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CEBS Consultation Paper (CP43) Summary

Core Content

The CEBS consultation paper (CP43) outlines its recommendation to the European Commission regarding the eligibility of entities producing only credit scores for ECAI (External Credit Assessment Institution) recognition under Directive 2006/48/EC. The paper proposes amendments to ensure consistency, transparency, and prudential soundness in the use of credit assessments for capital requirements.

Main Views and Key Information

1. Proposed Amendment

CEBS proposes to amend Directive 2006/48/EC to require that an entity seeking ECAI recognition must be registered as a Credit Rating Agency (CRA) under Regulation (EC) No 1060/2009, unless it only issues credit ratings that fall under the exceptions in Article 2(2)(d) of the CRA Regulation. This would apply to all entities except Central Banks.

2. Eligibility of Credit Assessments

CEBS argues that credit scores produced solely through pre-set statistical models or systems, without substantial analytical input from rating analysts, should not be eligible for use in capital requirement purposes. This is because such assessments lack the necessary objectivity, independence, and transparency required for prudential purposes.

3. Central Banks Exception

Central Banks are excluded from the scope of the CRA Regulation under Article 2(2)(d). However, CEBS acknowledges that they can still be eligible for ECAI recognition, provided their credit ratings meet the principles of integrity and independence outlined in the Regulation. In such cases, the technical criteria in Annex VI, Part 2 of Directive 2006/48/EC must still be satisfied.

4. Unlevel Playing Field

CEBS highlights that the current framework allows entities producing only credit scores to be eligible for ECAI recognition without meeting the registration or technical criteria required of CRAs. This creates an unlevel playing field and lacks transparency, which is problematic for both supervisors and the market.

5. Supervisory Consistency

CEBS emphasizes the need for supervisory consistency and transparency. It suggests that the recognition process for ECAIs should be publicly explained and a list of eligible ECAIs should be made available to all competent authorities.

6. Securitisation and Market Acceptance

For the use of ECAI credit assessments in securitisation, CEBS proposes that the competent authorities must be satisfied that the ECAI complies with the requirements of Article 81, including technical criteria in Annex VI, Part 2, and has demonstrated ability in the securitisation area, such as strong market acceptance.

7. CRA Registration and Eligibility

CEBS notes that registered CRAs are already presumed to meet the requirements of objectivity, independence, ongoing review, and transparency. Therefore, entities registered as CRAs under Regulation (EC) No 1060/2009 are eligible for ECAI recognition, provided they meet the technical criteria in Annex VI, Part 2.

Summary of CEBS's Proposal

• New Paragraph 1a. to Article 81: Requires ECAI registration under the CRA Regulation as a precondition for ECAI recognition, except for those issuing credit ratings under Article 2(2)(d).
• Article 97 Amendment: Proposes a new paragraph 2 that ensures ECAIs used in securitisation are eligible only if they comply with Article 81, including technical criteria and demonstrated market acceptance.
• Public Transparency: Suggests that recognition processes and lists of eligible ECAIs should be publicly available.
• Credibility and Transparency: Emphasizes that credit assessments used for capital requirements must comply with the principles of credibility and transparency as outlined in Annex IX, Part 3.

Conclusion

CEBS aims to align the ECAI recognition process with the CRA Regulation, ensuring that only entities meeting the necessary prudential standards are eligible for use in capital requirements. This includes requiring registration for most ECAIs, excluding entities producing only credit scores, and ensuring transparency and consistency across the EU. The proposal is open for public comment until 13 November 2010, with responses to be submitted to cp43@c-ecs.org.