Final Report: Revised Draft ITS on the Mapping of ECAIs' Credit Assessments

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 1

JC/CP/2017/61
07 December 2017
RESTRICTED
Final Report
Draft implementing technical standards amending Implementing Regulation (EU) 2016/1799 on the mapping of ECAIs’ credit assessments under Article 136(1) and (3) of Regulation (EU) No 575/2013

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 2 Contents

1. Executive summary 3
2. Background and rationale 5
3. Draft implementing technical standards amending Implementing Regulation (EU) 2016/1799 on
   the mapping of ECAIs’ credit assessment under Article 136(1) and (3) of Regulation (EU) No 575/2013 8
4. Accompanying documents 19
   4.1 Draft cost-benefit analysis/impact assessment 19
   4.2 Feedback on the public consultation 23

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 3

1. Executive summary
   On 7 October 2016, the Commission adopted Implementing Regulation (EU) 2016/1799 (the Implementing Regulation) 1 , laying down Implementing Technical Standards (ITS) with regard to the mapping of credit assessments of External Credit Assessment Institutions (ECAIs) for credit risk in accordance with Articles 136(1) and 136(3) of Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR). Credit risk assessments assigned to securitisation positions are out of scope, as the mandate is pursuant to Article 270 of the CRR, which has been addressed in Commission Implementing Regulation (EU) 2016/1801 2 . The CRR establishes that risk weights under the Standardised Approach should be based on the exposure class to which the exposure is assigned and, if applicable, its credit quality, determined by reference to the credit assessments of ECAIs. As per Article 136(1) of the CRR, the Implementing Regulation specifies the correspondence (mapping) between relevant credit assessments of 26 ECAIs and credit quality steps set out in Section 2 of Chapter 2 of Title II of Part Three of the CRR, which refers to the risk weights for the calculation of credit risk capital requirements under the Standardised Approach. Following the mandate of Article 136(3) of the CRR, the Implementing Regulation specifies as well the quantitative and qualitative factors and benchmarks that should be taken into consideration to determine such correspondence. The Implementing Regulation is based on the draft ITS submitted by the Joint Committee of the European Supervisory Agencies (ESAs). According to Article 136(1) of the CRR, mappings should be specified for all ECAIs, which are defined in Article 4(98) of the CRR as credit rating agencies (CRAs) registered or certified in accordance with the CRA Regulation 3 or a central bank issuing credit ratings that are exempt from the application of CRA Regulation. This ‘automatic’ recognition process represents a substantial modification of the process applicable under Directives 2006/48/EC and 2006/49/EC. This increases competition in the industry, where certain ECAIs exercise significant market power 4 .
   Annex III of the Implementing Regulation provided mapping tables for 26 ECAIs, which covered one
   central bank and all the CRAs registered or certified in accordance with the CRA Regulation at the time the ESAs started preparing the draft ITS. Since then, ESMA has withdrawn the registration of one CRA 5 1 Regulation (EU) 2016/1799 of 7 October 2016 (OJ L 275, 12.10.2016, p. 3-18): http://eur-lex.europa.eu/legal￾content/EN/TXT/?uri=uriserv:OJ.L_.2016.275.01.0003.01.ENG&toc=OJ:L:2016:275:TOC 2 Regulation (EU) 2016/1801 of 11 October 2016 (OJ L 275, 12.10.2016, p. 27-33): http://eur-lex.europa.eu/legal￾content/EN/TXT/?uri=uriserv:OJ.L_.2016.275.01.0027.01.ENG&toc=OJ:L:2016:275:TOC 3 Regulation (EC) No 1060/2009 of 16 September 2009 on credit rating agencies (OJ L 302, 17.11.2009, p. 1-33): http://eur￾lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02009R1060-20150621 4 The market share is concentrated in three ECAIs that represent around 90% of the market. Market share calculation based on 2015 applicable turnover from credit rating activities and ancillary services in the EU. Please refer to https://www.esma.europa.eu/sites/default/files/library/2016-1662_cra_market_share_calculation.pdf 5 https://www.esma.europa.eu/sites/default/files/library/esma71-99- 376_feri_eurorating_services_credit_rating_agency_registration_withdrawn.pdf

