COB 8 COB 8 Specific Rules – Operating A Credit Rating Agency
COB 8.1 COB 8.1 Application
COB 8.1.1 COB 8.1.1(1) This chapter applies to every
Personwho carries on, or intends to carry on, the Financial Serviceof Operating a Credit Rating Agencyin or from the DIFC.(2) In this chapter, where a reference is made to a Rating Subjectwhich is a credit commitment, a debt or a debt-like Investment referred to in GEN Rule 2.27.1(3)(b) or (c), that reference is to be read, where the context requires, as a reference to the Personresponsible for obtaining the Credit Rating.
COB 8.1.1 Guidance1. The
Financial Serviceof Operating a Credit Rating Agencyis defined in GEN Rule 2.27.1. This chapter contains the specific conduct requirements that apply to Personscarrying on the Financial Serviceof Operating a Credit Rating Agency.
Code of conduct/ethics2. The outcome intended by some of the specific conduct requirements in this chapter can be achieved by adopting a code of conduct/ethics. Whilst not proposing to prescribe that a
Credit Rating Agencymust have a code of conduct/ethics, a Credit Rating Agencyshould consider, particularly where noted in relation to specific Rules, adopting such a code as a means of achieving the outcome intended by the relevant requirements. However, where a Credit Rating Agencydoes not adopt such a code, the onus is on the Credit Rating Agencyto demonstrate how it achieves compliance with the relevant requirements through other means.
Persons responsible for obtaining a Credit Rating3. Not all
Rating Subjectsare bodies corporate. For example, Credit Ratingscan be provided in respect of a credit commitment given by a Person, or a debt or debt-like Investment. In such instances, where a Rule in this chapter requires the Rating Subjectto carry out some activity, such a reference is to be read, pursuant to COB Rule 8.1.1(2), as a reference to the Personwho is responsible for obtaining the Credit Rating. Such a Personwould generally be the originator, arranger or sponsor of the relevant financial product which is being rated. The Credit Rating Agencyshould clearly identify the Personresponsible for a Rating Subjectbefore proceeding with its Credit Rating Activitiesrelating to that Rating Subject.4. However, there is no restriction against more than one Personbeing identified as Personsresponsible for obtaining a Credit Ratingrelating to a Rating Subject. In such cases, a Credit Rating Agencyshould clearly identify those Personsas responsible Personsrelating to the relevant Rating Subject.
COB 8.2 COB 8.2 Additional Principles for Credit Rating Agencies
COB 8.2 Guidance
Principle 1 – Quality and integrity
Credit Rating Agencymust take all reasonable steps to ensure that its Credit Ratingsare well founded and are based on a fair and thorough analysis of all relevant information which is reasonably known or available to the Credit Rating Agency.
Principle 2 – Independence and conflicts of interest
Credit Rating Agencymust take all reasonable steps to ensure that its decisions relating to Credit Ratingsare independent and free from political or economic pressures and not affected by conflicts of interest arising due to its ownership structure or business or other activities or conflicts of interest of its Employees.
Principle 3 – Transparency and disclosure
COB 8.2.3 COB 8.2.3
Credit Rating Agencymust take all reasonable steps to ensure that it conducts its Credit Rating Activitiesin a transparent and responsible manner.
COB 8.2.3 Guidance
Acting in a responsible manner means that a
Credit Rating Agencyundertakes the level of due diligence and care expected of an entity undertaking similar business in conducting its Credit Rating Activities. What is reasonable would depend on the nature, scale and complexity of its operations, including models and methodologies it has adopted in order to formulate Credit Ratings.
COB 8.3 COB 8.3 Quality of the rating process
Policies and procedures
COB 8.3.1 COB 8.3.1(1) A
Credit Rating Agencymust adopt, implement and enforce policies, procedures and controls that are adequate to ensure that:(a) its Credit Ratingsare based on a thorough and fair analysis of all the Relevant Information;(b) it has clearly defined methodologies and models for the purposes of preparing and reviewing Credit Ratings; and(c) its Rating Analysts, in preparing and reviewing Credit Ratings, adhere to the relevant methodologies and models adopted by the Credit Rating Agency, including any updates of such methodologies and models.(2) For the purposes of (1)(a), Relevant Informationis information which is:(a) reasonably known or available to the Credit Rating Agency; and(b) required, pursuant to the established rating methodologies and models adopted by the Credit Rating Agency.(3) For the purposes of (1)(c), a Rating Analystmeans an Employeeof a Credit Rating Agencywho performs analytical functions in relation to the preparation or review of a Credit Rating.(4) A Credit Rating Agencymust have adequate mechanisms to monitor whether its policies, procedures and controls are implemented in such a way so as to ensure that they operate, on an on-going basis, effectively and as intended.
