Credit rating agencies
Regulation (EC) No 1060/2009 on credit rating agencies
It seeks to regulate the activity of credit rating agencies to protect investors and European financial markets against the risk of malpractice.
Its aim is to guarantee the independence and integrity of the credit rating process and to improve the quality of the ratings issued.
It lays down conditions for the issuing of credit ratings and rules on the organisation and conduct of credit rating agencies, including their shareholders and members, to promote:
credit rating agencies’ independence;
avoiding conflicts of interest; and
better consumer and investor protection.
Since the regulation was amended by Regulation (EU) 2017/2402 (Simpler, more transparent and more standardised securitisation) on common rules for securitisation*, it also lays down obligations for issuers and related third parties established in the EU regarding securitisation instruments. Regulation (EU) 2017/2402 replaced the original regulation’s wording ‘structured instruments’ by ‘securitisation instruments’.
Registration, rules of conduct and supervision
To be registered in the EU, credit rating agencies must:
avoid conflicts of interest: for example, credit rating analysts must not rate an organisation in which they have a holding;
ensure the quality of their ratings and rating methods;
ensure a high degree of transparency: for example, by publishing an annual transparency report.
Since July 2011, the European Securities and Markets Authority (ESMA) has been responsible for registering credit rating agencies and has exclusive supervisory powers in relation to such agencies.
Over-reliance on credit ratings
Directive 2013/14/EU amended the regulation to require financial institutions and investors to carry out their own evaluation of credit risks, and not to rely solely or automatically on external ratings in order to evaluate the creditworthiness of an organisation or financial instrument.
Ratings of the sovereign debt of EU countries
Credit rating agencies must set up a schedule of dates on which they will rate EU countries; countries will be rated at least every 6 months.
To avoid market disruption, ratings may only be published after EU stock exchanges have closed, and at least 1 hour before they reopen.
Investors and EU countries must be informed of the facts and assumptions behind each rating.
Responsibility of credit rating agencies
A credit rating agency may be held liable if it infringes the regulation, either intentionally or through gross negligence, thereby causing damage to an investor or an issuer.
Independence and preventing conflicts of interest
A rotation rule requires issuers of complex securitisation instruments to change agency every 4 years.
Credit rating agencies must disclose situations where a shareholder holds 5% or more of the agency’s capital or voting rights and 5% or more of an organisation rated by that agency. If both these holdings reach or exceed 10%, the credit rating agency is not entitled to rate the entity.
It is forbidden to hold 5% or more of the capital or voting rights of more than one credit rating agency, unless these agencies belong to the same group.
All available ratings are published on a European rating platform by ESMA.
It has applied since 7 December 2009 with the exception of rules on:
references to credit rating in prospectuses (Article 4(1)) which have applied since 7 December 2010; and
credit rating agencies established in non-EU countries (Article 4(3) points (f), (g) and (h) which have applied since 7 June 2011.
The EU regulation on credit rating agencies is one of the initiatives taken by the EU in response to the commitments made at the G20 Washington Summit in November 2008.
Securitisation: transactions that enable a lender or other originator of assets — for example, a credit institution — to refinance a set of loans or assets (e.g. mortgages, car leases, consumer loans, credit cards) by converting them into securities. The lender or originator organises a portfolio of its loans into different risk categories, tailored to the risk versus reward requirements of investors. Returns to investors are generated from the cash flows of the underlying loans.
Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (OJ L 302, 17.11.2009, pp. 1-31)
Successive amendments to Regulation (EC) No 1060/2009 have been incorporated into the original document. This consolidated version is of documentary value only.
Report from the Commission to the European Parliament and the Council on alternative tools to external credit ratings, the state of the credit rating market, competition and governance in the credit rating industry, the state of the structured finance instruments rating market and on the feasibility of a European Credit Rating Agency (COM(2016) 664 final, 19.10.2016)
Commission Delegated Regulation (EU) 2015/1 of 30 September 2014 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to regulatory technical standards for the periodic reporting on fees charged by credit rating agencies for the purpose of ongoing supervision by the European Securities and Markets Authority (OJ L 2, 6.1.2015, pp. 1-23)
Commission Delegated Regulation (EU) 2015/2 of 30 September 2014 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to regulatory technical standards for the presentation of the information that credit rating agencies make available to the European Securities and Markets Authority (OJ L 2, 6.1.2015, pp. 24-56)
Report from the Commission to the Council and the European Parliament on the feasibility of a network of smaller credit rating agencies (COM(2014) 248 final, 5.5.2014)
Directive 2013/14/EU of the European Parliament and of the Council of 21 May 2013 amending Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision, Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) and Directive 2011/61/EU on Alternative Investment Funds Managers in respect of over-reliance on credit ratings (OJ L 145, 31.05.2013, pp. 1-3)
Commission Delegated Regulation (EU) No 946/2012 of 12 July 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to rules of procedure on fines imposed to credit rating agencies by the European Securities and Markets Authority, including rules on the right of defense and temporal provisions (OJ L 282, 16.10.2012, pp. 23-26)
Commission Delegated Regulation (EU) No 447/2012 of 21 March 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council on credit rating agencies by laying down regulatory technical standards for the assessment of compliance of credit rating methodologies (OJ L 140, 30.5.2012, pp. 14-16)
Commission Delegated Regulation (EU) No 449/2012 of 21 March 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to regulatory technical standards on information for registration and certification of credit rating agencies (OJ L 140, 30.5.2012, pp. 32-52)
Commission Delegated Regulation (EU) No 272/2012 of 7 February 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to fees charged by the European Securities and Markets Authority to credit rating agencies (OJ L 90, 28.3.2012, pp. 6-10)
Rules on the obligations of depositaries for EU investment funds
Delegated Regulation (EU) 2016/438 supplementing Directive 2009/65/EC with regard to obligations of depositaries
This delegated regulation sets out in detail the specific rights and obligations of depositaries* and management and investment companies under EU rules for undertakings for collective investment in transferable securities (UCITS)*.
