Guidelines and Recmmendatins Guidelines n peridic infrmatin t be submitted t ESMA by Credit Rating Agencies 23 June 2015 ESMA/2015/609
Table f Cntents 1 Scpe... 3 2 Definitins... 3 3 Purpse f Guidelines... 3 4 Cmpliance and reprting bligatins... 3 5 Infrmatin t be cntained in the peridic submissins... 3 5.1 Financial revenues and csts (per type f credit rating and n individual and cnslidated basis)... 4 5.2 Staff turnver, vacancies and key prmtins... 4 5.3 FTE headcunt... 5 5.4 Internal cmplaints submitted t the Cmpliance Department... 5 5.5 Bard minutes, independent nn-executive directrs pinins and reprts submitted t the Bard... 5 5.6 Curt, arbitratin and ther dispute reslutin prceedings... 5 5.7 Ptential and actual cases f nn-cmpliance with the CRA Regulatin that have been identified and measures taken... 6 5.8 Organisatinal charts... 6 5.9 Cmpliance, Internal Audit, Risk Management... 6 5.10 Enterprise IT strategy... 7 5.11 Other areas... 7 5.12 Ntificatins f material changes t the initial cnditins fr registratin... 7 5.13 CRA supervisry fee and market share calculatins... 8 5.14 CRA market share calculatin... 9 6 Annex 1: Summary f peridic infrmatin t be submitted t ESMA by Credit Rating Agencies... 11 1
Acrnyms used CRA Regulatin CRA ESMA HR IA Regulatin (EC) N 1060/2009 f the Eurpean Parliament and f the Cuncil (as last amended by Regulatin (EU) N 462/2013). Credit Rating Agency Eurpean Securities and Markets Authrity Human Resurces Internal Audit 2
1 Scpe Wh? 1. These Guidelines apply t credit rating agencies (CRAs) registered in the EU. These guidelines d nt apply t certified CRAs. When? 2. The guidelines will becme effective tw mnths after their publicatin n ESMA s website in all the fficial languages f the EU. 2 Definitins 3. ESMA Regulatin: Regulatin (EU) N 1095/2010 f the Eurpean Parliament and f the Cuncil f 24 Nvember 2010 establishing a Eurpean Supervisry Authrity (Eurpean Securities and Markets Authrity), amending Decisin N 716/2009/EC and repealing Cmmissin Decisin 2009/77/EC. 3 Purpse f Guidelines 4. The Guidelines set ut the infrmatin that shuld be submitted by CRAs t enable ESMA s nging supervisin f CRAs n a cnsistent basis. The Guidelines als clarify ESMA s expectatins f the infrmatin that shuld be submitted t ESMA fr the calculatin f supervisry fees and CRAs market share. 4 Cmpliance and reprting bligatins 5. This dcument cntains guidelines issued under Article 16 f the ESMA Regulatin. In accrdance with Article 16(3) f the ESMA Regulatin, financial market participants must make every effrt t cmply with the guidelines and recmmendatins. 5 Infrmatin t be cntained in the peridic submissins 6. This Sectin sets ut the infrmatin that CRAs shuld submit t ESMA n a quarterly, semi-annual and annual basis as part f their peridic submissins. Infrmatin shuld be submitted within ne mnth fllwing the end f the quarter cncerned. 3
Perid 1Q 20xx (up t 31 March 20xx) 2Q 20xx (up t 30 June 20xx) 3Q 20xx (up t 30 September 20xx) 4Q 20xx (up t 31 December 20xx) Submissin deadline 30 April 20xx 31 July 20xx 31 Octber 20xx 31 January 20x(x+1) 7. Please nte that, where ptential infringements f the CRA Regulatin that pse a risk t the integrity and bjectivity f existing credit ratings have been identified (including pssible fraudulent r irregular activity (e.g. emplyee r manager miscnduct)), CRAs will wish t cnsider infrming ESMA f them prmptly. CRAs will be aware that a failure t d s wuld, in the event f an infringement being fund, prevent the firm frm relying n the mitigating factr set ut in Pint 3 f Sectin II f Annex IV f the CRA Regulatin ( If the credit rating agency has brught quickly, effectively and cmpletely the infringement t ESMA s attentin, a cefficient f 0,4 shall apply. ). 8. ESMA des nt intend that a CRA will waive legal privilege in submitting the peridic infrmatin included in these guidelines. A. Quarterly infrmatin submissins 5.1 Financial revenues and csts (per type f credit rating and n individual and cnslidated basis) 9. ESMA shuld receive infrmatin n quarterly revenues per i) type f credit rating and ii) csts. 10. Quarterly revenues shuld be split acrss the fllwing types f credit ratings: Crprate Nn Financials; Crprate Financials; Svereign/Public Finance; Structured Finance; Cvered Bnds. 11. Quarterly csts shuld shw peratinal and ttal csts n a separate basis. Operatinal csts shuld be an apprximatin f earnings befre interest and tax charges. Figures shuld be presented as quarter-n-quarter revenues and csts (rather than year-n-year). 12. CRAs exempt frm an annual supervisry fee shuld submit this infrmatin semiannually, rather than quarterly. 5.2 Staff turnver, vacancies and key prmtins 13. Quarterly turnver f Senir Management (including senir IT management), Lead Analysts and Analysts shuld be prvided. CRAs exempt frm an annual supervisry fee shuld submit this infrmatin semi-annually, rather than quarterly. 4
