[ParlTrack]

Proposal for a regulation
Recital 3 a (new)

(3a) Any regulation at national or Union level on credit rating agencies should not, directly or indirectly, lead to or risking to be interpreted as a restriction on the freedom of expression.

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 5

(5) Credit rating agencies are important participants in the financial markets. As a consequence, the independence and integrity of credit rating agencies and their credit rating activities are of particular importance to guarantee their credibility vis-à-vis market participants, in particular investors and other users of ratings. Regulation 1060/2009 provides that credit rating agencies have to be registered and supervised as their services have considerable impact on the public interest. Credit ratings, unlike investment research, are not mere opinions about a value or a price for a financial instrument or a financial obligation. Credit rating agencies are not mere financial analysts or investment advisors. Credit ratings have regulatory value for regulated investors, such as credit institutions, insurance companies and other institutional investors. Although the incentives to excessively rely on credit ratings are being reduced, credit ratings still drive investment choices, notably because of information asymmetries and for efficiency purposes. In this context, credit rating agencies must be independent and perceived as such by market participants.

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 6

(6) Regulation (EC) No 1060/2009 already provided a first round of measures to address the question of independence and integrity of credit rating agencies and their credit rating activities. The objectives of guaranteeing the independence of credit rating agencies and of identifying, managing and, to the extent possible, avoiding any conflict of interest that could arise were already underlying several provisions of that Regulation in 2009. Whilst providing a sound basis, the existing rules do not appear to have had a sufficient impact in this regard. Credit rating agencies still are not perceived as sufficiently independent actors. The selection and remuneration of the credit rating agency by the rated entity (issuer- pays model) engenders inherent conflicts of interest, which are insufficiently addressed by the existing rules. Under this model, there are incentives for credit rating agencies to issue complacency ratings on the issuer in order to secure a long-standing business relationship guaranteeing revenues or in order to secure additional work and revenues. Moreover, relationships between the shareholders of credit rating agencies and the rated entities may cause conflicts of interest which are not sufficiently dealt with by the existing rules. As a result, credit ratings issued under the issuer-pays model may be perceived as the credit ratings that suit the issuer rather than the credit ratings needed by the investor. Without prejudice to the conclusions of the report to be submitted by the Commission on the issuer-pays model by December 2012 pursuant to Article 39(1) of Regulation (EC) No 1060/2009, it is essential to reinforce the conditions of independence applying to credit rating agencies in order to increase the level of credibility of credit ratings issued under the issuer-pays modelConsiders that any evaluation of these provisions is premature as they have been operational only for a limited period of time.

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 7

(7) The credit rating market shows that, traditionally, credit rating agencies and rated entities enter into long-lasting relationships. This raises the threat of familiarity, as the credit rating agency may become too sympathetic to the desires of the rated entity. In those circumstances, the impartiality of credit rating agencies over time could become questionable. Indeed, credit rating agencies mandated and paid by a corporate issuer are incentivised to issue overly favourable ratings on that rated entity or its debt instruments in order to maintain the business relationship with such issuer. Issuers are also subject to incentives that favour long-lasting relationships, such as the lock-in effect: an issuer may refrain from changing credit rating agency as this may raise concerns of investors regarding the issuer's creditworthiness. This problem was already identified in Regulation (EC) No 1060/2009, which required credit rating agencies to apply a rotation mechanism providing for gradual changes in analytical teams and credit rating committees so that the independence of the rating analysts and persons approving credit ratings would not be compromised. ~~The success of those rules, h~~However, was highly dependant on a behavioural solution internal to the credit rating agency: the actual independence and professionalism of the employees of the credit rating agency vis- à-vis the commercial interests of the credit rating agency itself. These rules were not designed to provide sufficient guarantee towards third parties that the conflicts of interest arising from the long-lasting relationship would effectively be mitigated or avoided. It therefore appears necessary to provide for a structural response having a higher impact on third parties. This could be achieved effectively by limiting the period during which a credit rating agency can continuously provide credit ratings on the same issuer or its debt instruments. Setting out a maximum duration of the business relationship between the issuer which is rated or which issued the rated debt instruments and the credit rating agency should remove the incentive for issuing favourable ratings on that issuer. Additionally, requiring the rotation of credit rating agencies as a normal and regular market practice should also effectively address the lock-in effect, where an issuer refrains from changing credit rating agency as this would raise concerns of investors regarding the issuer's creditworthiness. Finally, the rotation of credit rating agencies should have positive effects on the rating market as it would facilitate new market entries and offer existing credit rating agencies the opportunity to extend their business to new areasno holistic and viable alternative to the current issuer-pays model has yet been presented it seems apparent that the current system is to be considered the second-best solution.