In 2018, it was amended by Regulation (EU) 2018/1619 in regard to the safe-keeping duties of depositaries. This was due to a divergence in the level of protection for financial instruments held in custody by depositaries as a result of differing national and insolvency laws. The amendment primarily seeks to provide greater clarity and consistency in how assets are kept separated so that investors are better protected and to ensure more market efficiency.
The depositary must have a written contract with the investment company or the management company for each of the common funds the latter manages. This must include details such as:
a description of the services to be provided and ways safekeeping, oversight and confidentiality obligations are to be exercised;
rules on the two-way transfer of information between the depositary and the management and investment companies, and with a third party;
procedures to prevent money laundering and the financing of terrorism, and to provide information when new cash accounts are opened;
confirmation the depositary may, through access to books and on-site visits, assess the conduct of the management or investment company and the quality of information it receives.
Regulation (EU) 2018/1619 sets out the minimum details that should feature in the contract between a depositary and a third party on delegation of custody of assets of the depositary’s UCITS clients.
Due diligence and oversight
The depositary must have in place procedures to:
assess, when it is appointed, the risks from the nature, scale and complexity of the UCITS’s investment policy and strategy;
devise, on the basis of that risk assessment, appropriate oversight, including checks and controls on the management or investment company;
ensure the sale and redemption of a UCITS assets tally and that proper procedures are in place to value those assets;
verify that instructions from the management or investment company are fully legal;
detect and inform the management or investment company when payments it is due are late;
check the accuracy of dividend payments;
monitor effectively a UCITS cash flow by, for instance, ensuring its money is in an account with a central bank or authorised credit institution;
receive from the management or investment company at the end of each business day details of payments made by or on behalf of investors;
ensure any UCITS financial instruments which it cannot physically hold itself are properly registered;
guarantee it has access without undue delay to all the information it needs from a management or investment company to carry out its various duties, such as verifying ownership and registering in its records any UCITS assets;
apply due diligence and ongoing monitoring when appointing another company to hold in custody the assets of its UCITS clients;
protect fully the assets of a UCITS client if their custodian in a non-EU country subsequently goes bankrupt.
The UCITS Directive requires that where a depositary delegates safekeeping functions to custodians, the assets also need to be segregated at the level of the delegate. Amending Regulation (EU) 2018/1619 specifies the manner in which this requirement should be met.
Depositaries, if they have fully carried out their duties, are not liable for any loss in the following circumstances:
natural events beyond human control or influence;
adoption of any law, regulation or decree impacting on the assets they hold in custody;
war, riots or other major upheaval;
the UCITS never legally owned the financial instrument, was deprived of its ownership or is unable to dispose of it.
The following rules apply:
No one may be simultaneously member or official of a management company and a depositary’s management board.
Limits exist on joint membership of management and supervisory boards for both partners.
Management or investment companies must use clear decision-making processes when choosing and appointing depositaries.
Conflicts of interest between management or investment companies and depositaries, including their management boards and supervisory functions, must be identified and avoided.
The regulation has applied since 13 October 2016. The changes introduced to it by Delegated Regulation (EU) 2018/1619 apply from 1 April 2020.
Depositaries: credit institutions (i.e. deposit-taking banks) or investment firms with regulatory permission to act as custodians of funds.
UCITS: investment vehicles that pool investors’ capital and invest that capital collectively through a portfolio of financial instruments such as stocks, bonds and other securities.
