Agencies

Inaugural meeting
Associatio n of Crediit Rating A

with EU Commission
March 17th, 2010
Page
Mission and objectives 2

Market review 6

Some concerns 16
uropean A

Contact Details 23
Eu

Page 1
 Eu
uropean A
Associatio n of Crediit Rating A
Agencies

MISSION AND OBJECTIVES

Page 2
 Objectives
j
OUR OBJECTIVES
OUR 
OU OBJECTIVES: The Objectives of the association include without limitations:
O J C S e Object es o t e assoc at o c ude t out tat o s
Agencies

¾Promote the interests of the CRA’s in the context of legislative measures and the 
communication with the relevant stakeholders (eg regulators, supervisors, market operators 
and the financial community as a whole);
n of Crediit Rating A

¾Enhance the understanding and the functioning of Credit Ratings to the financial 
community and the general public;
¾Promote the cooperation between the CRA’s
p across Europe in order to enhance cross‐
p
border know‐how and the spread of best practices;
¾Provide a framework of cooperation for CRAs with regard to development of common 
standards (eg Transparency and disclosure standards, rating methodologies) in order to reduce 
uropean Associatio

transaction costs relating for the users of ratings;
¾Provide support to CRAs regarding compliance activities (such as due to organizational 
requirements, ICT, managing of conflicts of interest, etc) in order to reduce costs of 
A

supervision;
i i
¾Establish cooperation with public and private research centres, in order to create synergies 
with academic institutions as well.
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¾Contribute to enhance knowledge and skills in the credit rating industry.

Page 3
 Agencies
n of Crediit Rating A Field of activities

Cooperation Public 
between Agencies dissemination
Institutional Presentation of Members
Providing an institutional  Relations Newsletter from EACRA 
framework in order to  Participation in Conferences
address industry specific
address industry specific  CESR C lt ti
Consultation process
uropean Associatio

issues: Focus for 2010 will  CEBS
be the registration process  EC 
due within the period June  European interest
p ggroups
p ((egg UNICE, European Issuers)
p )
A

7th to September 7th European standard settings organisations (eg ISO)

Special Working Groups  Media organisations
on specified topics could be  financial community
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set up on a later stage

set up on a later stage other institutions
other institutions

Page 4
 Rectifying the public opinion
y g p p
Market share of global rating agencies Number of ratings issued
1400
S&P
Agencies

1200
Moody's
1000
FitchRatings
800
A.M. Best
600
Other
Associatio n of Crediit Rating A

400
200
0
S&P FitchRatings Moody's European 
Rating 
Creditreform Agencies
Whereas the global market for ratings is Assekurata
dominated by the Big Three, consolidated PSR
numbers of European Rating Agencies MAR
equals or surpass each of these players: CPR
¾ In terms of local market share RusRating
¾ in terms of ratings issued Bulgarian Credit …
¾ in terms of resources available European Rating 
p g…
uropean A

Credit Rating
EACRA’s target is to contribute to a change JCR Eurasia
in the public opinion.
0 200 400 600 800
Eu

Based on pubic information on the website of the agencies. These figures

do not include Private (confidential) ratings nor Unsolicited ratings.
Please note that ratings from the Big Three are an “educated guess”. Page 5
 Vision
2009 2014
S&P
Agencies

Moody's
FitchRatings
A.M. Best
Other
Associatio n of Crediit Rating A

Increase the reach of Ratings by:

¾ Utilizing the extended scope of addresses: up to now only
ratings from ECAIs could be used for regulatory purposes. From December 7th, 2010, ratings from
registered agencies can be used not only by credit institutions but also funds and insurances
insurances.
¾ building on the transparency and disclosure requirements in order to foster the understanding

Rating Agencies across Europe and the world need to collaborate in order to reach this common goal.
uropean A

