Explanatory Memorandum to COM(2011)746 - Amendment of directives on investment funds managers in respect of the excessive reliance on credit ratings - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2011)746 - Amendment of directives on investment funds managers in respect of the excessive reliance on credit ratings. |
|---|---|
| source | COM(2011)746  |
| date | 15-11-2011 |
Regulation (EC) No 1060/2009 on credit rating agencies[1] (CRA Regulation) entered into full application on 7 December 2010. It requires credit rating agencies (CRAs) to comply with rigorous rules of conduct in order to mitigate possible conflicts of interest, ensure high quality and sufficient transparency of ratings and the rating process. Existing CRAs had to apply for registration and to comply with the requirements of the Regulation by 7 September 2010.
On 11 May 2011 an amendment to the CRA Regulation[2] (Regulation (EU) No 513/2011) was adopted, entrusting the European Securities and Markets Authority (ESMA) with exclusive supervisory powers over CRAs registered in the EU in order to centralise and simplify their registration and supervision at European level.
However, a number of issues related to credit rating activities and the use of ratings have not been sufficiently addressed in the existing CRA Regulation. One of these issues is the risk of overreliance on credit ratings by financial market participants, including undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIFs)[3].
The European Commission pointed to these open issues in its Communication of 2 June 2010 ("Regulating financial services for sustainable growth") i and in a consultation paper of the Commission services of 5 November 2011[5] announcing the need for a targeted review of the CRA Regulation which is delivered with this proposal.
On 8 June 2011, the European Parliament issued a non-legislative report on CRAs[6]. The report supports, inter alia, the need to enhance the regulatory framework for credit rating agencies and to take measures to reduce the risk of over-reliance of ratings.
At an informal ECOFIN meeting of 30 October 2010 the Council of the European Union acknowledged that further efforts should be made to address a number of issues related to credit rating activities, including the risk of over-reliance on credit ratings and the risk of conflict of interests stemming from the remuneration model of rating agencies. The European Council of 23 October 2011 concluded that progress is needed on reducing overreliance on credit ratings.
At the international level, the Financial Stability Board (FSB) issued in October 2010 principles to reduce authorities’ and financial institutions’ reliance on external ratings[7]. The principles call for removing or replacing references to such ratings in legislation where suitable alternative standards of creditworthiness are available and for requiring investors to make their own credit assessments. Those principles were endorsed by the G 20 Seoul Summit in November 2010.
Contents
- RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS
- LEGAL ELEMENTS OF THE PROPOSAL
- BUDGETARY IMPLICATION
- On 6 July, the Commission services held a roundtable in order to obtain further feedback from relevant stakeholders on these issues. A summary of the roundtable can be found at
- An impact assessment has been produced for this proposal. It can be found at
- 3.1. Legal basis
- 3.3. Explanation of the proposal
- 3.3.1. Amendment of Directive 2009/65/EC on UCITS
- 3.3.2. Amendment of Directive 2011/61/EC on managers of AIFs
- 3.3.3. Transposition
The European Commission conducted a public consultation from 5 November 2010 to 7 January 2011 presenting various options to address the issues identified, including the question of over-reliance. The Commission received approximately 100 contributions from stakeholders which have been taken into account in drafting this proposal. A summary of the responses to the consultation paper can be found at
ec.europa.eu/internal_market/securities/docs
On 6 July, the Commission services held a roundtable in order to obtain further feedback from relevant stakeholders on these issues. A summary of the roundtable can be found at
ec.europa.eu/internal_market/securities/docs
ec.europa.eu/internal_market/securities/agencies
It is necessary, in order to reduce the risk of over-reliance of managers of UCITS and AIFs on credit ratings, to introduce amendments to Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of law, regulations and administrative provisions relating to the undertakings for collective investment in transferable securities (UCITS)[8] and Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers[9]. The Commission is presenting in parallel a proposal of Regulation for the amendment of the CRA Regulation, based on Article 114 of the Treaty of the Functioning of the European Union (TFUE).
However, that proposal of Regulation would not be the appropriate legal instrument for the amendment of these directives. On the one hand, those amendments include provisions which are not directly applicable and need transposition into national law. On the other hand, the proposal for the amendments of Directive 2009/65/EC and Directive 2011/61/EU should rather be based on Article 53(1) of the TFUE, which provided the legal basis for the latter Directive. Directive 2009/65/EC was based on the corresponding Article 95 of the Treaty establishing the European Community.
Therefore, it appears appropriate that the draft amendments to Directive 2009/65/EC and 2011/61/EU are presented in a proposal for a Directive based on Article 53(1) TFUE.