COB 8.3.1 Guidance
Application to Groups and Branches1. Where a
Credit Rating Agencyis a member of a Group, the Credit Rating Agencymay rely on the policies, procedures and controls adopted at the group-wide level. Where this is the case, the Credit Rating Agencyshould ensure that the group-wide policies, procedures and controls are consistent with the requirements applicable to it and do not constrain its ability to comply with the applicable requirements in the DIFC.2. In the case of Branch operations, the DFSA will only grant an authorisation to conduct the Financial Serviceof Operating a Credit Rating Agencywhere it is satisfied with the adequacy of the home jurisdiction regulation of the relevant legal entity.3. Considerations set out in Guidance No 1 and 2 are equally relevant to the other requirements applicable to CRAs which are set out in this chapter.
Periodic review4. A
Credit Rating Agencyshould ensure that there is a formal and rigorous periodic review (at least annually) of the effectiveness of its systems and controls, including the methodologies and models it uses, to ensure that they remain effective and adequate in light of factors such as changing market conditions and practices and matters that have a material impact on the users of Credit Ratings.5. Such a review should be carried out by individuals who are not involved in the day-today management or operations of the Credit Rating Agency. Taking into account the nature, scale and complexity of its business, a Credit Rating Agencymay undertake such a review through a designated function at the group-wide level, or using external consultants. The DFSA expects the findings of such a review to be made available to the Governing Bodyand the senior management of the Credit Rating Agency, and that any inadequacies identified are promptly and effectively addressed.
Analysts6. By definition, the
Employeesof a Credit Rating Agencyinclude Rating Analystswho are either employed by the Credit Rating Agencyor appointed under a contract for services to perform analytical functions in relation to the preparation of Credit Ratings. Such appointed Rating Analystsmay, in the case of a Credit Rating Agencywhich is part of a Group, be employed by another entity within the Group. In that case, the Credit Rating Agencyshould ensure that such Rating Analystscomply with the applicable DFSA Rules when conducting Credit Rating Activitieson its behalf.
Relevant Information7. See Guidance under Rule 8.3.4.
Methodologies and models
COB 8.3.2 COB 8.3.2
For the purposes of producing and reviewing
Credit Ratings, a Credit Rating Agencymust adopt and use rating methodologies and models, including any key rating assumptions, which:(a) are rigorous and systematic;(b) to the extent possible, result in Credit Ratingsthat can be subjected to some form of objective validation based on historical experience;(c) are subject to periodic review as appropriate; and(d) are made public, including any changes made to such methodologies and models.
COB 8.3.2 Guidance1. A
Credit Rating Agencywill need to establish proper procedures for the regular review of its methodologies and models, including any key rating assumptions used in such methodologies and models, in order to be able to properly assess the Relevant Informationand prepare credible and high quality Credit Ratings. Any changes to the methodologies and models should incorporate cumulative experience gained through on-going market surveillance.2. Where any material modifications are made to the methodologies or models used by the Credit Rating Agency, it should make prior disclosure to the public of such modifications before applying the modified methodologies and models, especially to existing Credit Ratings.3. A Credit Rating Agencyshould assess whether existing methodologies and models for providing a Credit Ratingin respect of structured financial products remain appropriate where the risk characteristics of the assets underlying a structured product change materially.
COB 8.3.3 COB 8.3.3
Credit Rating Agencymust ensure that its Rating Analysts:(a) have adequate and appropriate knowledge and experience to carry out Credit Rating Activitiesassigned to them;(b) have access to, and use, all the Relevant Information;(c) apply the relevant methodologies and models in a transparent and consistent manner;(d) act without bias in carrying out their functions; and(e) observe high standards of integrity.
COB 8.3.3 Guidance1. See Rules GEN 5.3.18 and GEN 5.3.19 with regard to the assessment that a
Credit Rating Agency, as an Authorised Firm, needs to undertake to ensure that its Employees(including Rating Analysts) are fit and proper and have adequate competencies in order to carry out their functions.2. A Credit Rating Agencyshould structure its rating teams in such a way so as to promote continuity of adequate skills and expertise within a relevant team, and avoidance of bias in the preparation or review of a Credit Rating. For the purpose of promoting objectivity and lack of bias in preparing or reviewing Credit Ratings, measures such as periodic rotation of Rating Analysts, as appropriate, should be considered.
COB 8.3.4 COB 8.3.4
Credit Rating Agencymust ensure that:(a) the role and responsibility of assigning a Credit Ratingrests clearly on the Credit Rating Agencyand not on any of its Rating Analysts;(b) the information it uses for the purposes of preparing or reviewing a Credit Ratingis of sufficient quality to support a credible Credit Rating;(c) its Credit Ratings:(i) reflect all the Relevant Information;(ii) do not contain any misrepresentations, and are not misleading in respect of the creditworthiness of the Rating Subject; and(iii) contain clear and prominent statements if they are premised on limited historical data, are not subject to on-going surveillance or are subject to any other limitation which has or may have a material impact on the relevant Credit Rating; and(d) it does not produce a Credit Ratingwhere it has reasonable doubts as to whether a credible Credit Ratingcan be produced due to the complexity of, or the lack of adequate information relating to, a potential Rating Subject.