EACRA has
h been
b formed
f d in
i order
d to
t contribute
t ib t to
t this
thi goal:
l
¾Reduce the burden on Rating Agencies through cooperation,
¾cost sharing initiatives,
¾using economies of scales in order to turn legislative constraints into opportunities
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¾P idi iinformation
¾Providing f ti on ratings
ti
¾ Providing cross-selling opportunities for Members by building on in-depth local know-how and
presence Page 6
 Eu
uropean A
Associatio n of Crediit Rating A
Agencies

MARKET REVIEW

Page 7
 Raising reach of ratings
g g
Credit
C dit
Agencies

Rating Agency institutions The new EU legislation on Credit rating 

agencies extends the user of ratings for 
Pension
Funds capital requirements to an extended list of 
Associatio n of Crediit Rating A

market participants.
k t ti i t
Issuer ¾This will make Ratings more attractive as 
Insurance UCITS
Reinsurance
more funds could be mobilized.

The on‐going revision of the Basel 2 guidelines = All-in Cost

nterest Rate
regarding capital requirements for banks will + M&U / Expenses

Margin
Interest
most likely lead to a higher capital requirements: + “Credit Spread”

Rate
¾In order to achieve the same return in capital, + Return in Capital
banks will need to increase the interest rates.
rates Reference Rate (Euribor
(Euribor, Libor )
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In
+ Liquidity Costs
¾This in turn will narrow the gap between the
observed credit spreads in the banking market
Maturity
and the capital market.
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Page 8
 Bridging
g g the ggap
p
Turnover in EUR
mln
Agencies

Global
Global Big Three
500 Companies
Associatio n of Crediit Rating A

50 Large Companies

European Rating Agencies

Medium Companies
10
Small Companies
Credit Scoring Institutions
Individuals

The European rating agencies with their focus on SME companies bridge the gap between the 
global companies and small companies
¾ given the structure of the European economy, the European Agencies are much better 
given the structure of the European economy, the European Agencies are much better
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prepared to cover European ratings
¾ similar to the internal rating processes used by banks and in order to reach economies of scale, 
the degree of analysis and information requirement depends on the size of the company
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¾ The combined manpower of European agencies is comparable to the staff of the big players
Th bi d fE i i bl h ff f h bi l

Page 9
 Scope of EU Regulation
p g
Turnover in EUR
mln This Regulation does not apply to:
( ) private
(a) i t creditdit ratings
ti
Agencies

Large
Credit
50 Companies (b) credit scores,
Rating
(c) credit ratings produced by export
10 Medium Companies
p credit agencies
Associatio n of Crediit Rating A

(d) credit ratings produced by the

central banks
Small Companies
Credit
Scoring
Individuals

This Regulation applies to credit ratings issued by credit rating agencies registered in the 
This Regulation applies to credit ratings issued by credit rating agencies registered in the
Community and which are disclosed publicly or distributed by subscription (Article 2.1) .
‘credit rating’ means an opinion regarding the creditworthiness of an entity, a debt or financial 
obligation, debt security, preferred share or other financial instrument, or of an issuer of such a 
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debt or financial obligation, debt security, preferred share or other financial instrument, issued 
using an established and defined ranking system of rating categories;
On March 8th, 2010, CESR members clarified the scope of the regulation and stated that non‐
Eu

qualitative ratings do not count as credit ratings for the purpose of the regulation.  We think that 
this interpretation is too strict and might create problems with respect to Unsolicited ratings.
Page 10
 Review of CRA’s in Europe
p
Country of
We have identified around  Name residence website
40 companies in Europe 
p p AAA Soliditet Sweden www.soliditet.se
Assekurata Assekuranz Rating-Agentur GmbH Germany www.assekurata.de
active in the field of ratings. 
Agencies

