisory fee.5

Analysis:  The threshold standards for registration are maximum harmonisation measures, that is, no Member States can impose additional or higher threshold requirements than are set out in the Regulations, which is appropriate given the purpose and scope of the Regulations.

3. Equivalence and endorsement:  For recognising the ratings of instruments and entities given by CRAs outside of the European Community:

  1. Registered CRAs can endorse the ratings of entities or instruments given by their affiliates outside of the European Community, provided that (amongst other things):6

    1. the registered CRA can verify on an ongoing basis that the conduct of the third country CRA operates under a no-less-stringent supervisory regime;
    2. there is an objective reason for the rating to be performed in the third country rather than within the European Community; and
    3. there is an "appropriate" co-operation agreement in place between the national regulator of the registered CRA and the third country CRA's regulator.  This way multinational CRAs may be able to endorse within the EU the ratings given by their foreign affiliates, although it is critical that the commission publishes a list of third countries with which such "co-operation arrangements" are in place.
  2. Ratings of third country CRAs relating to third country instruments or entities may be used by credit institutions for regulatory purposes provided (amongst other things):

    1. There is in effect a cooperation agreement between the Commission and the third country regulator in effect;
    2. The European Commission has adopted an "equivalence decision" confirming the standards of regulation in the third country are equivalent to EU standards; and
    3. The third country CRA has been "certified" by the CESR.

Analysis:  The endorsement approach is aimed at larger CRAs, the approach to equivalence aimed at smaller CRAs without an EU group presence.  Whilst in principle it is helpful to set out a regime for recognising third country ratings equivalence, it is not clear how endorsement criteria will be satisfied or what the actual process for putting in place cooperation agreements and making equivalence decisions will work, nor exactly what will constitute 'equivalence'.  In particular, the substantive requirements of the Regulation - against which "equivalence" will be judged - are more detailed and extensive than the international IOSCO Code of Conduct for CRAs,7 and this may restrict the ability of CRAs to obtain equivalence rulings.

4. Withdrawal of registrations and transition periods:  If a CRA's home regulator withdraws that CRA's registration (pursuant to the processes set out in the Regulations), there will be a transition period during which that CRA's ratings of any investments or entity may still be used by credit institutions for regulatory purposes. 

This period is:

  1. Ten working days, where the investment or entity rated is also rated by a different registered CRA; or
  2. Three months, otherwise – a period which may be extended by the Commission in circumstances where there is "potential for market disruption or financial instability".8

Analysis:  The automatic transition periods are welcome, as the potential regulatory capital shock of a CRA losing its registration could otherwise be immense and would generate exactly the kind of market instability that regulators and all market participants would want to prevent. 

5. Structured Finance:  Structured finance instruments will have some form of "additional symbol" to distinguish them from other ratings categories.9  CRAs will also be required to disclose information about the due diligence processes they have performed, loss information and cash-flow analysis, and their assumptions and stress scenario simulations undertaken.10  A structured finance instrument is defined as an instrument resulting from a securitisation as defined in the Banking Consolidation Directive.11

There is a further restraint on the issuance of ratings for complex products:

"where the lack of reliable data or the complexity of the structure of a new type of financial instrument or the quality of information available is not satisfactory or raises serious questions as to whether a credit rating agency can provide a credible credit rating, the credit rating agency shall refrain from issuing a credit rating or withdraw an existing rating."12

Analysis:  The additional symbol proposal has been circulating for some time, and the IOSCO Final Report of May 2008 includes a similar provision.13  Whilst it may seem politically desirable, this requirement is apt to confuse investors and suggests that there is some qualitative difference between structured finance ratings and the rest.  For regulatory capital purposes – i.e. determining the applicable credit quality step assigned to a rating – the additional symbol would appear not to make a difference (for now).  This raises the question, what does this additional symbol achieve? If the rating of a structured product is qualitatively inferior, why would this not be reflected in a lower rating itself?  If it is not inferior, why do we need the additional symbol?  Certainly, part of the overall challenge for regulators is to ensure that published ratings capture qualitative differences between types of rated entities or instruments (i.e. that structured instruments are fundamentally different to corporate entities and behave in very different ways) and the additional symbol is part of their response to this challenge.

