United States: Alternative Investments Group Client Alert: ESMA Publishes CRA's’ Market Share Calculation Paper

On 16 December 2013, the European Securities and Markets Authority ("ESMA") published on its website a paper entitled "CRAs' Market share calculation according to Article 8d of the CRA Regulation"1 (the "Paper"). The Paper fulfils ESMA's obligations under new Article 8d(2)2 of Regulation (EC) No 1060/2009 on credit rating agencies (the "CRA Regulation") and sets out a list of credit rating agencies registered in the European Union ("Rating Agencies") indicating their total market share, together with the types of credit ratings issued (classified as sovereign ratings, corporate ratings3, structured finance ratings and covered bond ratings).

In this Client Alert, we focus on the contents of the Paper and address a number of questions as they affect, in particular, issuers and arrangers of structured finance transactions.

Q1. REMIND ME WHAT ARTICLE 8d IS?

A. Article 8d of the CRA Regulation was introduced by Article 1(11) of Regulation (EU) No 426/2013 ("CRA III"). Article 8d(1) provides that where an issuer or a related third party intends to appoint at least two Rating Agencies for the rating of the same issuance or entity, the issuer4 or a related third party5 is required to consider appointing at least one Rating Agency that has no more than 10% of the total market share6. Where the issuer or a related third party does not appoint at least one Rating Agency with no more than 10% of the total market share, there is a requirement that this be documented.

Article 8d(2) requires EMSA to publish annually on its website a list of registered Rating Agencies, indicating their total market share and the types of credit ratings issued which can be used by the issuer as a starting point for the evaluation discussed in the paragraph above. We note that the legislation has omitted reference to "related third parties" here, however, we see this as unintentional and related third parties should also use the Paper as a starting point for such an evaluation for their transactions.

Q2. IS THERE ARE REQUIREMENT TO HAVE TWO RATING AGENCIES ON ALL TRANSACTIONS?

A. No. It is only a requirement under the CRA Regulation7 that where an issuer or a related third party intends to solicit a credit rating for a structured finance instrument8, at least two independent Rating Agencies shall be appointed.

Q3. SO WHAT DOES THIS PAPER MEAN FOR ISSUERS AND RELATED THIRD PARTIES?

A. The obligation of issuers and related third parties under Article 8d(1) to consider and document the choice of Rating Agencies was effective as of 20 June 2013. However, prior to the publication of the Paper, little publicly available data existed which clearly set out the precise market share of each Rating Agency in order to evaluate a Rating Agency's market share and their capability to rate transactions. Accordingly, issuers and related third parties had to make informed decisions based on perceived (as opposed to actual) market data. Now that ESMA has published the Paper, such parties will now have a useful source to refer to when making such evaluation. This in turn gives greater comfort to those making the decision.

Q4. HOW DOES ESMA CALCULATE TOTAL MARKET SHARE?

A. The total market share is measured with reference to the annual turnover from credit rating activities and ancillary services, at group level, generated by Rating Agencies. The total turnover is calculated with respect to credit rating activities and ancillary services.

Credit rating activities includes the provision of opinions in relation to "an entity, a debt or financial obligation, debt security, preferred share or other financial instrument, or of an issuer of such a debt or financial obligation, debt security, preferred share or other financial instrument"9 and ancillary services comprise "market forecasts, estimates of economic trends, pricing analysis and other general data analysis as well as related distribution services"10.

Q5. SO WHICH REGISTERED RATING AGENCIES ISSUE STRUCTURED FINANCE RATINGS?

A. There are, unsurprisingly, a very limited number of EU registered rating agencies in Europe that provide structured finance ratings. The Paper lists Moody's11, Fitch12, S&P13, Creditreform Rating AG, DBRS Ratings Limited ("DBRS") and Scope Credit Rating GmbH as Rating Agencies providing structured finance ratings. Unhelpfully, the total market share calculation is by reference to credit rating activities and ancillary services14 and does not narrow down into specific ratings categories which makes it difficult to gauge deal volume and experience in a specific rating sector such as structured finance. It should not, however, be difficult for market participants to infer from the percentages set out in the Paper and their experience generally that Moody's, S&P and Fitch are the key players for structured finance transactions. We have, however, seen DBRS provide structured finance ratings in, for example, European CMBS15, Auto ABS16 and to a very limited extent, CLOs17.

