Instruction No. 003-07-2019 on the Recognition of External Credit Assessment Institutions for Prudential Purposes

The Governor of the Central Bank of West African States, Having regard to the Treaty of the West African Monetary Union (WAMU) of 20 January 2007, particularly Article 34; Having regard to the Statutes of the Central Bank of West African States (BCEAO), annexed to the WAMU Treaty of 20 January 2007, particularly Articles 9, 30, 42, 59 and 60; Having regard to the Uniform Act on banking regulation; Having regard to Decision No. 013/24/06/2016/CM/UMOA of 24 June 2016 on the prudential framework applicable to credit institutions and financial companies in WAMU; Having regard to Decision No. 014/24/06/2016/CM/UMOA of 24 June 2016 on the consolidated supervision of parent credit institutions and financial companies in WAMU; DECIDES

TITLE I: GENERAL PROVISIONS

Article 1: Definitions
For the purposes of this Instruction, the following terms shall be understood as:
(a) Competent Authority: the authority responsible for the financial market, supervising External Credit Assessment Institutions (ECAIs) in WAMU or any equivalent body responsible for supervising ECAIs outside WAMU; (b) Other International Financial Institutions: non-private international financial institutions, other than multilateral development banks and sovereigns, that provide financing to governments of States in difficulty or to the private sector of a country; (c) Multilateral Development Banks: supranational institutions created by sovereign States that are their shareholders. Their missions fall within the framework of cooperation and development aid policies defined by these States; (d) Rating Category: symbol used to identify each rating, within each rating class, in order to distinguish the specific risk characteristics of different types of entities, issuers, debt securities or financial instruments rated; (e) Financial Companies: companies established in WAMU whose main activity, in one or more Member States of WAMU, is to take and manage financial holdings and which, either directly or through companies with the same object, control one or more companies carrying out financial operations, at least one of which is a credit institution; (f) Banking Sector Entities: the following entities:
i. banks and banking financial institutions;
ii. all other entities subject to the Uniform Act on banking regulation;
iii. financial companies;
iv. Decentralized Financial Systems, abbreviated DFS;
v. electronic money institutions;
vi. companies located outside WAMU that meet the definitions given in points i) to v) above in their jurisdiction;
vii. auxiliary service companies whose main activity consists of providing services to the entities referred to in points i) to vi) above, or holding fixed assets allocated to the operation of these entities;
(g) Supervised Entities: financial companies, parent credit institutions, credit institutions and any other entity subject to the control of the Banking Commission; (h) Credit Institution: a legal person that habitually carries out banking operations as defined by the Uniform Act on banking regulation. A credit institution is licensed as a bank or a banking financial institution; (i) Parent Credit Institution: a credit institution that is not controlled by a credit institution or a financial company and holds at least one subsidiary that is another credit institution; (j) Financial Institutions: the following entities:
i. banking sector entities referred to in point f) above;
ii. financial services of postal administrations;
iii. national savings banks;
iv. other international financial institutions;
(k) Rating or Credit Assessment: an opinion, issued by applying a well-defined and well-established classification system providing for different rating categories, concerning the solvency of an entity, the credit quality of a debt security or a marketable debt security; (l) External Credit Assessment Institution, abbreviated ECAI or Rating Agency: an entity whose main and regular activity consists of issuing ratings or credit assessments; (m) Public Bodies other than Central Government: local and regional administrations; (n) Sovereigns: the following entities:
i. WAMU States and their subdivisions (Treasury, Ministries and central services);
ii. States outside WAMU;
iii. central banks;
(o) WAMU: West African Monetary Union.

Article 2: Subject Matter
This Instruction sets out the conditions and procedures for the recognition by the Central Bank of external credit assessment institutions, whose ratings may be used for prudential purposes by supervised entities in WAMU.

Article 3: Scope of Application
The provisions of this Instruction apply to:

• ECAIs;
• Supervised Entities.
  It does not govern the conditions for exercising the rating agency activity, nor the use of ratings issued by ECAIs for purposes other than prudential.

TITLE II: CONDITIONS FOR RECOGNITION

Article 4: Eligibility Criteria
The recognition of an ECAI for prudential purposes in WAMU is subject to compliance with the following six criteria.

4.1. Objectivity and Rigor of the Rating Methodology Used
The credit assessment methodology must be rigorous, systematic and subject to internal validation based on historical data. The rating is subject to revision at least once a year and must reflect any significant change arising from the financial situation and market context. The ECAI must have documented processes that describe in detail the rating methodology used. The latter must be based on both qualitative and quantitative elements. The documentation must include, in particular, the key variables selected, assumptions, definition of default, data sources, depth of historical data, performance tests of quantitative models, changes in assessment methods and business models of rated entities. Prior to recognition by the Central Bank, a methodological credit assessment approach tailored to each market segment, including rigorous ex-post control procedures, must have been established by the ECAI for at least three years. This period may be reduced, at the express request of the interested party, in exceptional cases duly justified.

4.2. Independence of the ECAI
The ECAI must demonstrate independence and not be subject to any political or economic pressure likely to influence its assessments. Independence is preserved from constraints that may arise from conflicts of interest resulting from the ECAI's funding sources and the composition of its Board of Directors or shareholding. Employees of the ECAI and persons closely related to them must not, under any circumstances, have economic or control links with public sector entities, companies or issuers for which a rating is established and supervised entities. The ECAI must in particular be equipped with:

• adequate processes and controls to identify, prevent and manage actual and potential conflicts of interest that its organization's actors might face;
• a code of conduct accessible to the public and compliant with the principles established by the International Organization of Securities Commissions (IOSCO);
• a compliance function, which ensures respect for its code of conduct and the legal provisions governing its activities;
• a remuneration policy that guarantees the independence of personnel involved in credit assessment;
• a documented pricing policy.

4.3. Access to Information and Transparency
Credit assessments carried out by the ECAI must be published through communication channels easily accessible to any person with a legitimate interest and under the same conditions, unless it is a private assessment. The general method used by the ECAI must be made public.

4.4. Disclosure of Information on the Rating Framework
The ECAI must in particular publish the following information:

• the procedures, methodologies and general assumptions it uses to assign ratings, including the definition of default, the time horizon and the meaning of each rating category;
• the observed default rate for each rating category;
• the migration matrix between different rating categories;
• its fee schedule.

4.5. ECAI Resources
The ECAI must have sufficient financial, human and logistical resources to provide high-quality ratings. To this end, it must have experts in all market segments referred to in Article 6 below, for which it assigns a rating. When a rating is requested by an issuer or a company, the ECAI's human resources must ensure close contact with the governing and operational bodies of the assessed entities in order to enhance the quality of the ratings issued.

4.6. Credibility of the ECAI
The ECAI and the ratings it assigns must be credible. This credibility stems, on the one hand, from compliance with all requirements set out in this Instruction and, on the other hand, from the level of trust accorded by independent parties, namely investors, insurers and business partners, to the ratings provided by the ECAI. The market's level of trust is assessed through, among other things, the ECAI's market share, the number of rated issuers or companies and its presence in other jurisdictions with a regulatory framework at least equivalent to that in force in WAMU. Credibility also implies:

• the existence of internal procedures to prevent the misuse of confidential information;
• the assessment by the competent authority of the ECAI's compliance with the legal and regulatory provisions governing its activities.

TITLE III: RECOGNITION GRANTING PROCESS

Article 5: Eligible Applicants
The recognition application process may be initiated with the BCEAO by the following entities:

• ECAIs benefiting from an operating approval granted by the Competent Authority for the financial market in WAMU;
• ECAIs based outside WAMU and subject to supervisory and regulatory provisions at least equivalent to those of the Competent Authority for the financial market in WAMU;
• Supervised Entities that intend to use external ratings for prudential purposes.

Article 6: Scope of Recognition
The recognition of an ECAI may be total or partial. In the case of partial recognition, it may be limited to certain market segments, asset classes or geographical areas.
Eligible market segments are:

• the public sector, which includes sovereigns, public bodies other than central government and multilateral development banks;
• the private sector, which includes financial institutions and companies;
• any other segments deemed relevant by the BCEAO.

Article 7: Forms of Recognition
The recognition of an ECAI may be direct or indirect. In the direct recognition process, the BCEAO evaluates the ECAI's compliance with the criteria set out in Article 4 of this Instruction. In the case of indirect recognition, the Central Bank accepts ratings granted by an ECAI that has been recognized for prudential purposes by a competent banking authority of a third State applying a prudential regulation at least equivalent to that of WAMU. In this case, the non-objection opinion of this authority is sought prior to the recognition of the ECAI. The rating system established by the Central Bank may also be eligible as an ECAI.

Article 8: Submission of the Recognition Application File
The recognition application file is submitted to the BCEAO Headquarters or to a main BCEAO Branch, which is responsible for transmitting it to Headquarters.
The ECAI submits a complete file to the Governor of the Central Bank, in three copies, comprising the documents listed in the Annex as well as the electronic version of said documents. Any incomplete file is deemed inadmissible. The submission of the recognition file results in the issuance of an acknowledgment of receipt by the BCEAO. The date of issuance of this acknowledgment of receipt constitutes the date of receipt of the file.

Article 9: Processing of the Recognition Application
The Central Bank processes the recognition application file. To this end, it may:

• request any additional information or elements it deems necessary;
• conduct on-site visits at the relevant ECAI to verify the relevance of the information provided;
• seek the opinion of the competent authority on the regulatory status of the relevant ECAI;
• summon the relevant ECAI to a hearing on the file.

Article 10: Processing Timeframe
The regulatory processing timeframe for the recognition application file by the BCEAO is one hundred and twenty (120) working days from the date of receipt of the file.
Any request for information or additional elements, referred to in Article 9 of this Instruction, from the applicant or the ECAI's competent authority suspends the processing timeframe. The one hundred and twenty (120) day processing timeframe resumes from the date of receipt of the requested information or additional elements. The applicant has a maximum period of thirty (30) calendar days to communicate the requested additional information. Upon expiration of this period and, in the absence of communication of all required information or elements, the application is deemed inadmissible and rejected, with notification to the applicant by the Central Bank.

Article 11: Notification of the Decision Following Processing
Recognition is granted by Decision of the Governor of the Central Bank and notified in writing to the applicant.
Refusal of recognition is notified to the applicant in the same form.
Recognition is formalized by inscribing the beneficiary entity on the list of ECAIs recognized for prudential purposes by the BCEAO.
The Central Bank notifies the recognition of the relevant ECAI to its competent authority as soon as possible.

Article 12: Duration of Recognition
Recognition is granted for a period of three years, renewable. The renewal application is made in the same forms as those set out in Title III of this Instruction.
The Central Bank may, at any time, re-evaluate the recognition granted to an ECAI when it becomes aware of facts or events indicating that the requirements set out in this Instruction may no longer be met.

Article 13: Publication
The BCEAO periodically publishes, on its website, the updated list of recognized ECAIs, indicating the market segments, asset classes and countries concerned.
It also publishes the rating correspondence table of recognized ECAIs.

TITLE IV: SUPERVISION OF ECAIs

Article 14: Supervision of ECAIs
The ECAI recognized by the BCEAO for prudential purposes is subject to the supervision of its Competent Authority. It exercises its activities under the responsibility of the latter. However, in close collaboration with this Competent Authority, the BCEAO verifies the ECAI's compliance with the provisions of this Instruction.

Article 15: Information Obligation
Recognized ECAIs are required to provide, upon any request from the BCEAO, within the specified timeframes and forms, all documents, information, clarifications and justifications necessary to assess compliance with the requirements of this Instruction. The ECAI is required to inform the BCEAO without delay of any significant modification to its rating methodology and governance framework.

Article 16: Measures in Case of Non-Compliance with Recognition Conditions
In the event of non-compliance by the ECAI with the recognition conditions, the BCEAO may take the following measures against it:

• an injunction to take, within a specified timeframe, the necessary measures to achieve compliance;
• temporary withdrawal of recognition;
• permanent withdrawal of recognition.
  In cases of withdrawal of recognition, the ratings assigned by the relevant ECAI can no longer be used for prudential purposes by supervised entities.
  The Central Bank notifies the measures taken against the relevant ECAI to its competent authority as soon as possible.
  When the competent authority of an ECAI revokes its approval, said decision results, without delay, in the permanent withdrawal of the recognition granted by the BCEAO.

TITLE V: FINAL PROVISIONS

Article 16: Entry into Force
This Instruction, including its Annex which forms an integral part thereof, enters into force as of its signature date and is published wherever necessary.
Done in Dakar, on [Date]
Tiémoko Meyliet KONE

ANNEX: LIST OF DOCUMENTS FOR THE RECOGNITION APPLICATION FILE

1. Administrative and Legal Documents and Information

• a signed application by the duly authorized representative of the applicant entity, addressed to the Governor of the BCEAO;
• the approval issued by the Competent Authority for the financial market to exercise the rating agency activity in WAMU or the equivalent from any other similar structures established outside WAMU;
• an information sheet on major shareholders, partners, directors and partners (certified true copies of identity documents, dated and signed curricula vitae, criminal record extracts or any other equivalent document dated less than three months ago). For shareholders, the sheet must also indicate the participation level of each and the type of cash or in-kind contributions;
• a description of all existing legal, financial or commercial links between shareholders or partners, including direct family ties, links with the directors of legal entities, holdings or other financing, agreements, etc.

2. Organizational Documents and Information

• a detailed organizational chart and governance bodies;
• the code of conduct;
• a description of the profiles of personnel responsible for rating activities;
• a description of the ECAI's auxiliary services;
• policies and procedures applied to identify and manage conflicts of interest.

3. Technical Documents and Information

• the market segments, asset classes and countries for which recognition is requested;
• a detailed description of the rating methodology as defined in Article 4 of this Instruction, for each of the market segments, asset classes and countries concerned;
• the list of jurisdictions in which the entity is recognized as an ECAI for prudential purposes.

4. Financial Documents and Information

• the annual financial statements for the last three fiscal years certified by an auditor approved by its competent authority.

5. Any other documents and information deemed relevant by the BCEAO
   All documents must be submitted in French.