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ESMA Clarifies Boundaries of CRA Regulation

The European Securities and Markets Authority (ESMA) has published new guidelines for the EU Credit Ratings Agency (CRA) Regulation in an attempt to clarify the rules that fall under its remit, who can issue a credit rating in Europe, and to better explain the exemptions, disclosure recommendations and enforcement boundaries of the new regime vis-à-vis other bodies.

The ESMA paper entitled ‘Guidelines and Recommendations on the Scope of the CRA Regulation’ seeks to clarify certain aspects of the scope of the EU Credit Rating Agencies Regulation for registered CRAs, and other treasury and non-treasury market participants operating on the perimeter of this sector. In an effort to aid cross-border harmonisation, ESMA also says it wants the guidelines to be used by different domestic national securities markets regulators across Europe and to explain the demarcation lines between them.

The Guidelines focus on a number of areas under the CRA Regulation, which ESMA believes require clarification following its experience of assessing applicants in the registration process and its enforcement of the perimeter under the EU supervisory regime. The areas include enforcement, rating activities, exemptions, branches of registered CRAs outside the EU, and disclosure recommendations.

According to Steven Maijoor, ESMA chair: “These Guidelines are aimed at clarifying, for market participants and the wider public, those activities which fall under ESMA’s CRA supervision and require its authorisation, as recent experience has shown us that unauthorised entities continue to operate at the perimeter of this new regime.

“I would remind market participants that issuing credit ratings in the EU is a regulated activity and carrying out this activity without being registered is a breach of the CRA Regulation and is subject to sanctions.

“These Guidelines will contribute to a consistent approach in the application of the CRA Regulation, ensure a level-playing field for all market participants and protect investors.”

The Guidelines clarify the interpretation of the scope of the CRA Regulation with respect to the following areas:

• Enforcement of the scope of the CRA Regulation: ESMA will take action against any CRAs issuing, endorsing, or distributing credit ratings to the public or by subscription without being registered or certified. National securities markets regulators shall keep ESMA informed in order to assist it in enforcing the regime.

• Obligation to register: a CRA established in the EU must be registered with ESMA in order to conduct rating activities.

• Credit rating activities v credit scoring activities: the guidelines delineate the boundaries between both activities. Credit rating activities call for the contribution of a rating analyst in terms of professional knowledge, expertise and analytical input.

Private ratings: these respond to an individual, specific and documented order placed by a client; ratings distributed to a list of subscribers do not fall within the definition of private rating and therefore fall within the registration requirement.

Establishment of branches outside the EU by registered CRAs: CRAs’ important operational functions should not be carried out through branches established outside the EU.

Credit scores: in order to guarantee a high level of investor protection, ESMA recommends that credit scoring firms that distribute credit scores to the public in the EU provide clear and prominent disclosure that those scores are not credit ratings, as defined under the CRA Regulation.