Axesor Spain www.axesor.es

Banque de France Rating France www.banque-france.fr
Their business model  Bulgarian Credit Rating Agency J.S.C, Bulgaria www.bcra-bg.com
(solicited and unsolicited,  Capital Intelligence Limited Cyprus www.ciratings.com
Capp&Caap
pp p Srl Italyy www.capp-capp.com
pp pp
Associatio n of Crediit Rating A

i
investor‐pays versus issuer‐
t i Coface France www.cofacerating.com
pays, public versus private  Companhia de Rating Portuguesa Portugal www.cprating.pt
Credit Rating Ukraine www.credit-rating.ua
ratings etc.), their geographic  Creditreform Rating AG Germany www.creditreform-rating.de
ECRAI — External Credit Rating and Slovakia www.ecrai.eu
and investors reach might g Assessment Institution
Institution, a.s.
as
differ substantially.  Euler Hermes Rating GmbH Germany www.eulerhermes.com
European Rating Agency, a.s. Slovakia www.euroratings.co.uk
According to the EU  Fedafin Federalism and Finance AG Switzerland www.fedafin.ch
Feri EuroRatings Services Germany www.feri.de
regulation, “existing rating  Fitch Ratings UK www.fitchratings.com
agencies” need to register  GDUR KMU Rating Agentur Switzerland www.kmuratingagentur.ch
Global Rating Bulgaria www.globalrating.bg
until under the regulation  ICAP Greece www.icap.gr
until September 7th, 2010.  Integrated Rating GmbH
JCR Eurasia
Germany www.integrated-rating.de
Turkey www.jcravrasyarating.com
Who are these agencies?
Who are these agencies? Lince Spa Italy www lince it
www.lince.it
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PSR Germany www.schneck-rating.de

In the impact assessment  Rating Allianz Germany www.rating-allianz-online.de
Rating Evidence GmbH Germany http://www.rating-evidence.com/
accompanying the proposal,  RusRating Russia www.rusrating.ru
15 companies were  Saha Rating Turkey www.saharating.com
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S
Svenskk KommunRating
K R ti AB S d
Sweden www.kommunrating.se
k ti
estimated to apply for  Turkratings Turkey http://www.turkrating.com/en/
registration. Which ones? UC AB Sweden www.uc.se
URA Rating Agentur AG Germany www.ura.de
Page 11
 Different business Models
The EU regulation distinguishes three broad categories of market segments: Public/Sovereign;
Corporates and Structured Finance.
Finance
Agencies

¾ only very few players cover all of these market segments
¾ the segment of Corporates includes financial institutions, insurance companies and industrial 
corporates: most agencies focus on 1 or 2 of these sub‐categories
corporates: most agencies focus on 1 or 2 of these sub categories only, sometimes even to 
only sometimes even to
Associatio n of Crediit Rating A

one specific sector only.

The business model of the Bigg Three can be described as issuer‐pays,

p y , solicited,, subscriber based
ratings with the coverage of all market segments.
Next to this business model, several alternatives models are applied by European rating agencies:
¾ Investors pays versus issuer pays
p y p y
¾ Solicited versus unsolicited ratings
¾ Public versus Subscriber based versus confidential ratings
¾ Issuer ratings / issue ratings
g / g
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¾ Provision of ancillary services (eg Consultancies)
¾ Changing weight of qualitative factors in final rating
¾ Size: most European rating agencies have less than 50 employees in the rating business. 
Size: most European rating agencies have less than 50 employees in the rating business.
Eu

The EU regulation on Credit Rating Agencies rather reflects the operations of the Big Three.
Page 12
 ECAI’s in Europe
p
Country
Country Fitch Moody's S&P other ECAI
indirect S&P, Moody’s and FitchRatings are
Code recognition
AT Austria x x x DBRS x
recognised
g as ECAIs in all Member
BE Belgium x x x JCR, R&I, BdF BdF States of the European Economic
Agencies

BG Bulgaria x x x x
CY Cyprus x x x x Area (EU 27 and Iceland,
CZ Czeck Republic 2 3 x
DE Germany x x x DBRS, JCR JCR Liechtenstein and Norway). Note that
Associatio n of Crediit Rating A