5.3 FTE headcunt 14. In additin t staff turnver data, ESMA shuld receive a quarterly reprt f the ttal number f staff wrking at a CRA expressed in terms f Full Time Emplyees. CRAs exempt frm the annual supervisry fee shuld prvide this infrmatin semi-annually, rather than quarterly. 5.4 Internal cmplaints submitted t the Cmpliance Department 15. CRAs shuld submit t ESMA n receipt f a cmplaint within the scpe f the Regulatin: A descriptin f the cntent f the cmplaint; The fllw-up actins undertaken by the CRA; Infrmatin n whether an internal investigatin was pened as a cnsequence, including whether the investigatin is nging r clsed at the date f reprting; where the investigatin has been clsed, a cpy f any cnsequent reprt made in respect f the investigatin. B. Semi-annual infrmatin submissins 5.5 Bard minutes, independent nn-executive directrs pinins and reprts submitted t the Bard 16. CRAs shuld submit n a semi-annual basis: The minutes f their bard meetings; A cpy f dcuments sent t management and supervisry bard members in advance f their respective bard meetings, as well as additinal dcuments discussed in the meeting (fr instance, reprts made by Cmpliance, Internal Audit Risk, internal review reprts functin, infrmatin security and risk functin); Where an independent nn-executive directr s (INED) pinin is prvided in a standalne dcument, CRAs shuld submit in the semi-annual submissin any pinins presented by a CRA s INED(s) pursuant t pint 2 f Sectin A f Annex I f CRA Regulatin and all reprts (including fllw-up reprts) issued by an independent directr. 5.6 Curt, arbitratin and ther dispute reslutin prceedings 17. ESMA shuld receive semi-annually a brief descriptin f, and updated infrmatin n pending and current curt prceedings, arbitratin prceedings and any frm f binding dispute reslutin prceedings which are/were in being at any pint in time during the reprting perid, and which may adversely impact the cntinuity r quality f ratings and/r materially impact the financial psitin f a CRA. This descriptin shuld include a 5
summary f the prceedings and f the ptential utcme f the prceedings in terms f liability. 5.7 Ptential and actual cases f nn-cmpliance with the CRA Regulatin that have been identified and measures taken 18. CRAs shuld prvide semi-annually detailed infrmatin regarding pssible cases that may result in nn-cmpliance with any f the initial cnditins fr registratin, including: a. A descriptin f each case which may result in a pssible nn-cmpliance with the initial cnditins fr registratin; b. A statement f the reasns why such case has arisen; c. A statement f the actins undertaken by the CRA fllwing the identificatin f the case cncerned; d. A statement f whether an internal investigatin has been pened in relatin t the case cncerned and f whether such investigatin is nging r clsed; and where clsed, furnish a cpy f any cnsequent reprt made in respect f the investigatin. 5.8 Organisatinal charts 19. CRAs shuld submit semi-annually rganisatinal charts if there have been updates t the rganisatinal charts. Such rganisatinal chart shuld prvide such detail as will enable ESMA t identify the structure f the fllwing departments and shuld describe the main functins f the departments: Cmpliance functin; Internal Audit; Internal Review functin; Business lines in charge f the ratings activities; Infrmatin Security functin; IT department; Risk functin. 5.9 Cmpliance, Internal Audit, Risk Management 20. Each CRA shuld submit semi-annually its Cmpliance wrk plan in any case where an updated versin f such plan has been prduced during the perid. 21. Where a CRA has established an Internal Audit functin r cmmissined internal audits frm an external party, ESMA shuld receive a cpy f the Internal Audit updated wrk plan in any case where an updated versin f such plan has been prduced during the perid. 22. Each CRA shuld submit t ESMA cpies f the reprts issued by its cmpliance, internal audit, and risk management (cvering, fr example, peratinal r infrmatin security risks). CRAs shuld prvide details f any fllw-up actin identified t mitigate 6