COB 8.3.4 Guidance
Relevant Informationis defined in COB Rule 8.3.1(2). A Credit Rating Agencyshould adopt adequate measures to ensure that the quality of information it uses is reliable to support a credible Credit Rating. Such measures may include:a. relying on independently audited financial statements and public disclosures where available;b. conducting random sampling examination of the information received; andc. having contractual arrangements with Personswho request a Credit Rating, or any third party source from whom information is obtained, that render such Personsliable if they knowingly provide materially false or misleading information, or fail to conduct due diligence they are reasonably expected to carry out to verify the accuracy of the Relevant Information.
On-going monitoring and review of the Credit Ratings
COB 8.3.5 COB 8.3.5(1) Unless a
Credit Ratingclearly states that it will not be subject to ongoing review, a Credit Rating Agencymust:(a) have adequate personnel and financial resources committed for the on-going surveillance of the creditworthiness of the Rating Subject;(b) ensure a review of a Credit Ratingis undertaken regularly, and in any case, promptly upon becoming aware of information reasonably likely to result in a Rating Action; and(c) take any appropriate Rating Actionpromptly.(2) For the purposes of (1), a Rating Actionis an upward or downward move of a Credit Rating, a confirmation of an existing Credit Ratingor a withdrawal of a Credit Rating.(3) Following the review in (1)(b), a Credit Rating Agencymust issue a notice of its Rating Action. Such a notice must:(a) be promptly disseminated to the public or distributed by subscription, as applicable; and(b) contain a clear and prominent statement specifying:(i) the date on which the Credit Ratingwas last updated; and(ii) the date on which the new Credit Ratingis effective; or(iii) if the Credit Ratingis withdrawn, the effective date from which it is withdrawn and the reasons for such withdrawal.(4) Without prejudice to the obligation to conduct on-going surveillance and review of a Credit Rating, where a Credit Rating Agencyforms an opinion on reasonable grounds that it does not have adequate or credible Relevant Information, it must not support an existing Credit Rating, and must withdraw such a Credit Ratingimmediately. Where it does so, it must issue a notice of withdrawal of the Credit Ratingin accordance with (3).
COB 8.3.5 Guidance1. A
Credit Rating Agencymay use separate teams of Rating Analystsfor determining initial Credit Ratingsand subsequent review of such ratings. It should ensure that each team has the requisite level of expertise and resources to perform its functions effectively.2. A Credit Rating Agencyshould undertake both periodic and ad hoc reviews of its Credit Ratingsas appropriate to the nature of the Rating Subject, the market conditions and reasonable expectations of users of such Credit Ratings. Such reviews should apply any changes in its rating methodologies and models, including rating assumptions.3. A Credit Rating Agencyshould have clear and published parameters relating to the review of Credit Ratings, including, to the extent possible, when it will undertake any ad hoc reviews. Such parameters should include any material change in the risk characteristics of the Rating Subjector significant changes in the markets which relate to, or affect, the Rating Subject.4. A Credit Rating Agencymay place under surveillance a Rating Subjectupon becoming aware of any material changes relating to, or affecting, it. A Credit Rating Agencyshould consider whether, in such circumstances, it is appropriate to give any prior notice that the relevant Rating Subjectis under surveillance.
COB 8.4 COB 8.4 Integrity of the credit rating process
Policies and procedures
COB 8.4.1 COB 8.4.1
To promote integrity of its credit rating process, a
Credit Rating Agencymust implement adequate policies, procedures and controls to ensure that it and its Employees:(a) comply with all the applicable legal and other requirements, including those relating to its Credit Rating Activities, regardless of where such activities are carried on;(b) deal fairly and honestly with Rating Subjectsand Personsusing or relying on its Credit Ratings, such as investors and other market participants, including the public; and(c) do not, either expressly or implicitly, give any assurances or guarantees of a particular rating outcome before undertaking a full analysis of the Relevant Informationin accordance with the applicable methodologies and models.
COB 8.4.1 Guidance1. Where a
Credit Rating Agencyundertakes activities in a number of jurisdictions, the effect of COB Rule 8.4.1 is that it will need to ensure that respective obligations arising in all those jurisdictions are effectively met as appropriate. In doing so, it will need to take account of the application of the DFSA regime to Groupand Branchoperations (see Guidance 1 and 2 under Rule 8.3.1).2. A Credit Rating Agencyis required, under GEN Rule 7.5.1(2), to have an Authorised Individualas its Compliance Officer. It is the responsibility of the Compliance Officerto ensure proper observance by the Credit Rating Agencyand its Employees, particularly Rating Analysts, of the applicable legal and other obligations, including any code of conduct/ethics adopted by the Credit Rating Agency. Such a code should generally set out matters relating to unacceptable and unethical behaviour which should be avoided by its Employees. See also Guidance 2 under section 8.1.1.