DK Denmark i
in some countries
ti multiple
lti l
EE Estonia x x x
EL Greece x x x ICAP subsidiaries of the big three might be
ES Spain x x x
FI Finnland x x x DBRS recognised.
FR France x x 2 Coface, DBRS, JCR, R&I
HU Hungary x x x Coface,
Coface DBRS
DBRS, JCR x Some international players (DBRS,
IE Irland x x x DBRS, JCR x
IT Italy x x x Lince
R&I and JCR) have been recognised in
LT Lithuania x x x x some countries.
LU Luxembourg x x x JCR JCR
LV Latvia x x x Countries having local players (eg
MT Malta x x x x
NL
The
x x x DBRS
France, Greece, Italy) have also
Netherlands
PL Poland x x x x recognised their national champion.
Coface Servicos
PT Portugal x x x
Portugal Some competent authorities have
RO Romania x x x x
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SE Sweden x x x DBRS x
usedd theth i di t recognition
indirect iti
SI Slovenia x x x Coface France SA Coface method (without carrying out its
SK Slovakia x x 2 x
UK
United
x x x
own direct recognition process,
Kingdom
relying
y g on the recognition
g of the ECAI
Eu

by the competent authority of

Overall, 10 ECAI‘s currently operate in the European Union. another Member State).
Source: supervisory disclosure sites at CEBS Page 13
 Latest developments
p
The global market share of the Big Three did not substantially change:
¾Th i
¾Their reputation has suffered but market is still using the ratings as no alternative is perceived
i h ff d b k i ill i h i l i i i d
Agencies

¾Smaller rating agencies have lost a substantial share of their revenues as number of issues 
decreased
Associatio n of Crediit Rating A

¾Existing calls for the built up of a public sponsored European Rating Agencies
Smaller rating agencies are envisaging to close down the activity: 
¾An agency will retreat to credit scoring
¾An agency will retreat to credit scoring
¾another agency is thinking of closing their activities
¾Agencies in one country are envisaging to merge into one unit
¾Some agencies have built up reputation but still lack the resources to provide services on a 
¾S i h b ilt t ti b t till l k th t id i
larger scale.
¾Larger agencies are a loss making entity to the mother companies (usually involved in credit 
scoring factoring or credit insurance)
scoring, factoring or credit insurance)
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Status of memberships in EACRA reflect the above problems:
¾Founding members have different profiles
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¾Affordability of Membership fee is an issue
Page 14
 Empowering Europe
p g p
European Agencies provide:
¾ Local understanding and know‐how and minimize inter‐cultural problems
L l d t di dk h d i i i i t lt l bl
Agencies

¾ Track record of ratings
¾ Acceptance by (local) market participants for the quality of the assessments
Associatio n of Crediit Rating A

¾ A diversity of business models and approaches
A di i fb i d l d h
¾ A competitive pricing scheme for the rating services

By connecting and empowering the existing agencies in Europe, the European Union will receive 
a platform for ratings at a much lower cost than by the set up of a public agency.
¾ In order to survive the current crisis affecting the Credit Rating industry, to cope with the 
administrative burden onto the rating agencies and to maintain the variety of agencies the
administrative burden onto the rating agencies and to maintain the variety of agencies, the 
EU should provide for basic financial support to the agencies 
¾ In order to make ratings more affordable to issuers, the EU could provide support to issuers. 
Such a model is used by “rating initiative” (www.ratinginitiative.org) which targets to expand 
y g ( g g) g p
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the use of ratings in microfinance in developing countries. Using a similar approach but 
applying it to European issuer could be an alternative.
¾ According to EU legislation, the Commission should propose alternatives to the issuer‐pays 
Eu

model latest by 2012. We would propose advancing the proposal and to make ratings 
mandatory at least for any issuance on capital markets. 
Page 15
 Eu
uropean A
Associatio n of Crediit Rating A
Agencies

SOME CONCERNS

Page 16
 Registration process
g p
The EU regulation foresees a window for registration for Existing Rating Agencies in the period 
June 7th, 2010 to September 7
June 7 2010 to September 7th, 2010:
2010:
Agencies