Commission Delegated Regulation (EU) 2016/438 of 17 December 2015 supplementing Directive 2009/65/EC of the European Parliament and of the Council with regard to obligations of depositaries (OJ L 78, 24.3.2016, pp. 11-30)
Commission Delegated Regulation (EU) 2018/1619 of 12 July 2018 amending Delegated Regulation (EU) 2016/438 as regards safe-keeping duties of depositaries (OJ L 271, 30.10.2018, pp. 6-9)
Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC (OJ L 182, 29.6.2013, pp. 19-76)
Successive amendments to Directive 2013/34/EU have been incorporated into the original document. This consolidated version is of documentary value only.
Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, pp. 338-436)
Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, pp. 1-337)
See consolidated version.
Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ L 302, 17.11.2009, pp. 32-96)
EU rules on derivatives contracts
Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories
The European market infrastructure regulation (known as ‘EMIR’), lays down rules regarding over-the counter (OTC) derivative contracts*, central counterparties (CCPs)* and trade repositories*, in line with the G20 commitments made in Pittsburgh in September 2009.
EMIR aims to reduce systemic risk, increase transparency in the OTC market and preserve financial stability.
To increase transparency in the OTC market, the regulation provides that all information on all European derivative contracts must be reported to trade repositories and made accessible to supervisory authorities, including the European Securities and Markets Authority (ESMA).
To reduce counterparty credit risk*, the regulation sets out strict organisational, business conduct and prudential obligations for CCPs. Standard derivative contracts must be cleared through CCPs (see clearing*).
To reduce operational risk*, the regulation requires that electronic means must be used for the timely confirmation of the terms of OTC derivatives contracts.
The clearing and reporting obligations apply to:
financial firms, e.g. banks and insurance firms,
non-financial firms, e.g. energy companies and airlines, which have large holdings in OTC derivatives.
ESMA is responsible for identifying contracts that should be subject to the clearing obligation, that is, those that are standardised and must be cleared by CCPs. ESMA also supervises trade repositories.
The European Commission has adopted a number of measures, including technical standards on the basis of ESMA drafts, to implement the terms of the regulation. The technical standards developed by ESMA cover a range of topics including, e.g. capital requirements of CCPs, the minimum data to be reported to trade repositories and supervisory reporting of institutions of the liquidity coverage requirement.
The Commission has also adopted decisions on the ‘equivalence’ of the regulation regimes for CCPs in certain non-EU countries.
In August 2015, the Commission adopted a delegated regulation that determines that some classes of OTC interest rate derivative contracts be cleared through central counterparties. It covers interest rate swaps denominated in euros, pounds sterling, Japanese yen or US dollars that have specific features, including
the index used as a reference for the derivative;
its maturity — when it becomes payable; and
the notional type (i.e. the nominal or face value that is used to calculate payments made on the derivative).
On 5 June 2015, the European Commission adopted a delegated regulation in accordance with Article 85(2) of EMIR. This extends temporary exemption from central clearing requirements for pension scheme arrangements (PSAs) until 16 August 2017. PSAs — which include all categories of pension funds — hold neither significant amounts of cash nor highly liquid assets. If PSAs had to source cash for central clearing, imposing such a requirement on them would require very far-reaching and costly changes to their business model which could ultimately affect pensioners’ income.
In June 2016, Commission Delegated Regulation (EU) 2016/1178 introduced additional rules on the classes of OTC derivatives and categories of counterparties subject to the clearing obligation and the dates from which the clearing obligation takes effect.
It has applied since 16 August 2012.
Over-the-counter (OTC) derivatives are generally negotiated privately. The information concerning them is consequently only available to the contracting parties, which can make it difficult to identify the nature and level of risks involved.
r (OTC) derivative: a derivative is a financial contract linked to the future value or status of an underlying entity such as an asset, index or interest rate.
An OTC derivative is a derivative not traded on an exchange or on an equivalent non-EU market but is instead privately negotiated between 2 counterparties, for example, a bank and a manufacturer.
Central counterparty (CCP): a body that acts between the 2 counterparties to a transaction, acting as the buyer to every seller and the seller to every buyer.
A CCP’s main purpose is to manage the risk of a counterparty being unable to make the required payments when they are due, and defaulting on the deal.
Trade repository: a central data centre where details of derivatives transactions are reported. Trade repositories are commercial firms. There are global trade repositories for credit, interest rate and equity OTC derivatives (a particular class of derivative such as options or futures).
Counterparty credit risk: a risk that a counterparty, i.e. the other party in a financial transaction, will default on payment.
Clearing: all activities from the time a commitment is made for a transaction until it is settled.
Operational risk: a risk of loss resulting from inadequate or failed internal processes or external events, e.g. fraud, human error, terrorism.
Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (OJ L 201, 27.7.2012, pp. 1-59)
Successive amendments and corrections to Regulation (EU) No 648/2012 have been incorporated in the basic text. This consolidated version is of documentary value only.
