The Pfandbrief 2011 | 2012

It is time for new priorities in the regulation of rating agencies in the
European Union. Clear rules for rating agencies’ communications with
market participants and greater transparency on the part of agencies
with respect to the models they use are needed in particular. Currently,
the significance of external ratings for regulatory purposes is also being
scrutinized.
According to the authors, if satisfactory answers to these questions cannot
be found, the approach adopted by the regulators of not interfering
in the methodologies used by the agencies would have to be brought into
question.
Purpose and Objectives of Regulation
The crisis in the financial markets was a key factor in the decision also to introduce mandatory
licensing and supervision of rating agencies in Europe. This was accomplished by Regulation
(EC) No. 1060/2009 governing the regulation of rating agencies, which entered into force in
September 2009.
It has been noted that rating agencies were partially responsible for the onset of the crisis
in the financial markets, charging that they had issued inappropriately high ratings for structured
financial products. The main reason for this, it is alleged, is that the agencies have a
conflict of interest, in that they receive payments from the very companies they analyse. As a
result, the agencies would have a vested interest in issuing the best possible credit ratings.
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Avoiding Conflicts of Interest
The fact that the Regulation has only been in existence for a short time explains why politicians
and supervisory authorities targeted only a few goals in regulating rating agencies. Their
priorities included improving the quality of the ratings by avoiding conflicts of interest or at
least in disclosing these, if they were unavoidable. Hence, most of the regulatory requirements
in the Regulation are related to the business model and the way the rating agencies are organised.
In addition, the agencies’ registration requirements have become very comprehensive.
Greater Transparency and Greater Competition
Another goal in adopting the Regulation was to increase the transparency of rating agencies.
Among other things, rating companies are required to make their methods, models and
assumptions more transparent and publish extensive historical default rates, for example.
Ultimately, European regulators had intended for Regulation to improve competition. In fact,
the three major agencies, Fitch, Moody’s and Standard & Poor’s (S&P), continue to form an
oligopoly with no real competition. Originally, the first revision of the Regulation governing
rating agencies also focused on promoting competition. The EU Commission’s draft version
stipulated that issuers or originators of securitisations should be required to upload all of the
information they have provided to a rating agency commissioned by them onto a password-