¾ Who are the Existing Rating Agencies?
¾ When can we expect CESR to publish the guidance as referred to in article 21(2) and 21(3) as 
this materially implies on the likelihood that a registration request is successful?
this materially implies on the likelihood that a registration request is successful?
Associatio n of Crediit Rating A

Composition of the supervisory college:
¾ A competent Authority might opt in at its own discretion in the supervision of an agency. 
A competent Authority might opt in at its own discretion in the supervision of an agency
Could you provide an indication to the rating agencies on which competent Authorities will 
opt in? Or might the competent Authorities use the indirect recognition method as in the 
case of the ECAI directive?
¾ Article 19 provides for the possibility to charge registration and supervisory fees. Could you 
provide an indication?
¾ How will the evolving supervisory framework from CESR to ESMA affect the registration 
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process??
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Page 17
 Unsolicited Ratingg
Rating Agencies might assign Unsolicited  Credit
Rating Agency institutions
R i
Ratings as:
Agencies

¾ It corresponds to their business model (eg Pension
Funds
It enables economies of scale while 
addressing the SME market)
addressing the SME market)
Associatio n of Crediit Rating A

I
Issuer
¾ It is keen to enter into a market and assigns  Insurance UCITS
Reinsurance
reference ratings
¾ It is keen to convert an unsolicited rating 
It is keen to convert an unsolicited rating
into an solicited one (against a fee)
The EU Regulation states:
An unsolicited credit rating namely a credit rating not initiated at the request of the issuer or
An unsolicited credit rating, namely a credit rating not initiated at the request of the issuer or 
rated entity, should be clearly identified as such and should be distinguished from solicited 
credit ratings by appropriate means.
The EU Regulation does not prohibit unsolicited ratings. CESR members in their March 8th 2010 
uropean A

statement rule out ratings “not initiated at the request of the issuer or rated entity” and 
thereby neglects the investor‐pays approach from some agencies. Note that CESR is aware that 
a grey area exists.
Given the target of the Regulation to foster competition in the market CESR members should
Given the target of the Regulation to foster competition in the market, CESR members should 
Eu

take a wider approach and clearly state that Unsolicited ratings are subject to the regulation
Page 18
 Administrative burden
Administrative burden onto European Agencies is high: 
• the Big Three need already to comply with US supervision (requesting similar information 
th Bi Th d l d t l ith US ii ( ti i il i f ti
Agencies

as European supervisors) – the additional costs out of European supervision to these 
agencies will be limited.
• The European Commission has estimated the costs of compliance to  only EUR 19.000,
The European Commission has estimated the costs of compliance to only EUR 19 000 ‐ in  in
Associatio n of Crediit Rating A

the first year and to EUR 1.500,‐ thereafter. We proceed from the assumption that the 
costs of compliance for smaller agencies will be substantially higher as:
– Some Rating agencies need to formalize procedures and methodologies,
– Some Rating Agencies might need to modify their business model and might loose 
further revenues,
– Some Rating Agencies might need to introduce an independent board member or an 
compliance officer.
– The recurring costs of Disclosures requirements (including Transparency report) and 
of compliance with the regulation will easily surpass the estimate of EUR 1.500,‐
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• The costs of supervision will be borne by the rating agencies. At this stage, the exact 
h f ll b b b h h h
amount has not yet been communicated.
In light of the EU target to reduce the administrative burden in Europe by 25%, this Regulation 
substantially increases the administrative costs to smaller agencies
substantially increases the administrative costs to smaller agencies. 
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Page 19
 Open topics
p p
Exemption for smaller Rating agencies according to Art 6.3
• Article 6.3.a defines a threshold of 50 employees. How are these employees accounted for?
A ti l 6 3 d fi th h ld f 50 l H th l t df ?
Agencies

¾ Do these refer to Full‐Time employees?
¾ Do employees in companies, which carried out outsourced services on behalf of a 
rating agency count in this threshold?
rating agency, count in this threshold?
Associatio n of Crediit Rating A