Commission Implementing Regulation (EU) No 680/2014 of 16 April 2014 laying down implementing technical standards with regard to supervisory reporting of institutions according to Regulation (EU) No 575/2013 of the European Parliament and of the Council (OJ L 191, 28.6.2014, pp 1–1861)
Commission Delegated Regulation (EU) 2015/2205 of 6 August 2015 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on the clearing obligation (OJ L 314, 1.12.2015, pp 13-21)
Commission Delegated Regulation (EU) 2015/1515 of 5 June 2015 amending Regulation (EU) No 648/2012 of the European Parliament and of the Council as regards the extension of the transitional periods related to pension scheme arrangements (OJ L 239, 15.9.2015, pp. 63-64)
Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (OJ L 337, 23.12.2015, pp 1-34)
Commission Implementing Regulation (EU) 2016/892 of 7 June 2016 on the extension of the transitional periods related to own funds requirements for exposures to central counterparties set out in Regulation (EU) No 575/2013 and Regulation (EU) No 648/2012 of the European Parliament and of the Council (C/2016/3354) (OJ L 151, 8.6.2016, pp 4–5)
Commission Delegated Regulation (EU) 2016/1178 of 10 June 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on the clearing obligation (C/2016/3446) (OJ L 195, 20.7.2016, pp 3–10)
Ensuring accuracy and integrity of benchmarks
Regulation (EU) 2016/1011 on indices used as financial benchmarks
It sets common European Union (EU) standards to prevent manipulation of benchmarks* that could affect the price of financial instruments, or financial contracts such as loans or mortgages.
Administrators * responsible for overseeing financial benchmarks must:
apply robust governance arrangements and clear organisational structures;
identify, prevent, or manage any potential conflicts of interest;
ensure their staff have the necessary skills, knowledge and experience, and are effectively managed and supervised;
maintain permanent and effective oversight of all aspects of the benchmarks under their responsibility;
operate controls to ensure benchmarks comply with the legislation;
have a system in place to record input data, phone or electronic communications and complaints received and investigated;
subject any outsourcing to strict conditions;
publish clear guidelines for different types of input data and the methodology used for calculating benchmarks;
develop a code of conduct stipulating the responsibilities of contributors inputting the data.
The regulation establishes 3 separate regimes progressively increasing the level of regulation and supervision depending on a benchmark’s importance:
non-significant benchmarks do not fall into either of the 2 categories below and are subject to less onerous rules;
significant benchmarks are used as a reference for financial instruments, financial contracts or investment funds with a total average value of at least €50 billion or fulfil certain other criteria;
critical benchmarks are used as a reference for financial instruments, financial contracts or investment funds with a total value of at least €500 billion or fulfil certain other criteria.
Specific arrangements exist for commodity benchmarks*, interest rate benchmarks and regulated data benchmarks*.
The European Securities and Markets Authority (ESMA) establishes and maintains a public register of all authorised or registered administrators.
Various schemes exist to provide access to the EU market for financial benchmarks and administrators from outside the EU.
EU countries’ competent authorities have the power to apply appropriate administrative sanctions and other measures for an infringement.
The European Commission, by 1 January 2020, is to report to the European Parliament and the Council of the European Union on the way the system is functioning.
Benchmarks are used to price financial instruments and financial contracts or to measure the performance of investment funds. Well-known examples of benchmarks are the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR) used for interbank interest rates. Benchmarks are also used for oil price assessments, stock market indexes and the level of personal mortgage payments.
Benchmark: a figure which is made public and used to price payments under financial instruments or financial contracts or to measure the performance of an investment fund.
Administrator: an individual or company/organisation with control over a benchmark.
Commodity benchmark: often based on data from non-supervised entities (e.g. commodity producer organisations). Their administrators are therefore required to take steps to ensure that benchmarks are provided on a fair, reasonable, transparent and non-discriminatory basis to all users.
Regulated data benchmark: benchmarks determined from input data that is provided by regulated venues, energy exchanges and emission allowance auctions.
Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (OJ L 171, 29.6.2016, pp. 1-65)It applies from 1 January 2018 except for certain articles which took effect on 30 June 2016. These involve largely preparatory work such as the development by ESMA of regulatory technical standards but also the identification and supervision of critical benchmarks.
Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC (OJ L 133, 22.5.2008, pp. 66-92)
Successive amendments to Directive 2008/48/EC have been incorporated into the original text. This consolidated version is of documentary value only.
Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010 (OJ L 60, 28.2.2014, pp. 34-85)
Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC (OJ L 173, 12.6.2014, pp. 1-61)
Commission Implementing Regulation (EU) 2016/1368 of 11 August 2016 establishing a list of critical benchmarks used in financial markets pursuant to Regulation (EU) 2016/1011 of the European Parliament and of the Council (C/2016/5150) (OJ L 217, 12.8.2016, pp. 1-3)l