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 4 and five additional CRAs have been recognised 6 . The Implementing Regulation will therefore need to be amended to reflect mappings for the newly established ECAIs and to remove the reference to the deregistered ECAI. This is in line with the second subparagraph of Article 136(1), which states that revised draft ITS shall be submitted by the ESAs where necessary. The revised draft ITS will therefore register mappings for the current ECAI population, namely mappings for the five newly established ECAIS and unchanged mappings for the 25 ECAIs 7 covered in the Implementing Regulation. The ESAs publicly consulted on these draft ITS. The consultation period was launched on 18 July 2017 and lasted for two months, ending on 18 September 2017. 6 Please refer to the ESMA website for a list of CRAs registered or certified in accordance with the CRA Regulation:
https://www.esma.europa.eu/supervision/credit-rating-agencies/risk 7 The Implementing Regulation provided mappings for 26 ECAIs, including Feri EuroRating Services AG (Feri). Feri no longer meets the ECAI definition in Article 4(98) of the CRR, given the withdrawal of its CRA registration by ESMA.

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 5
2. Background and rationale
The nature of ITS under EU law
These revised draft ITS are produced in accordance with Article 15 of Regulation (EU) No 1093/2010 (EBA Regulation) 8 , Article 15 of Regulation (EU) No 1094/2010 (EIOPA Regulation) 9 and Article 15 of Regulation (EU) No 1095/2010 (ESMA Regulation) 10 . Background to these revised draft ITS Use of external credit assessments in the CRR/CRD IV 11 Regulation (EU) No 575/2013 (CRR) allows the use of external credit assessments of ECAIs to determine the credit quality that will be used to set the corresponding risk weight under the Standardised Approach; see Article 113(1). This provision is equivalent to the provisions of the Basel II framework and represents a significant enhancement in the risk sensitivity and prudential soundness of the credit risk rules. These draft ITS are especially relevant for institutions where credit risk is less material, which is typically the case for less sophisticated institutions, for insignificant exposure classes or in situations where using internal approaches would be overly burdensome. Where credit risk is material, institutions should therefore generally seek to implement internal ratings-based approaches or internal models. Notwithstanding the principle stated in the previous paragraph, the G-20 conclusions and the Financial Stability Board (FSB) principles for reducing reliance on external credit ratings should also be taken into account. Therefore, although the analysis behind the mapping of each ECAI and its regular monitoring over time should alleviate any mechanistic overreliance of the credit risk rules on external ratings, institutions should be encouraged to use internal ratings rather than external credit ratings, even for the purpose of calculating own fund requirements, as a way to reduce overreliance on external credit ratings. 8 Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC(OJ L 331, 15.12.2010, p. 12). 9 Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/79/EC (OJ L 331, 15.12.2010, p. 48). 10 Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ L 331, 15.12.2010, p. 84). 11 CRD IV refers to Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and
2006/49/EC Text with EEA relevance

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 6 ECAIs and relevant external credit assessments As stated in Article 135(1) of the CRR, external credit assessments can be used only if they have been provided by an ECAI. These draft ITS specify the mappings that should be used for determining the own fund requirements under the Standardised Approach. ECAIs are defined as credit rating agencies registered or certified in accordance with the CRA Regulation or any central bank issuing credit ratings that are exempt from the application of the CRA Regulation.
Annex III of the Implementing Regulation provided mapping tables for 26 ECAIs, which covered one
central bank and all the CRAs registered or certified in accordance with the CRA Regulation at the time the ESAs started preparing the draft ITS. Since then:

• Five additional ECAIs have been recognised: Egan-Jones Ratings Co.; HR Ratings de México,
  S.A. de C.V.; INC Rating Sp. z o.o.; modeFinance S.r.l.; and Rating-Agentur Expert RA GmbH.
• The CRA registration of Feri EuroRating Services AG (Feri) has been withdrawn by ESMA. Feri
  renounced its registration under the conditions set out in Article 20(1)(a) of the CRA Regulation, as it no longer performed credit rating activities and no longer existed as a separate legal person following acquisition by Scope KGaA. The revised draft ITS therefore contain draft mappings for the current ECAI population, namely mappings for the five newly established ECAIS together with unchanged mappings for the 25 ECAIs 12 covered in the Implementing Regulation. Structure of the ITS These revised draft ITS amend Annex III of the Implementing Regulation to take into account changes in the ECAI population. This is in line with the second subparagraph of Article 136(1), which states that revised draft ITS shall be submitted where necessary. Together with the revised draft ITS, individual mapping reports are also published on the EBA website to illustrate how the methodology is applied to derive the mappings for each of the newly established ECAIs. 12 The Implementing Regulation provided mappings for 26 ECAIs, including Feri. Feri no longer meets the ECAI definition in
  Article 4(98) of the CRR, given the withdrawal of its CRA registration by ESMA. Mappings for the other 25 ECAIs remain
  unchanged.

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 7 Next steps The draft ITS will be submitted to the Commission for endorsement, following which they will be published in the Official Journal of the European Union. The technical standards will apply from the twentieth day following that of their publication in the Official Journal of the European Union.

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 8
3. Draft implementing technical
standards amending Implementing
Regulation (EU) 2016/1799 on the mapping of ECAIs’ credit assessment under Article 136(1) and (3) of Regulation (EU) No 575/2013

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 9 COMMISSION IMPLEMENTING REGULATION (EU) No …/... amending Implementing Regulation (EU) 2016/1799 of 7 October 2016 laying down implementing technical standards with regard to the mapping of credit risk assessments of external credit rating institutions for credit risk according to Articles 136(1) and 136(3) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of XXX THE EUROPEAN COMMISSION, Having regard to the Treaty on the Functioning of the European Union, Having regard to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms 1 , and in particular the third subparagraph of Article 136(1) and the third subparagraph of Article 136(3) thereof, Whereas:
(1) Commission Implementing Regulation (EU) 2016/1799 2 specifies, among others, in its Annex III, the correspondence of the relevant credit assessments issued by an ECAI to the credit quality steps set out in Section 2 of Chapter 2 of Title II of Part Three of Regulation (EU) No 575/2013 (mapping). (2) Given that Article 136(1) of Regulation (EU) No 575/2013 requires the specification of mappings for all ECAIs registered or certified in accordance with Regulation (EC) No 1060/2009 of the European Parliament and of the Council 3 , and that, on the one hand, since the adoption of Regulation (EU) 2016/1799 additional CRAs, have been registered or certified in accordance with Regulation (EC) No 1060/2009, while, on the other hand, one of the ECAIs for which Regulation (EU) 2016/1799 provided a mapping has been deregistered, it is necessary to amend Regulation 2016/1799 to provide mappings for the newly registered or certified ECAIs, and to remove the mapping for the deregistered ECAI. (3) This Regulation is based on the draft implementing technical standards submitted by the European Banking Authority (the EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) jointly (the ‘European Supervisory Authorities’) to the Commission. (4) EBA, ESMA and EIOPA have conducted open public consultations on the draft implementing technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the opinion of the Banking 1 OJ L 176, 27.6.2013, p. 1. 2 Commission Implementing Regulation (EU) 2016/1799 of 7 October 2016 laying down implementing technical standards with regard to the mapping of credit assessments of external credit assessment institutions for credit risk in accordance with Articles 136(1) and 136(3) of Regulation (EU) No 575/2013 of the European Parliament and of the Council (OJ L 275, 12.10.2016, p. 3). 3 Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (OJ L 302, 17.11.2009, p. 1).

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 10 Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council 4 ; the opinion of the Securities and Markets Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1095/2010 of the European Parliament and of the Council 5 ; and the opinion of the Insurance and Reinsurance Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1094/2010 of the European Parliament and of the Council 6 . Implementing Regulation (EU) 2016/1799 should be amended accordingly, HAS ADOPTED THIS REGULATION:
Article 1
Amendments to Regulation (EU) 2016/1799
Implementing Regulation (EU) No 2016/1799 is amended as follows:
Annex III is replaced by the text set out in the Annex to this Regulation.
Article 2
Entry into force
This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. This Regulation shall be binding in its entirety and directly applicable in all Member States. Done at Brussels, For the Commission The President Jean-Claude Juncker 4 Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC(OJ L 331, 15.12.2010, p. 12). 5 Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ L 331, 15.12.2010, p. 84). 6 Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/79/EC (OJ L 331, 15.12.2010, p. 48).