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 8

(8) ~~Regular rotation of credit rating agencies issuing credit ratings on an issu~~Financial markets per for its debt instruments should bring more diversity to the evaluation of the creditworthiness of the issuer that selects and pays that credit rating agency. Multiple and different views, perspectives and methodologies applied by credit rating agencies should produce more diverse credit ratings and ultimately improve the assessment of the creditworthiness of the issuers. For this diversity to play a role and to avoid complacency of both issuers and credit rating agencies, the maximum duration of the business relationship between the credit rating agency and the issuer paying must be restricted to a level guaranteeing regular fresh looks at the creditworthiness of issuers. Therefore, a time period of three years would seem appropriate, also considering the need to provide certain continuity within the credit ratings. The risk of conflict of interest increases in situations where the credit rating agency frequently issues credit ratings on debt instruments of the same issuer within a short period of time. In those cases, the maximum duration of the business relationship should be shorter to guarantee similar results. Hence, the business relationship should stop after a credit rating has rated ten debt instruments of the samem at best when there is a multitude of opinions and ideas expressed as to what the macro and micro financial development will be like. The opinions issued by leading credit rating agencies shall not be taken as the ultimate truth nor be the sole basis for an investment decision. Rather, they are to support the risk assessment of financial actors in their role as allocators of savings and investments. Therefore, it is of outmost importance that rules and provisions regulating the credit rating industry promote and encourage a plurality of views and estimates of the credit quality of private and public issuers. However, in order to avoid imposing a disproportionate burden on issuers and credit rating agencies, no requirement to change credit rating agency within the first 12 months of the business relationship should be imposed. Where an issuer mandates more than one credit rating agency, either because as an issuer of structured finance instruments he is obliged to do so, or on a voluntary basis, it should be sufficient that the strict rotation periods only apply to one of the credit rating agencies. However, also in this case, the business relationship between the issuer and the additional credit rating agencies should not exceed a period of six yearsThis objective is best obtained by ensuring that entry of new rating agencies is facilitated by removing excessive regulatory hurdles and disapproving of proposals such as making agencies civilly liable for their ratings as that would constitute a paramount disincentive for any new player to enter the industry.

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 9

(9) The rule requiring rotation of credit rating agencies needs to be enforced in a credible manner to be meaningful. The rotation rule would not achieve its objectives if the outgoing credit rating agency were allowed to provide rating services to the same issuer again within a too short period of time. Therefore, it is important to provide for an appropriate period within which such credit rating agency may not be mandated by the same issuer to provide rating services. That period should be sufficiently long to allow the incoming credit rating agency to effectively provide its rating services to the issuer, to ensure that the issuer is truly exposed to a new scrutiny under a different approach and to guarantee that the credit ratings issued by the new credit rating agency provide enough continuity. That period should allow that an issuer cannot rely on comfortable arrangements with only two credit rating agencies that would replace each other on a continuous basis, as this could lead to maintaining the familiarity threat. Hence, the period during which the outgoing credit rating agency should not provide rating services to the issuer should generally be set at four years.deleted

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 10

(10) The change of credit rating agency inevitably increases the risk that knowledge about the rated entity acquired by the outgoing rating agency is lost. As a result, the incoming credit rating agency would have to make considerable efforts to acquire the knowledge necessary to carry out its work. However, a smooth transition should be ensured by establishing a requirement on the outgoing credit rating agency to transfer relevant information on the rated entity or instruments to the incoming credit rating agency.deleted