thse risks. 5.10 Enterprise IT strategy 23. ESMA shuld be infrmed semi-annually f CRAs enterprise IT strategies and f any changes made theret. 24. ESMA shuld be infrmed semi-annually f CRAs IT wrk plans and f any changes theret. CRAs shuld als prvide updates n the implementatin status f the wrk plan. 5.11 Other areas 25. CRAs shuld als reprt semi-annually: New ptential and actual cnflicts f interest identified and measures taken in respnse theret; Infrmatin n any internal review being initiated r intended t be perfrmed n rating mdels and rating prcesses; Outcmes f the methdlgy reviews including infrmatin n any backtesting perfrmed in the perid, details f any key findings as well as actins taken by the CRA as a result. 5.12 Ntificatins f material changes t the initial cnditins fr registratin 26. ESMA cnsiders a material change t be a change in the infrmatin submitted in the registratin applicatin and, mre generally, any change that may affect cmpliance with the requirements f the CRA Regulatin. 27. A CRA shuld ntify ESMA f any material changes t the cnditins f its initial registratin, including but nt limited t the fllwing matters: a. Opening and clsing f branches; b. Use f endrsement; c. CRAs right t an exemptin(s) given at registratin; d. Outsurcing arrangements; e. Legal frm; 7
f. Business structure (including rerganisatin r restructuring f the CRA activities and spin-ffs); g. Type f business activities (including the prvisin f a new service and launch f new prduct in either the rating r nn-rating business); h. Class and/r type f credit ratings; i. Ownership structure: acquisitin r dispsal f hldings abve 5% f capital; j. Membership f the supervisry/administrative bard; k. Cmpliance functin and review functin; l. Prcedures used t issue and review credit ratings; m. Financial resurces (including change share capital r lng term debt); n. Rating methdlgies, mdels r key rating assumptins;. IT prcess and infrmatin prcessing systems supprting the rating prcess, such as changes in IT gvernance. 5.13 CRA supervisry fee and market share calculatins Supervisry fee 28. Fr the purpse f calculating the supervisry fees, CRAs shuld submit t ESMA their annual audited accunts fr the previus year, at the latest by 31 st May each year. 29. The basis fr the calculatin f the supervisry fee is the revenue generated frm the CRA s credit rating activities and ancillary services. A CRA prviding a service r services ther than credit ratings shuld prvide ESMA with a detailed descriptin f such service(s) s that ESMA can assess whether the service(s) cncerned cnstitute nn-rating services, nn-ancillary services r ancillary services. 30. Where a CRA, with annual ttal revenue f at least 10 millin eur, identifies revenues as generated frm nn-rating activities and/r nn-ancillary services, the CRA shuld prvide ESMA with a detailed descriptin f such activities and services. This is t allw ESMA t assess whether the revenues generated frm thse activities and services are eligible fr deductin frm the applicable turnver. The amunts crrespnding t thse nn-rating activities and nn-ancillary services shuld be apprpriately certified by the CRA s external auditrs 1. 1 Certificatin may be dne by the CRAs external auditr thrugh different means such as a specified prcedures reprt r an agreed-upn prcedure reprt with the CRA s external auditr, a statement f the CRA s revenues r amunts billed by the CRA s external auditr, r by including this certificatin request in the audit engagement with the CRA s external auditr. 8
