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CBI Position on CREDIT RATING AGENCIES / March 2009 (European Commission Proposal for a Regulation on Credit Rating Agencies, COM (2008) 704/3) The CBI supports the shared objective of the Commission and the European Parliament of restoring investor confidence in Credit Rating Agencies (CRAs) and the ratings they produce through a robust and efficient regulatory framework. In achieving this objective, the CBI’s key concern is that any proposed regulation does not disrupt the use of ratings which are an intrinsic part of global finance (including capital issuance by our corporate members as well as being actively used by our financial services members). Hence, we would support regulation that is proportionate, globally consistent and non-protectionist. However, there remain a number of concerns about the proposed regulation: 1. Consistency of international approach and co-ordination with other countries The tone of the Regulation remains ‘protectionist’ in nature and appears to seek to force EU issuers to use EU registered CRAs, and favour CRAs with their head offices in the EU by imposing an obligation on issuers to use their ratings. This point is made explicitly within Article 4(1) of the current Commission proposal, which would restrict the ability of European investors to invest in regional securities not rated by firms with an EU presence. Given the global nature of the work of the CRAs and the use of such ratings by global corporates and global firms, enhanced co-operation and co-ordination is essential. The CBI therefore does not support Amendments 9 and 22 which do not seek to build international consistency in line with the G20 commitments to open and global economic approaches. The CBI does support Amendments 213 and 395 which seek to develop global consistent approaches. The Parliament’s amendments introduce an ‘endorsement’ approach for ratings of 3rd country arms of registered CRAs with amendments 12 and 21 requiring the Commission to determine mechanisms for assessing ‘equivalence’. It will be difficult to see how ‘equivalence’ might work with an EU framework which is out of line with the ongoing global processes. In addition, the ‘equivalence’ regime in amendment 21 would not apply to rating agencies operating entirely outside of the EU (which might still be allowed under the CRD’s ECAI regime). This would therefore restrict firms’ investment opportunities. The CBI believes that further development is needed on how global co-operation will work. The CBI supports Amendments 119 and 241 which seek to ensure that rating agencies and ratings from third countries are in line with the same regulatory objectives as the EU framework. 2. Market disruption The proposals set out in Article 21 and 22 with respect to the removal of registration and the suspension of ratings appear to have effect immediately. When ratings are used for capital purposes (as under the Capital Requirements Directive) this would lead to significantly increased capital requirements. Such action has the potential to introduce cliff effects in terms of firms’ capital capacity, and may cause indiscriminate sell-offs for particular assets with unintended consequences for the desirability of corporate funding. The CBI believes that some form of transitional provision is required to avoid such cliff effects. The CBI therefore supports Amendments 163, 345 and 355 – 362. 3. Oversight responsibility The Regulation contains a range of measures that are the responsibility of different parties: for example Member States, Home States, CESR. Many of the amendments seek to centralise responsibilities with CESR, for example for registration or withdrawal of CRAs. However, there is insufficient detail on how CESR will either acquire the necessary powers to be able to carry out these activities, nor have the resources to carry them out adequately. The CBI believes that further clarification should be made on how the revised responsibilities will be delivered and therefore cannot at this point support Amendments 42 – 66, 69, 73, 75 and 77. The CBI supports Amendments 204 and 205 which seek to strengthen CESR’s co-ordination and peer review role. 4. Scope of application The original Article 4(2) of the Commission proposal prevents EU investment firms and credit institutions from dealing on behalf of clients with respect to rated financial instruments unless those ratings have been issued by a CRA registered under the Regulation. The proposal would have been simply unworkable and would have led to significant damage to UK investors and firms and the openness of the investment fund market. The CBI therefore supports Amendments 20 and 240 which remove Article 4(2) of the Commission proposal. We have concerns, however, that some of the Parliament’s amendments remove references to the ‘use of ratings for regulatory purposes’. This would raise significant ‘extra-territoriality’ concerns and force EU firms to ensure that ratings come from EU registered CRAs for all uses, which would exclude 3 rd country ratings and raise entry barriers for smaller CRAs. This is not practical. The CBI therefore does not support Amendments 3, 15, 19, 41 which seek to widen the scope of application beyond regulatory purposes. The CBI does support Amendments 219 – 223 which seek to clarify that the scope of application is restricted to regulatory purposes, and Amendments 231 – 233 which clarifies what is meant by regulatory purposes. 5. Independence of ratings We support the need for the rating methodologies and individual ratings produced by CRAs to be independent. The CBI therefore supports Amendments 68, 352 and 353 which further strengthen the obligations of Member States to remain independent by requiring them not to interfere in the rating methodologies as well as the individual ratings. CONTACT If you would like further information or have any questions, please do not hesitate to contact Steven Hall, Head of Financial Services, +44 20 7395 8047, email@example.com or Maija Haas, Senior Policy Adviser, +32 2 286 1131, firstname.lastname@example.org The CBI is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. The organisation is also the UK's official business representative in the European Union, which generates more than 50 per cent of regulation affecting British firms.
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