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 11

(11) Requiring issuers to regularly change the credit rating agency they mandate to issue credit ratings is proportionate to the objective pursued. This requirement only applies to certain regulated institutions (registered credit rating agencies) which provide a service affecting the public interest (credit ratings that can be used for regulatory purposes) under certain conditions (issuer-pays model). The privilege of having its services recognised as playing an important role in the regulation of the financial services market and being approved to carry out this function, entails the need to respect certain obligations in order to guarantee independence and the perception of independence in all circumstances. A credit rating agency which is prevented from providing credit rating services to a particular issuer would still be allowed to provide credit ratings to other issuers. In a market context where the rotation rule applies to all players, business opportunities will arise since all issuers would need to change credit rating agency. Moreover, credit rating agencies may always issue unsolicited credit ratings on the same issuer, capitalising on their experience. Unsolicited ratings are not constrained by the issuer-pays model and therefore are less affected by potential conflicts of interests. For issuers, the maximum duration of the business relationship with a credit rating agency or the rule on the employment of more than one credit rating agency also represents a restriction on their freedom to conduct their own business. However, this restriction is necessary on public- interest grounds considering the interference of the issuer-pays model with the necessary independence of credit rating agencies to guarantee independent credit ratings that can be used by investors for regulatory purposes. At the same time, these restrictions do not go beyond what is necessary and should rather be seen as an element increasing the issuer's creditworthiness towards other parties, and ultimately the market.deleted

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 12

(12) One of the specificities of sovereign ratings is that the issuer-pays model generally does not apply. Instead, the majority of ratings are produced as unsolicited ratings, providing the basis for both solicited and unsolicited ratings of the financial institutions of the country concerned. It is therefore not necessary to require the rotation of credit rating agencies issuing sovereign ratings.deleted

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 17

(17) The new rules limiting the duration of the business relationship between an issuer and the credit rating agency would significantly reshape the credit rating market in the Union, which today remains largely concentrated. New market opportunities would arise for small and mid-size credit rating agencies, which would need to develop to take up those challenges in the first years following the entry into force of the new rules. Those developments are likely to bring new diversity into the market. The objectives and the effectiveness of the new rules would, however, be largely jeopardised if, during these initial years, large established credit rating agencies would prevent their competitors from developing credible alternatives by acquiring them. Further consolidation in the credit rating market driven by large established players would result in a reduction of the number of available registered credit rating agencies, thus creating selection difficulties for issuers at the moment in which they regularly need to appoint one or more new credit rating agencies and disturbing the smooth functioning of the new rules. More importantly, further consolidation driven by large established credit rating agencies would particularly prevent the emergence of more diversity in the marketIncreased competition in the credit rating industry shall be promoted and a through consultation with industry players including credit rating agencies, financial intermediaries, institutional investors, financial consumer organisations, national debt offices and other relevant interests shall be carried out in order to find viable and constructive actions for the fulfilment of this objective.

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 24

(24) Credit ratings, whether issued for regulatory purposes or not, have a significant impact on investment decisions. Hence, credit rating agencies have an important responsibility towards investors in ensuring that they comply with the rules of Regulation (EC) No 1060/2009 so that their ratings are independent, objective and of adequate quality. However, in the absence of a contractual relationship between the credit rating agency and the investor, investors are not always in a position to enforce the agency's responsibility towards them. Therefore, it is important to provide for an adequate right of redress for investors who relied on a credit rating issued in breach of the rules of Regulation (EC) No 1060/2009. The investor should be able to hold the credit rating agency liable for any damage caused by an infringement of that Regulation which had an impact on the rating outcome. Infringements which do not impact the rating outcome, such as breaches of transparency obligations, should not trigger civil liability claimsAlthough ratings sometimes are associated with broad market interest it shall be remembered they are nothing but the estimation of an individual rating agency. Civil liability on behalf of the credit rating agencies would pose a substantial risk of increasing user's reliance upon them and thereby be contradictory to the overarching aim of reducing reliance on ratings. Regarding matters concerning the civil liability of a credit rating agency such matters should therefore be governed by the applicable national law determined by the relevant rules of international private law.

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 25

(25) Credit ratings agencies should only be held liable if they infringe intentionally or with gross negligence any obligations imposed on them by Regulation (EC) No 1060/2009. This standard of fault means that credit rating agencies should not face liability claims if they neglect individual obligations under the Regulation without disregarding their duties in a serious way. This standard of fault is appropriate because the activity of credit rating involves a certain degree of assessment of complex economic factors and the application of different methodologies may lead to different rating results, non of which can be qualified as incorrectre merely an opinion by a single rating agency on the credit quality of a financial instrument and shall be considered as such. Elevating these opinions into a legally enforceable assurance, true in all its predictions, would reduce the incentive of the investor to scrutinise the instrument at hand by himself, thereby further risking to increase the reliance on such ratings. Rather, the use of ratings shall be subject to the responsibility of the issuer and the investor not to base decisions on them in a mechanical fashion. An agency which consequently misperforms will face significant credibility problems which will affect its ability to pursue its business.