The additional disclosure requirements specific to structured finance instruments may help some investors in their investment decisions, or they may lead to a diminished investor appetite for such instruments (based on the concern that, having been provided with this additional information, the investor would be obliged to review it, which may be an excessive operational challenge for certain investors).  Furthermore, whilst it may seem like common sense (and good business) for CRAs not to issue ratings where the structure or information available does not permit satisfactory analysis, to encode it in the Regulation may have the effect of stifling financial innovation (although the IOSCO Code of Conduct has a similar provision).14

6. CRA internal governance and transparency:  The Regulation imposes standards of internal governance to ensure (amongst other things) that CRAs manage any conflicts of interest, have independent compliance departments and review their rating methodologies periodically.  Additionally, the analysts or persons who approve ratings must not "make proposals or recommendations, whether formally or informally, regarding the design of structured finance instruments on which the credit rating agency is expected to issue a credit rating."15  The Regulation also prescribes time periods during which former analysts may not take up certain positions within entities which they have rated.16

Analysis:  It is unlikely that this will have a significant new impact since CRAs which comply with the IOSCO Code of Conduct are already prohibited from providing structuring advice in terms similar to the Regulation.17 

7. Timing and implementation:  the Regulations enter into force on the twentieth day after publication of the Regulations in the Official Journal of the EU.  The approved text of the Regulation is now presented for information to the ECOFIN meeting on 5 May.  Publication in the Official Journal is expected to take place later this year.

However, the requirement that credit institutions use only ratings from registered CRAs for regulatory purposes will apply from 12 months after that date of entry into force.  The equivalence criteria for third country CRAs will apply from 18 months after the entry into force of the Regulations.


From credit institutions' point of view, the final approved Regulations contain a number of improvements from initial consultations and drafts: pinning the usage of ratings to regulatory purposes, having a twelve-month window before the Regulations affect regulatory capital and putting in place transitional arrangements so that ratings can continue to be used for a period where registration is revoked are all helpful.

From the point of view of the CRAs, the Regulations impose an increased administrative, disclosure and supervisory burden, although for CRAs that already comply with the IOSCO Code of Conduct Fundamentals, the transition required to be Regulations-compliant may be less than the changes that they have already undertaken.  For third country CRAs looking to do business within the EU, and for EU credit institutions looking to buy securities rated only by third country CRAs, the impact of the Regulation may be considerably harsher.


1.       Recital 1.  All references are to the Regulation unless otherwise stated.

2.       Article 4(1).

3.       Article 2a.

4.       Article 12(1).

5.       Article 16.

6.       Article 4(4) - 4(6).

7.       "Code of Conduct Fundamentals for Credit Rating Agencies" issued by the Technical Committee of the International Organization of Securities Commissions ("IOSCO"), May 2008 (the "IOSCO Code of Conduct").

8.       Article 21(1a)(b).

9.       Article 8(3).

10.     Annex I, Section D part II.

11.     That is, "a transaction or scheme whereby the credit risk associated with an exposure or pool of exposures is tranched, having the following characteristics: (a) payments in the transaction or scheme are dependent upon the performance of the exposure or pool of exposures; and (b) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme".  Directive 2006/48/EC Article 4(36).

12.     Annex I, Section D part I paragraph 3.

13.     "The Role of Credit Rating Agencies in Structured Finance Markets" Final Report of the Technical Committee of IOSCO, May 2008, p16.

14.     IOSCO Code of Conduct Article 1.7-3.

15.     Annex 1, Section B paragraph 5.

16.     Annex 1, Section C paragraph 6, for example.

17.     IOSCO Code of Conduct Article 1.14-1.

Visit us at

Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2008. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.