The Capital Requirements Regulations 2006

Regulations 22 and 23

SCHEDULE 1 Recognition of ECAIs

PART 1 Methodology

Objectivity

1.  The Authority must verify that an ECAI’s assessment methodology is rigorous, systematic, continuous and subject to validation based on historical experience.

Independence

2.  The Authority must verify that an ECAI’s assessment methodology is free from external political influences or constraints, and from economic pressures that may influence a credit assessment.

3.  The Authority must assess the independence of an ECAI’s assessment methodology according to factors such as the following—

(a) ownership and organisation structure of the ECAI;

(b) financial resources of the ECAI;

(c) staffing and expertise of the ECAI;

(d) corporate governance of the ECAI.

Ongoing review

4.  The Authority must verify that an ECAI’s credit assessments—

(a) are subject to ongoing review, taking place after all significant events and at least annually; and

(b) are responsive to changes in the financial conditions.

5.  The Authority must verify that the assessment methodology for each market segment is established according to standards such as the following—

(a) that backtesting has been established for at least one year;

(b) that the Authority monitors the regularity of the review process by the ECAI;

(c) that the Authority is able to receive from the ECAI information as to the extent of the ECAI’s contacts with the senior management of the entities which it rates.

6.  The Authority must take such steps as it considers necessary to ensure that it is promptly informed by an ECAI of any material changes in the methodology that the ECAI uses for assigning credit assessments.

Transparency and disclosure

7.  The Authority must take such steps as it considers necessary to ensure that the principles of the methodology employed by an ECAI for the formulation of its credit assessments are publicly available so as to enable all potential users to decide whether they are derived in a reasonable way.

PART 2 Credit assessments

Credibility and market acceptance

8.  The Authority must verify that the individual credit assessments of each ECAI are recognised in the market as credible and reliable by the users of such credit assessments.

9.  The Authority must assess credibility according to factors such as the following—

(a) market share of the ECAI;

(b) revenues generated by the ECAI;

(c) financial resources of the ECAI;

(d) whether there is any pricing on the basis of the rating;

(e) whether at least two credit institutions use the individual credit assessments of the ECAI for—

(i) bond issuing, or

(ii) assessing credit risks.

Transparency and Disclosure

10.  The Authority must verify that individual credit assessments are—

(a) accessible on equivalent terms to all credit institutions and investment firms having a legitimate interest in those individual credit assessments, and

(b) available to non-domestic parties on equivalent terms as to domestic credit institutions and investment firms having a legitimate interest in those individual credit assessments.