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 26

(26) It is important to provide investors with an effective right of redress against credit rating agencies. As investors do not have close insight in internal procedures of credit rating agencies a partial reversal of the burden of proof with regard to the existence of an infringement and the infringement's impact on the rating outcome seems to be appropriate if the investor has made a reasonable case in favour of the existence of such an infringement. However, the burden of proof as regards the existence of a damage and the causality of the infringement for the damage, both being closer to the sphere of the investor, should fully be on the investor.deleted

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 27

(27) Regarding matters concerning the civil liability of a credit rating agency ~~and which are not covered by this regulation,~~ such matters should be governed by the applicable national law determined by the relevant rules of International Private Law. The competent court to decide on a claim for civil liability brought by an investor should be determined by the relevant rules on International Jurisdiction.

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Recital 28

(28) The fact that institutional investors including investment managers are obliged to carry out their own assessment of the creditworthiness of assets should not prevent courts from finding that an infringement of this Regulation by a credit rating agency has caused damage to an investor for which that credit rating agency is liable. While this Regulation will improve the possibilities of investors to make an own risk assessment they will continue to have more limited access to information than the credit agencies themselves. Furthermore, in particular smaller investors often will lack the capability to critically review an external rating provided by a credit rating agency.deleted

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Article 1 – point 20

Regulation (EC) No 1060/2009
Title IIIa

(20) The following Title IIIa is inserted after Article 35: ‘TITLE IIIa CIVIL LIABILITY OF CREDIT RATING AGENCIES Article 35a Civil liability 1. Where a credit rating agency has committed intentionally or with gross negligence any of the infringements listed in Annex III having an impact on a credit rating on which an investor has relied when purchasing a rated instrument, such an investor may bring an action against that credit rating agency for any damage caused to that investor. 2. An infringement shall be considered to have an impact on a credit rating if the credit rating that has been issued by the credit rating agency is different from the rating that would have been issued had the credit rating agency not committed that infringement. 3. A credit rating agency acts with gross negligence if it seriously neglects duties imposed upon it by this Regulation. 4. Where an investor establishes facts from which it may be inferred that a credit rating agency has committed any of the infringements listed in Annex III, it will be for the credit rating agency to prove that it has not committed that infringement or that that infringement did not have an impact on the issued credit rating. 5. The civil liability referred to in paragraph 1 shall not be excluded or limited in advance by agreement. Any clause in such agreements excluding or limiting the civil liability in advance shall be deemed null and void.’deleted

2012/04/17
Committee: ECON

Gunnar HÖKMARK

Proposal for a regulation
Annex III – point 1 – point b

Regulation (EC) No 1060/2009
Annex III – Part I – points 26a to 26 f

(b) the following new points 26a to 26f are inserted: '26a. The credit rating agency which entered into a contract with an issuer or its related third party for the issuing of credit ratings on the issuer infringes Article 6b(1) by issuing credit ratings on this issuer for a period exceeding three years. 26b. The credit rating agency which entered into a contract with an issuer or its related third party for the issuing of credit ratings on the debt instruments of the issuer infringes Article 6b(2) by issuing credit ratings on at least ten debt instruments of the same issuer during a period exceeding 12 months or by issuing credit ratings on the debt instruments of the issuer for a period exceeding 3 years. 26c. The credit rating agency which entered into a contract with an issuer alongside at least one more credit rating agency infringes Article 6b(3) by having a contractual relationship with the issuer for a period exceeding six years. 26d. The credit rating agency which entered into a contract with an issuer or its related third party for the issuing of credit ratings on the issuer or its debt instruments of the issuer infringes Article 6b(4) by not respecting the prohibition to issue credit ratings on the issuer or its debt instruments for a period of four years from the end of the maximum duration period of the contractual relationship referred to in paragraphs1 to 3 of Article 6b. 26e. The credit rating agency which entered into a contract with an issuer or its related third party for the issuing of credit ratings on the issuer or its debt instruments of the issuer infringes Article 6b(6) by not making available at the end of the maximum duration period of the contractual relationship with the issuer or its related third party a handover file with the required information to an incoming credit rating agency contracted by the issuer or its related third party to issue credit ratings on this issuer or its debt instruments.'deleted

2012/04/17
Committee: ECON

17 Amendments of Gunnar HÖKMARK related to 2011/0361(COD)

ParlTrack - 2011-2024