Directive 2006/48/EC of the European Parliament and of the council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast) (Text with EEA relevance) (repealed) (c. 48)

ANNEX VI U.K. STANDARDISED APPROACH

PART 2 U.K. Recognition of ECAIs and mapping of their credit assessments

1. METHODOLOGY U.K.

1.1. Objectivity U.K.

1. Competent authorities shall verify that the methodology for assigning credit assessments is rigorous, systematic, continuous and subject to validation based on historical experience. U.K.

1.2. Independence U.K.

2. Competent authorities shall verify that the methodology is free from external political influences or constraints, and from economic pressures that may influence the credit assessment. U.K.

3. Independence of the ECAI's methodology shall be assessed by competent authorities according to factors such as the following: U.K.

(a)

ownership and organisation structure of the ECAI;

(b)

financial resources of the ECAI;

(c)

staffing and expertise of the ECAI; and

(d)

corporate governance of the ECAI.

1.3. Ongoing review U.K.

4. Competent authorities shall verify that ECAI's credit assessments are subject to ongoing review and shall be responsive to changes in the financial conditions. Such review shall take place after all significant events and at least annually. U.K.

5. Before any recognition, competent authorities shall verify that the assessment methodology for each market segment is established according to standards such as the following: U.K.

(a)

the back-testing must be established for at least one year;

(b)

the regularity of the review process by the ECAI must be monitored by the competent authorities; and

(c)

the competent authorities must be able to receive from the ECAI the extent of its contacts with the senior management of the entities which it rates.

6. Competent authorities shall take the necessary measures to be promptly informed by ECAIs of any material changes in the methodology they use for assigning credit assessments. U.K.

1.4. Transparency and disclosure U.K.

7. Competent authorities shall take the necessary measures to assure that the principles of the methodology employed by the ECAI for the formulation of its credit assessments are publicly available as to allow all potential users to decide whether they are derived in a reasonable way. U.K.

2. INDIVIDUAL CREDIT ASSESSMENTS U.K.

2.1. Credibility and market acceptance U.K.

8. Competent authorities shall verify that ECAIs' individual credit assessments are recognised in the market as credible and reliable by the users of such credit assessments. U.K.

9. Credibility shall be assessed by competent authorities according to factors such as the following: U.K.

(a)

market share of the ECAI;

(b)

revenues generated by the ECAI, and more in general financial resources of the ECAI;

(c)

whether there is any pricing on the basis of the rating; and

(d)

at least two credit institutions use the ECAI's individual credit assessment for bond issuing and/or assessing credit risks.

2.2. Transparency and Disclosure U.K.

10. Competent authorities shall verify that individual credit assessments are accessible at equivalent terms at least to all credit institutions having a legitimate interest in these individual credit assessments. U.K.

11. In particular, competent authorities shall verify that individual credit assessments are available to non-domestic parties on equivalent terms as to domestic credit institutions having a legitimate interest in these individual credit assessments. U.K.

3. ‘MAPPING’ U.K.

12. In order to differentiate between the relative degrees of risk expressed by each credit assessment, competent authorities shall consider quantitative factors such as the long-term default rate associated with all items assigned the same credit assessment. For recently established ECAIs and for those that have compiled only a short record of default data, competent authorities shall ask the ECAI what it believes to be the long-term default rate associated with all items assigned the same credit assessment. U.K.

13. In order to differentiate between the relative degrees of risk expressed by each credit assessment, competent authorities shall consider qualitative factors such as the pool of issuers that the ECAI covers, the range of credit assessments that the ECAI assigns, each credit assessment meaning and the ECAI's definition of default. U.K.

14. Competent authorities shall compare default rates experienced for each credit assessment of a particular ECAI and compare them with a benchmark built on the basis of default rates experienced by other ECAIs on a population of issuers that the competent authorities believes to present an equivalent level of credit risk. U.K.

15. When competent authorities believe that the default rates experienced for the credit assessment of a particular ECAI are materially and systematically higher then the benchmark, competent authorities shall assign a higher credit quality step in the credit quality assessment scale to the ECAI credit assessment. U.K.

16. When competent authorities have increased the associated risk weight for a specific credit assessment of a particular ECAI, if the ECAI demonstrates that the default rates experienced for its credit assessment are no longer materially and systematically higher than the benchmark, competent authorities may decide to restore the original credit quality step in the credit quality assessment scale for the ECAI credit assessment. U.K.