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November 17, 2017

ESMA published the final report updating its guidelines on the application of the endorsement regime under the Credit Rating Agencies (CRA) Regulation. The guidelines on the application of the endorsement regime will take effect on January 01, 2019. ESMA also published its final report on Technical Advice on CRA regulatory equivalence—CRA 3 update. CRA 3 will enter into force on June 01, 2018 for the purposes of endorsement and equivalence.

The report on the application of endorsement regime details a number of changes and clarifications to the existing guidelines. The updates focus on the obligations of the endorsing CRA, the conduct of the third-country CRA, and the third-country legal and supervisory framework. The report also clarifies ESMA’s supervisory powers over endorsed credit ratings and the notion of objective reasons. The effective date of January 01, 2019 for the endorsement regime will allow CRAs sufficient time to adapt policies and procedures to take into account ESMA’s additional guidance on the requirements, which are as stringent as EU requirements that are to be developed by ESMA in 2018. The final report on the Technical Advice to the EC assesses the legal and supervisory framework of the nine jurisdictions (Argentina, Australia, Brazil, Canada, Hong Kong, Japan, Mexico, Singapore, and United States), which until now have been eligible for equivalence and endorsement.

The entry into force of the 2013 amendments to the CRA Regulation (CRA 3), and the associated introduction of new requirements to endorsed ratings in 2018, provided an opportunity for ESMA to review the regime more broadly. Endorsement is a regime under the CRA Regulation, which allows credit ratings issued by a third-country CRA, and endorsed by an EU CRA, to be used for regulatory purposes in the EU. Endorsement is used by the largest CRAs in the EU. Equivalence allows a non-systemic CRA without any physical presence in the EU to be certified by ESMA. At present, four certified CRAs located in three non-EU jurisdictions rely on this regime. ESMA has concluded that the local legal and supervisory frameworks of these three jurisdictions, as well as those of Canada and Hong Kong, meet the objectives of the additional CRA 3 requirements for the purposes of equivalence. The countries whose legal and supervisory frameworks were assessed as not fully meeting the requirements are Argentina, Australia, Brazil and Singapore. However, the CRAs established in these jurisdictions currently rely only on the endorsement regime—not on equivalence.

 

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Keywords: Europe, EU, Securities, CRA 3, CRA Regulation, Equivalence, Endorsement Regime, ESMA

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