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 11
ANNEX
ANNEX III
Mapping tables for the purposes of Article 16
Credit quality step 1 2 3 4 5 6
AM Best Europe-Rating Services Ltd.
Long-term issuer credit ratings scale aaa, aa+, aa, aa- a+, a, a- bbb+, bbb, bbb- bb+, bb, bb- b+, b, b￾ccc+, ccc, ccc-, cc, c, rs Long-term debt ratings scale aaa, aa+, aa, aa- a+, a, a- bbb+, bbb, bbb- bb+, bb, bb- b+, b, b￾ccc+, ccc, ccc-, cc, c, d Financial strength ratings scale A++, A+ A, A- B++, B+ B, B- C++, C+ C, C-, D, E, F, S Short-term ratings scale AMB-1+ AMB-1- AMB-2, AMB-3 AMB- 4 ARC Ratings S.A. Medium- and long-term issuers rating scale AAA, AA A BBB BB B CCC, CC, C, D Medium- and long-term issues rating scale AAA, AA A BBB BB B CCC, CC, C, D Short-term issuers rating scale A-1+ A-1 A-2, A-3 B, C, D Short-term issues rating scale A-1+ A-1 A-2, A-3 B, C, D

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 12 ASSEKURATA Assekuranz Rating-Agentur GmbH Long-term credit rating scale AAA, AA A BBB BB B CCC, CC/C, D Short-term corporate rating scale A++ A B, C, D Axesor SA Global rating scale AAA, AA A BBB BB B CCC, CC, C, D, E Banque de France Global long-term issuer credit ratings scale 3++ 3+, 3 4+ 4, 5+ 5, 6 7, 8, 9, P BCRA – Credit Rating Agency AD Bank long-term ratings scale AAA, AA A BBB BB B C, D Insurance long-term ratings scale iAAA, iAA iA iBBB iBB iB iC, iD Corporate long-term ratings scale AAA, AA A BBB BB B CCC, CC, C, D Municipality long-term ratings scale AAA, AA A BBB BB B CCC, CC, C, D Issue long-term ratings scale AAA, AA A BBB BB B CCC, CC, C, D Bank short-term ratings scale A-1+ A-1 A-2, A-3 B, C, D Corporate short-term ratings scale A-1+ A-1 A-2, A-3 B, C, D Municipality short-term ratings scale A-1+ A-1 A-2, A-3 B, C, D

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 13 Issue short-term rating scale A-1+ A-1 A-2, A-3 B, C, D Capital Intelligence Ltd International long-term issuer rating scale AAA, AA A BBB BB B C, RS, SD, D International long-term issue rating scale AAA, AA A BBB BB B CCC, CC, C, D International short-term issuer rating scale A-1+ A-1 A-2, A-3 B, C, D International short-term issue rating scale A-1+ A-1 A-2, A-3 B, C, D Cerved Rating Agency S.p.A. Corporate long-term rating scale A1.1, A1.2, A1.3 A2.1, A2.2, A3.1 B1.1, B1.2 B2.1, B2.2 C1.1 C1.2, C2.1 Creditreform Ratings AG Long-term rating scale AAA, AA A BBB BB B C, D CRIF S.p.A. Global long-term rating scale AAA, AA A BBB BB B CCC, D1, D2 Dagong Europe Credit Rating Long-term credit rating scale AAA, AA A BBB BB B CCC, CC, C, D Short-term credit rating scale A-1 A-2, A-3 B, C, D DBRS Ratings Limited

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 14 Long-term obligations rating scale AAA, AA A BBB BB B CCC, CC, C, D Commercial paper and short-term debt rating scale R-1 H, R-1 M R-1 L R-2, R-3 R-4, R-5, D Claims paying ability rating scale IC-1 IC-2 IC-3 IC-4 IC-5 D Egan-Jones Ratings Co. Long-term credit rating scale AAA, AA A BBB BB B CCC,CC, C, D Short-term credit rating scale A-1+ A-1 A-2 A-3, B, C, D Euler Hermes Rating GmbH Global long-term rating scale AAA, AA A BBB BB B CCC, CC, C, SD, D European Rating Agency, a.s. Long-term rating scale AAA, AA, A BBB BB B CCC, CC, C, D Short-term rating scale S1 S2 S3, S4, NS EuroRating Sp. z o.o. Global long-term rating scale AAA, AA A BBB BB B CCC, CC, C, D Fitch Ratings Long-term issuer credit ratings scale AAA, AA A BBB BB B CCC, CC, C, RD, D

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 15 Corporate finance obligations – long-term ratings scale AAA AA A BBB BB B CCC, CC, C Long-term international IFS ratings scale AAA, AA A BBB BB B CCC, CC, C Short-term rating scale F1+ F1 F2, F3 B, C, RD, D Short-term IFS ratings scale F1+ F1 F2, F3 B, C GBB-Rating Gesellschaft für Bonitäts-beurteilung mbH Global long-term rating scale AAA, AA A, BBB BB B CCC, CC, C, D HR Ratings de México, S.A. de C.V. Global long-term rating scale HR AAA(G)/ HR AA(G) HR A(G) HR BBB(G) HR BB(G) HR B(G) HR C(G)/HR D(G) Global short-term rating scale HR+1(G)/ HR1(G) HR2(G) HR3(G) HR4(G), HR5(G), HR D(G) ICAP Group S.A Global long-term rating scale AA, A BB, B C, D E, F G, H INC Rating Sp. z o.o. Long-term issuer credit rating scale AAA, AA A BBB BB B CCC,CC, C, D Japan Credit Rating Agency Ltd

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 16 Long-term issuer ratings scale AAA, AA A BBB BB B CCC, CC, C, LD, D Long-term issue ratings scale AAA, AA A BBB BB B CCC, CC, C, D Short-term issuer ratings scale J-1+ J-1 J-2 J-3, NJ, LD, D Short-term issue credit ratings scale J-1+ J-1 J-2 J-3, NJ, D Kroll Bond Rating Agency Long-term credit rating scale AAA, AA A BBB BB B CCC, CC, C, D Short-term credit rating scale K1+ K1 K2, K3 B, C, D modeFinance S.r.l. Global long-term rating scale A1,A2 A3 B1 B2 B3 C1, C2, C3, D Moody’s Investors Service Global long-term rating scale Aaa, Aa A Baa Ba B Caa, Ca, C Bond fund rating scale Aaa-bf, Aa-bf A-bf Baa-bf Ba-bf B-bf Caa-bf, Ca-bf, C-bf Global short-term rating scale P-1 P-2 P-3 NP Rating-Agentur Expert RA GmbH International credit rating scale AAA, AA A BBB BB B CCC,CC, C, D, E

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 17 International reliability rating scale AAA, AA A BBB BB B CCC,CC, C, D, E Scope Ratings AG Global long-term rating scale AAA, AA A BBB BB B CCC, CC,C, D Global short-term rating scale S-1+ S-1 S-2 S-3, S-4 Spread Research International long-term rating scale AAA, AA A BBB BB B CCC, CC, C, D Standard & Poor’s Ratings Services Long-term issuer credit ratings scale AAA, AA A BBB BB B CCC, CC, R, SD/D Long-term issue credit ratings scale AAA, AA A BBB BB B CCC, CC, C, D Insurer financial strength ratings scale AAA, AA A BBB BB B CCC, CC, SD/D, R Fund credit quality ratings scale AAAf, AAf Af BBBf BBf Bf CCCf Mid Market Evaluation ratings scale MM1 MM2 MM3, MM4 MM5, MM6 MM7, MM8, MMD Short-term issuer credit ratings scale A-1+ A-1 A-2, A-3 B, C, R, SD/D Short-term issue credit ratings scale A-1+ A-1 A-2, A-3 B, C, D

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 18 The Economist Intelligence Unit Ltd Sovereign rating band scale AAA, AA A BBB BB B CCC, CC, C, D

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 19
4. Accompanying documents
4.1 Draft cost-benefit analysis/impact assessment
Procedural issues
In accordance with the regulations of the three ESAs, an analysis of costs and benefits is conducted when drafting ITS, unless the analysis is disproportionate in relation to the scope and impact of the draft ITS concerned. Problem definition The CRR permits the use of external credit ratings for determining own fund requirements. Recital 41 of the CRR indicates that external credit ratings could be used only in Standardised Approaches where credit risk is less material, such as the case of less sophisticated institutions, insignificant exposure classes or when the implementation of internal approaches would be unduly burdensome. In accordance with Article 135(1) of the CRR, an external credit assessment may be used to determine the risk weight of an exposure under the Standardised Approach only if it has been issued by an ECAI or if it has been endorsed by an ECAI in accordance with the CRA Regulation. Recital 98 of the CRR advises that the ECAI market should be open to more credit rating agencies given the dominance of three undertakings. Accordingly, Article 4(98) of the CRR automatically recognises credit rating agencies registered or certified in accordance with the CRA Regulation as ECAIs. Central bank issuing credit ratings that are exempt from the application of the CRA Regulation are also recognised as ECAIs. The usage of external credit ratings for determining own fund requirements requires a mapping between the credit assessments issued by an ECAI and the CQS of the Standardised Approach set out in Section 2 of Chapter 2 of Title II of Part Three of the CRR. Mappings should be made available for all existing credit rating agencies registered or certified in accordance with the CRA Regulation and for central banks producing ratings that are not subject to that regulation.

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 20 Objectives On 7 October 2016, the Commission adopted the Implementing Regulation laying down ITS with regard to the mapping of credit assessments of ECAIs for credit risk in accordance with Articles 136(1) and 136(3) of the CRR. The Implementing Regulation provided mapping tables for 26 ECAIs, which covered one central bank and all the CRAs registered or certified in accordance with the CRA Regulation at the time the ESAs started preparing the draft ITS. Since then, ESMA has withdrawn the registration of one CRA, and five additional CRAs have been registered or certified in accordance with the CRA. The objective of this revised draft ITS is to amend the Implementing Regulation to include mappings for the newly established ECAIs and to remove the reference to the deregistered ECAI. The revised draft ITS will therefore register mappings for the current ECAI population, namely mappings for the five newly established ECAIS and unchanged mappings for the 25 ECAIs covered in the Implementing Regulation 1 . These draft ITS should be particularly applicable to institutions where credit risk is less material, which is typically the case for less sophisticated institutions, for insignificant exposure classes or in situations where using internal approaches would be overly burdensome. Notwithstanding the principle stated in the previous paragraph, the G-20 conclusions and the FSB principles for reducing reliance on external credit ratings should also be taken into account. Therefore, although the analysis behind the mapping of each ECAI and its regular monitoring over time should alleviate any mechanistic overreliance of the credit risk rules on external ratings, institutions should be encouraged to use internal ratings rather than external credit ratings, even for the purpose of calculating own fund requirements, as a way to reduce overreliance on external credit ratings.
Figure 1: Newly registered or certified ECAIs
ECAI Country of residence Status
Egan-Jones Ratings Co. USA Certified
HR Ratings de México, S.A. de C.V. Mexico Certified INC Rating Sp. z o.o. Poland Registered modeFinance S.r.l. Italy Registered Rating-Agentur Expert RA GmbH Germany Registered 1 The Implementing Regulation provided mappings for 26 ECAIs, including Feri. Currently Feri no longer meets the ECAI definition in Article 4(98) of the CRR, given the withdrawal of its CRA registration by ESMA. Mappings for the other 25 ECAIs remain unchanged.

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 21 These ITS will contribute to a common understanding among institutions and the EU’s national competent authorities about the methodology that the Joint Committee should use to specify the mappings. Given that the mappings of any ECAI will be equally applicable in all EU Member States, these ITS will also contribute to ensuring a high level of harmonisation and consistent practice in this area and to achieving the objectives in the CRR of enhancing the risk sensitivity of the credit risk rules. Technical options considered The elements to characterise the degree of risk expressed by a credit assessment of an ECAI (quantitative and qualitative factors) and the levels of risk that should be used to characterise each credit quality step (benchmarks) remain unchanged with respect to the Implementing Regulation adopted by the Commission in October 2016. As noted in recital 26 of the adopted Implementing Regulation, in March 2016 the Commission notified the Joint Committee of the ESAs of its intention to endorse the draft ITS 2 with amendments, which affected the level of conservatism of the mapping. An opinion was issued by the ESAs rejecting the amendments proposed by the Commission 3 . The ESAs considered it appropriate, in line with their prudential objectives, that ECAIs with small pools of ratings should not be assigned mappings where the highest credit quality step could be achieved, given that creditworthiness cannot be adequately assessed against historical performance. This is also in line with the requirements for banks’ internal estimations, as set out in Article 179 of the CRR. The ESAs agreed in their final draft ITS to provide a phase-in period of three years for ECAIs with limited ratings data and thereafter to apply conservative mappings. The Commission rejected this approach, which would have applied to all five newly registered or certified ECAIs considered in this consultation paper, on market competition grounds and adopted the ITS with an ‘indefinitely extended’ phase-in period. As indicated in recital 27 of the ITS, the Commission proceeded to amend the draft ITS in respect of the provisions that may cause undue material disadvantage to smaller/newer ECAIs because of their more recent entry in the market. As a result, the application of a more conservative treatment in cases of limited data, after the end of the phase-in period in 2019, was not adopted. Therefore, the approach of an ‘indefinitely extended’ phase-in period has also been adopted here. 2 http://www.eba.europa.eu/documents/10180/1269185/Final+Draft+ITS+on+ECAIs%27 Mapping.pdf/3f4b46bb-825e￾4211-b199-519b6b3bf865 3 http://www.eba.europa.eu/documents/10180/1359456/ESAs+2016+41+%28Joint+Opinion+on+EC+amend+ITS+ECAIs+Map ping+CRR%29.pdf

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 22 Impact of the mappings for newly established ECAIs Costs The mapping is produced following the methodology adopted by the Commission. The Commission highlights the need to avoid the automatic application of a more conservative mapping to all ECAIs that did not produce sufficient ratings, for the sole reason that they did not produce sufficient ratings, without taking into account the quality of their ratings. There are potential risks that ECAIs with limited ratings could leverage on the Commission’s amendments and produce credit assessments that are less conservative than the mapping would suggest. Less conservative credit assessments would be associated with lower risk weights under the Standardised Approach, which would result in an underestimation of capital requirements. Subsequent monitoring of mapping reports should allow identification of these situations, which would warrant a mapping review. Benefits Five additional ECAIs will be provided with a correspondence between their credit assessments and the credit quality steps of the Standardised Approach, which allows the use of those credit assessments for determining own fund requirements. This increases competition in the industry, where certain ECAIs exercise a significant market power 4 . The analysis performed to arrive at each individual mapping and its regular monitoring over time should contribute to mitigating any mechanistic overreliance of the credit risk rules on external ratings, although due caution should continue to be exercised. This is one of the objectives of the CRR, derived from the G-20 conclusions and the FSB principles for reducing reliance on external credit ratings. Question for consultation:
Do you agree with the proposed revised draft Implementing Technical Standards? 4 The market share is concentrated in three ECAIs that represent around 90% of the market. Market share calculation based on 2015 applicable turnover from credit rating activities and ancillary services in the EU. Please refer to https://www.esma.europa.eu/sites/default/files/library/2016-1662_cra_market_share_calculation.pdf

FINAL REPORT: REVISED DRAFT ITS ON THE MAPPING OF ECAIS’ CREDIT ASSESSMENTS 23
4.2 Feedback on the public consultation
The ESAs publicly consulted on the draft proposal contained in this paper.
The consultation period lasted for two months and ended on 18 September 2017. No responses were received.