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Ratings shopping: ESMA consults on CRAR disclosures

ESMA has today published a consultation paper proposing guidelines on disclosure requirements for credit rating agencies (CRAs) on initial reviews and preliminary ratings under the CRA Regulation (CRAR).

The CRAR includes provisions designed to bring to light for the benefit of market participants whether an entity or debt instrument, before receiving a credit rating, was subject to an initial review or preliminary rating by a CRA. The aim is to mitigate against the risks of 'ratings shopping' - where issuers approach a number of CRAs with a view to selecting those that will provide the most favourable assessment for the entity or debt instrument - a practice blamed as one of the root causes of the global financial crisis, helping conceal dangers in subprime mortgage bonds in the years before 2008, and which regulators have spent over a decade trying to tackle.

In light of certain inconsistencies in the interpretation of the relevant CRAR provisions, ESMA has engaged with CRAs over a number of years to assess current market practices in this regard and sets out draft guidelines for CRAs on the disclosures. These aim to clarify ESMA's views on:

  • How the term "initial review and preliminary rating" should be understood for the purposes of the CRAR public disclosure requirements.
  • The content and timing of CRAs' public disclosures for interactions that meet the standard of "initial review and preliminary rating".
  • The steps to ensure these public disclosures are more accessible for investors and the market.

The consultation closes to responses on 4 August 2021. ESMA is seeking feedback from debt issuers and users of credit ratings, as well as CRAs.

The purpose of this has been to identify possible inconsistencies in CRAs practices, and define necessary steps to address these inconsistencies. In addressing these inconsistencies ESMA aims to ensure that the CRAR’s provisions to mitigate against rating shopping function in a manner that is as consistent and effective as possible.


fca, financial regulation, esma, credit ratings