EU Authority Acts on New Third-Country Endorsement and Equivalence Regime for Credit Ratings

The European Securities and Markets Authority has published updated Guidelines on the application of the endorsement regime and Technical Advice on the equivalence of certain third-country legal and supervisory frameworks under the Credit Rating Agencies Regulation. The CRA provides that banks, investment firms, insurers, reinsurers, management companies, investment companies, alternative investment fund managers and CCPs may only use credit ratings for regulatory purposes issued by CRAs established in the EU and registered with ESMA. Credit ratings issued in a third country may be used for regulatory purposes in the EU under the endorsement regime or the equivalence/certification regime. Endorsement allows credit ratings issued by a third-country CRA and endorsed by an EU CRA to be used for regulatory purposes in the EU. The equivalence/certification regime allows credit ratings issued by a third-country CRA in relation to a third-country entity or financial instrument to be used in the EU for regulatory purposes – it does not cover ratings issued by a third-country CRA for an EU entity or a financial instrument issued in the EU.

The Guidelines on the endorsement regime follow changes that were introduced through an amendment to the CRA Regulation (known as CRA 3) which will apply from June 1, 2018. The updated Guidelines include three main changes to the existing Guidelines. First, where a third-country legal and supervisory framework has been positively assessed by ESMA, ESMA will no longer assume that compliance of the third-country CRA with this framework equates to compliance with requirements as stringent as those under the CRA Regulation. The endorsing CRA is expected to verify and be able to demonstrate that the third-country CRA has established internal requirements which are at least as stringent as the corresponding requirements in the relevant provisions of the CRA Regulation. Secondly, the updated Guidelines confirm that ESMA has the power to request information directly from the endorsing CRA about the conduct of the third-country CRA and the endorsed credit rating. Thirdly, the updated Guidelines provide a list of what ESMA considers to be objective reasons for a credit rating to be elaborated in a third country. The Guidelines will apply to credit ratings issued on or from January 1, 2019 and to existing credit ratings reviewed after that date.

ESMA's Technical Advice to the European Commission on the equivalence of certain third-country legal and supervisory frameworks takes into account the additional equivalence requirements introduced under CRA 3. Four CRAs are currently certified by ESMA under the equivalence/certification regime – Japan Credit Rating Agency Ltd (Japan), Kroll Bond Rating Agency (US), HR Ratings de México, S.A. de C.V. (Mexico) and Egan-Jones Ratings Co. (US). ESMA has re-assessed the frameworks of those jurisdictions that were deemed equivalent to the EU regime before CRA 3 – Argentina, Brazil, Mexico, US, Canada, Hong Kong, Singapore, Japan and Australia. ESMA concluded that only the regimes in Mexico, the US, Hong Kong and Japan could be considered equivalent to the revised EU regime. Canada could also be equivalent, provided that a proposed rulemaking is adopted and implemented in Canadian law before June 1, 2018.

View the final Report and updated Guidelines and Technical Advice.