For such issuers and related third parties the Paper should be, to some degree, welcomed as they now have an official source to justify, if so required, their selection of Rating Agencies to rate a structured finance instrument.

Q6. HOW DOES THE ISSUER OR RELATED THIRD PARTY "DOCUMENT" ITS DECISION? ANY EXAMPLES TO DATE?

A. As noted above, Article 8d(1) requires the choice of Rating Agencies which rate structured finance instruments to be "documented". Unhelpfully, there is no guidance as to what "documented" entails. However, we have seen a number of different ways that issuers have sought to comply with this provision. In a recent Milbank CLO18, the directors of Dryden 29 Euro CLO 2013 B.V., a Dutch issuer, sought to achieve compliance by documenting their decision in the transaction board minutes with related disclosure in the offering circular.

Q7. WHAT ARE RELATED THIRD PARTIES?

A. The definition of related third parties is set out in Article 1(i) of the CRA Regulation and means an originator19, arranger, sponsor20, servicer or any other party that interacts with a Rating Agency on behalf of a rated entity, including any person directly or indirectly linked to that rated entity by control.

Footnotes

1 http://www.esma.europa.eu/system/files/esma_cra_market_share_calculation.pdf

2 Article 8d(2) of Regulation (EC) No 1060/2009 as amended by Regulation (EU) No 426/2013.

3 Corporate ratings includes non-financial, financial and insurance ratings.

4 "Issuer" is defined in the CRA Regulation as an issuer as defined in Article 2(1)(h) of Directive 2003/71/EC (the Prospectus Directive), being a legal entity which issues or proposes to issue securities.

5 See response to Q7 for detail on related third parties.

6 Article 8d(1) of Regulation (EC) No 1060/2009 as amended by CRA III.

7 Article 8c(1) of Regulation (EC) No 1060/2009 as amended by CRA III.

8 "structured finance instrument" is defined in the CRA Regulation as "a financial instrument or other assets resulting from a securitisation transaction or scheme referred to in Article 4(36) of Directive 2006/48/EC". Under Article 4(36) of Directive 2006/48/EC (the "Banking Consolidation Directive"), "securitisation" means "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.".

9 http://www.esma.europa.eu/system/files/esma_cra_market_share_calculation.pdf

10 http://www.esma.europa.eu/system/files/esma_cra_market_share_calculation.pdf

11 Moody's Investors Service Cyprus Ltd, Moody's France S.A.S., Moody's Deutschland GmbH, Moody's Italia S.r.l., Moody's Investors Service España S.A. and Moody's Investors Service Ltd. are each registered with ESMA.

12 Fitch France S.A.S, Fitch Deutschland GmbH, Fitch Italia S.p.A., Fitch Polska S.A., Fitch Ratings España S.A.U., Fitch Ratings Limited and Fitch Ratings CIS Limited are each registered with ESMA.

13 Standard & Poor's Credit Market Services France S.A.S., Standard & Poor's Credit Market Services Italy S.r.l. and Standard & Poor's Credit Market Services Europe Limited are each registered with ESMA.

14 For more detail on credit rating activities and ancillary services see response to Q4.

15 For example, see http://www.dbrs.com/research/261876/german-residential-funding-2013-2- limited.pdf

16 For example, see http://www.dbrs.com/research/253030/auto-abs-2012-3-fta.pdf

17 For example, see http://www.dbrs.com/research/242604/mesena-clo-2011-1-b-v.pdf

18 Milbank, Tweed, Hadley & McCloy LLP, as deal counsel, advised Pramerica Investment Management Limited in its capacity as investment manager.

19 "Originator" is defined in the CRA Regulation as an originator as defined in point (41) of Article 4 of the Banking Consolidation Directive, being "(a) an entity which, either itself or through related entities, directly or indirectly, was involved in the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposure being securitised; or (b) an entity which purchases a third party's exposures onto its balance sheet and then securitises them".

20 "Sponsor" is defined in the CRA Regulation as a sponsor as defined in point (42) of Article 4 of the Banking Consolidation Directive, being "a credit institution other than an originator credit institution that establishes and manages an asset-backed commercial paper programme or other securitisation scheme that purchases exposures from third party entities".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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

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

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions