ESMA director fears competition among rating agencies

Verena Ross (pictured), executive director at the European Securities and Markets Authority (ESMA), said increased competition between new and established credit rating agencies could harm their credibility.

Ross voiced concern about certain elements of the amended regulation on credit rating agencies (CRA 3) while speaking at the European Parliament in Brussels this week.

ESMA is currently in the process of implementing the provisions of the amended regulation on credit rating agencies, having taken responsibility in July 2011 for the day to day supervision of registered CRAs.

Ross said “a word of caution” was necessary regarding certain elements of the proposal, which introduces several provisions on mandatory rotation for rating analysts and CRAs.

“I fully support the Commission’s aim to achieve greater competition in the CRA sector, which might have been hampered by investors and users of ratings relying mainly on the most established CRAs,” Ross confirmed.

“Having said that, at least in the short term, there is a risk that new entrants might compete by offering higher ratings or by lowering prices. This could have a detrimental effect on the quality of the rating process and the reliability of the ratings themselves.

“If new entrants or smaller CRAs are attracted to bid in the rotation process, it is not clear that – at least in the short term – their professional competence (such as adequate staffing, processes, systems, controls, etc) will be able to live up to expectations,” she said.

While accepting these risks might only be short-term growing pains which are well worth it for the greater good of enhanced competition, Ross said caution is necessary regarding the potential impact these risks might have on the quality of the credit rating market at this important time.

She also criticsed the requirement for ESMA to assess new draft methodologies as a condition for their entry into force.

“From our current (admittedly limited) supervisory experience, this new proposed role for ESMA could create serious tensions with the requirement of non-interference and independence,” she said.

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