31. Where a CRA with annual ttal revenue f at least 10 millin eur prvides credit rating activities and ancillary services t different clients, it may request t deduct the related revenues frm the calculatin f the revenues generated frm ancillary services. The CRA shuld prvide ESMA with a detailed descriptin f its internal structure, as well as relevant plicies, prcesses and prcedures, if any. This is t enable ESMA t assess, n a case by case basis, whether the utcme is the prvisin f services t different clients thereby remving ptential cnflict f interest and the need fr supervisry scrutiny. On this basis, ESMA will determine whether the revenues generated frm the differentiated client bases are eligible fr deductin frm the applicable turnver. The amunts crrespnding t the revenues generated frm ancillary services which are prvided t different clients wh d nt receive rating services in the applicable financial year shuld be apprpriately certified by the CRA s external auditrs n a client-by-client basis and aggregated basis. Any change t the CRA s structure r t the relevant plicies, prcesses r prcedures relative t the prvisin f ancillary services t a given client shuld be cmmunicated t ESMA withut undue delay. 32. Fr the purpse f the abve-mentined calculatin and the assessment f the absence f ptential cnflict f interests, client means any client within the meaning f the term as defined in the last paragraph f pint 2 f Part II f Sectin E f Annex I f CRA Regulatin wh des nt receive any rating service frm the CRA grup 2. 33. Where a CRA requests any ther adjustment t the applicable turnver (such as the eliminatin f intercmpany transactins), the CRA shuld prvide ESMA with a detailed descriptin f the requested adjustment and the reasns fr such an adjustment. The amunt crrespnding t such adjustment shuld be apprpriately certified by the CRA s external auditr. 34. The calculatin f a CRA s supervisry fees is withut prejudice t ESMA s nging supervisry pwers t assess whether the prvisin f ancillary services prvided by a CRA cnstitutes a ptential cnflict f interest and, where this is the case, t adpt apprpriate measures in accrdance with the CRA Regulatin. 5.14 CRA market share calculatin 35. As the calculatin f CRA s market share is made n the same basis as the calculatin f supervisry fees, the guidelines fr calculating the applicable turnver fr supervisry fees will be applicable t the calculatin f the CRA s market share. 36. Fr the purpse f calculating the yearly CRA s market share, CRAs with a financial year ther than the calendar year shuld prvide ESMA with the financial accunts 2 The final paragraph f pint 2 f Part II f Sectin E f Annex I f the CRA Regulatin states: client means an entity, its subsidiaries, and assciated entities in which the entity has hldings f mre than 20%, as well as any ther entities in respect f which it has negtiated the structuring f a debt issue n behalf f a client and where a fee was paid, directly r indirectly, t the credit ratings agency fr the rating f that debt issue. 9
adjusted t the calendar year. The amunts crrespnding t such adjustments shuld be apprpriately certified by the CRA s external auditrs. A CRA may als prvide audited financial statements brken dwn by quarter r by ther time perids as lng as the infrmatin enables ESMA t make its annual calculatin fr the ttal market share and the calculatin f the supervisry fees. 10
6 Annex 1: Summary f peridic infrmatin t be submitted t ESMA by Credit Rating Agencies A. Quarterly infrmatin submissins Financial revenues (per type f credit rating and n individual and cnslidated basis) and csts (semi-annually fr CRAs exempt frm supervisry fees); Staff turnver, vacancies and key prmtins (semi-annually fr CRAs exempt frm supervisry fees); FTE headcunt (semi-annually fr CRAs exempt frm supervisry fees); Internal cmplaints submitted t the Cmpliance Department. B. Semi-annual infrmatin submissins Infrmatin n the initiatin f any internal review being perfrmed r intended t be perfrmed n rating mdels and rating prcesses; Outcmes f methdlgy reviews including infrmatin n any back-testing perfrmed in the perid, details f any key findings as well as actins taken by the CRA as a result; Cmpliance, Internal Audit, Risk Management and IT strategy and gvernance; Ptential cases f nn-cmpliance with the CRA Regulatin that have been identified and measures taken; New ptential and actual cnflicts f interest identified and measures taken; Bard minutes, INED pinins and reprts submitted t the Bard; Curt, arbitratin and ther dispute reslutin prceedings; Updated rganisatinal charts. 11