¾ As Article 7.2 (analysts not allowed to participate in the sales process) is not covered by 
the exemption, Do they take into account only the number of rating analysts and 
p
persons implied in the rating assignment? 
p g g
• How should Rating Agencies demonstrate that the requirements of the regulation are not 
proportionate in view of eg their scale?
• Given the administrative and compliance costs of the Regulation, it is quite clear that Rating 
p g q g
Agencies cannot cope with all requirements!
Ancillary services
• Ancillary services comprise market forecasts, estimates of economic trends, pricing analysis 
Ancillary services comprise market forecasts estimates of economic trends pricing analysis
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and other general data analysis as well as related distribution services. The key issue is the 
avoidance of conflict of interest with rating services.
• Are these the only Ancillary services a Rating Agency may provide? Or may other services 
y y g g y yp y
Eu

be provided if conflict of interest are properly managed? Would it suffice to separate rating 
services and other services in different legal entities?
Page 20
 Open topics
p p
Outsourcing (Article 9):
• The article refers to “important operational functions” of a rating agency. Could you define 
Th ti l f t “i t t ti l f ti ” f ti C ld d fi
Agencies

more precisely which activities are referred to?

Rating scales and symbols:
Rating scales and symbols:
Associatio n of Crediit Rating A

• The regulation has not defined the rating scales and symbols in terms of probability of 
default, underlying time horizont nor expected loss. An additional mandatory scale migth
help foster the transparency and comparability of ratings. 
p p y p y g
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Page 21
 ECAIs and CRA’s
Credit Rating Agencies (CRA) External Credit Assessment Institutions
(ECAIs)
legal basis Regulation 1060/2009 on credit rating Directive 2006/48/EC on Credit Institutions
agencies
i
Agencies

definition of credit rating’ means an opinion regarding the not specified

credit quality creditworthiness of an entity, a debt or
financial obligation, debt security, preferred
share or other financial instrument, or of an
issuer
ssue o of suc
such a debt oor financial
a c a ob
obligation,
gat o ,
Associatio n of Crediit Rating A

debt security, preferred share or other

financial instrument, issued using an
established and defined ranking system of
rating categories
criteria for integrity, responsibility and good governance objectivity, independence, ongoing review
methodologies and transparecny
target independence, objective and adequate quality credibility and transparency of ratings
users of Credit institutions, investments firms, Credit insitutions
ratings insurance and reinsurance undertakings,
UCTIS and institutions for occupational
retirement p provision may y use for regulatory
g y
purposes
how should The users of credit ratings should not rely consistently for all exposures of a class in a
ratings be blindly on credit ratings but should take continuous and consistent way over time
used utmost care to perform own analysis (…)
recognition by competent Authorities on request at least two credit institutions need to state
uropean A

prcess their interest in using an ECAI

According to Article 2(3) of the EU Regulation on CRA’s, “a credit rating agency shall apply for registration 
under this regulation as a condition for being recognised as an External Credit Assessment Institution”. 
The status of CRA is therefore an entry gate to the ECAI, which is meaningful given the different 
Eu

targets and methodologies. In order to allow companies to expand their business model towards 
ECAIs, the entry gate should be widely open.
if a same company is a CRA and an ECAI, how will credit institutions need to apply the ratings issued? Page 22
 Agencies Contacts

European Association of Credit Rating 

g
Agencies ((“EACRA”))
Associatio n of Crediit Rating A

Postal Address:  84, Avenue de la Republique, 
75011 Paris, France
Thomas Missong thomas.missong@eacra.eu
+43 676 380 73 44
Matej Lah matej.lah@eacra.eu
matej lah@eacra eu
+39 347 139 61 75
Gianni Zorzi gianni.zorzi@eacra.eu
+39 347 699 64 76
uropean A

General Mail cra@eacra.eu
Fax + 43 1 25 33 0 33 49 58
Eu

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