3.2. Subsidiarity and proportionality.
According to the principle of subsidiarity (Article 5(3) of the TUE), action at the EU level should be taken only where the aims envisaged cannot be achieved sufficiently by Member States alone and can therefore, by reason of the scale and effects of the proposed action be better achieved by the EU. The business of credit rating agencies is global and has been regulated at EU level. Ratings used by a credit rating agency based in one Member State are used and relied upon by market participants throughout the EU. Similarly, EU legislation has provided for a prudential regulatory framework for investment funds, whether UCITS of AIFs, which allows authorised funds to operate throughout the EU. Failures or a lack of regulatory framework in one specific Member State could adversely affect market participants and financial markets EU-wide. Therefore, sound regulatory rules applicable throughout the EU are necessary to protect investors and markets from possible shortcomings. Therefore, any further action to reduce the over-reliance on credit ratings by UCITs and AIFs can best be achieved by EU action.
The proposed amendments are also proportionate, as required by Article 5 i TUE. The amendments do not exceed what is necessary to achieve their objectives. The provisions on the reduction of the reliance on credit ratings are integrated into the general obligation for management and investment companies (as regards UCITS) and AIFMs (as regards AIFs) to employ risk-management processes or systems. The provisions proposed are very similar to the ones recently proposed by the Commission as regards credit institutions[10].
This proposal supplements the Commission proposal, submitted in parallel, for a Regulation amending the CRA Regulation, which contains other provisions regarding, inter alia, the reduction of the excessive reliance by market participants on credit ratings. Further to setting this general principle on the avoidance of over-reliance, the proposal for the amendment of the CRA Regulation provides for some measures that should facilitate investors’ achievement of that objective. Hence, it foresees that investors should be able to have access to additional information disclosed to the market by credit rating agencies and issuers of structured finance instruments. Credit rating agencies should disclose information on their rating methodologies and underlying assumptions, on any proposed changes to their methodologies or on specific information on certain types of credit ratings, such as sovereign ratings. Issued credit ratings should also become easily comparable for investors thanks to the European Rating Index (EURIX) to be operated by ESMA and incorporating harmonised rating scales. Issuers of structured financed instruments should provide more information on their products to the market, including information on the credit quality and performance of the individual underlying assets of the structured finance instrument, the structure of the securitization transaction, the cash flows or any collateral supporting a securitisation exposure. This additional information should facilitate that investors, such as UCITS or AIFs, could make their own credit risk assessments and need not systematically and mechanically rely on credit rating agencies to assess the creditworthiness of the instruments, in particular structured finance instruments, in which they invest.
Directive 2009/65/EC provides for the regulation at the EU level of UCITS. UCITS meeting certain conditions are therefore allowed to operate across the Union. Article 51 of this Directive established some prudential requirements as regards risk management. It requests in particular that a management or investment company managing UCITS should employ a risk-management process which enables it to monitor and measure at any time the risk of the positions and their contribution to the overall risk profile of the portfolio. The Commission received delegated powers to specify, through delegated acts, the criteria for assessing the adequacy of the risk management process employed by those managing the UCITS.
Article 1 of the proposal amends Article 51 of Directive 2009/65/EC as regards the risk management process:
– point (1) introduces a requirement for the management or investment company not to solely or mechanistically rely on external credit ratings for assessing the creditworthiness of the UCITS assets. External credit ratings may be used as one factor among others in this process but shall not prevail;
– point (2) proposes corresponding amendments to the existing empowerments for the Commission to adopt delegated acts with a view to specifying the provisions of Article 51(1) of 2009/65/EC.
Similarly, Directive 2011/61/EU provides for the regulation at the EU level of managers of alternative investment funds (AIFs). AIFs meeting certain conditions are therefore allowed to operate across the Union. Article 15 of Directive 2011/61/EU established some prudential requirements as regards risk management. It requests in particular that the manager of an AIF should implement adequate risk-management systems in order to identify, measure, manage and monitor appropriately all risks relevant to each AIF investment strategy and to which each AIF is or may be exposed. The Commission received delegated powers to specify, through delegated acts, the risks management systems to be employed by the managers of AIFs in relation to the risks they incur on behalf of the AIFs they manage.
Article 2 of the proposal amends Article 15 of Directive 2011/61/EU as regards the risk management systems:
– point (1) introduce a requirement for the AIF Manager not to solely or mechanistically rely on external credit ratings for assessing the creditworthiness ofthe AIF assets. External credit ratings may be used as one factor among others in this process but shall not prevail;
– point (2) proposes corresponding amendments to the existing empowerments for the Commission to adopt delegated acts with a view to specifying the provisions of Article 15(1) of Directive 2011/61/EU.
The proposal provides for a transposition period of 12 months.
The Commission's proposal has no impact on the European Union budget.