COB 8.5 COB 8.5 Conflicts of interest and independence
COB 8.5 Guidance1. There is a significant overlap between conflicts of interest and lack of independence of
Employees(who include Rating Analysts). Therefore, some of the requirements set out in this section, while promoting independence of Credit Rating Agencies, are equally relevant for the purpose of addressing conflicts of interest. For convenience, they are set out under distinct headings.2. The more detailed requirements set out in this section are designed to enable a Credit Rating Agencyto meet the requirements set out under COB Rule 8.2.2 (Principle 2 – Independence and transparency). For this purpose, a Credit Rating Agencyshould have a detailed code of conduct/ethics that sets out its policies and procedures for meeting the requirements including those in this module covering aspects relating to conflicts of interest, as well as independence, of its Employees. See also Guidance 2 under section 8.1.1.
Policies and procedures
COB 8.5.1 COB 8.5.1
Credit Rating Agencymust have adequate, clear and well documented policies, procedures and controls to:(a) promote high standards of care, independence and objectivity in decision making by its Employees;(b) ensure that its Credit Ratingsare not influenced by any considerations other than those which are relevant in accordance with its published methodologies and models as applicable to the particular Rating Subject; and(c) identify, and eliminate or manage, as appropriate, including through disclosure, any conflicts of interest that may influence its Credit Ratings, including those conflicts of interest which may influence its Employeeswho are involved in producing or reviewing Credit Ratings.
COB 8.5.1 Guidance1. A
Credit Rating Agencyshould neither take, nor forbear or refrain from taking, any Rating Actionbased on its potential effect (economic, political or otherwise) on the Credit Rating Agency, its Rating Subjects, investors or any other market participants (for example, the existence or non-existence of business relationship between the Credit Rating Agencyor a member of its Groupand the Rating Subject).2. The determination of a Credit Ratingshould be influenced only by factors relevant to the credit assessment in accordance with its published methodologies and models as applicable to the particular Rating Subject.3. A Credit Rating Agencyshould, at a minimum, set out clearly when conflicts of interest arise and, in relation to what type of business or commercial dealings or transactions, and between whom, such conflicts of interest can arise.4. Where the Rating Subject(such as a government) has, or is simultaneously pursuing, any oversight function relating to the Credit Rating Agency, the Credit Rating Agencyshould avoid assigning Employeesinvolved in the Credit Ratingof the Rating Subjectfor also discharging any function relating to the Credit Rating Agency'soversight.
Provision of consultancy and ancillary services
COB 8.5.2 COB 8.5.2(1) A
Credit Rating Agencymust not provide to a Rating Subjector a Related Partyof a Rating Subjectconsultancy or advisory services relating to the corporate or legal structure, assets, liabilities or activities of such Rating Subjector Related Party.(2) For the purposes of (1), a Related Partyof a Rating Subjectis:(a) an undertaking which is in the same Groupas the Rating Subject;(b) any Personwho interacts with the Credit Rating Agencyin respect of the Credit Rating; or(c) any Personwho has a significant business or other relationship with the Rating Subjector any Personreferred to in (a) or (b).(3) Without prejudice to (1), a Credit Rating Agencymay provide services which are ancillary to its Credit Rating Activitiesto a Rating Subjector a Related Partyof the Rating Subjectwhere it:(a) has a clear definition of what services it considers as ancillary services;(b) documents why such services are considered not to raise any conflicts of interest with its Credit Rating Activities; and(c) has in place adequate mechanisms to minimise the potential for any conflicts of interest arising.(4) If a member of the Groupin which the Credit Rating Agencyis also a member provides services of the kind referred to in (1) to a Rating Subjectof the Credit Rating Agencyor a Related Partyof such a Rating Subject, such services must be operationally and functionally separated from the business of the Credit Rating Agency.
COB 8.5.2 Guidance1. The prohibition in COB Rule 8.5.2(1) includes, for example, making proposals or recommendations regarding the design or structure of
Rating Subjects, including suggestions as to how a desired rating could be achieved. Therefore, such services cannot be provided.2. Some of the activities which are prohibited under COB Rule 8.5.2(1) may constitute a Financial Serviceother than Operating a Credit Rating Agency. Even if a Credit Rating Agencyhas an authorisation to provide such a Financial Service, it is prevented from providing such services to a Rating Subjector a Related Partybecause of the prohibition in COB Rule 8.5.2(1).3. Ancillary services referred to in COB Rule 8.5.2(3) include, for example, market forecasts, estimates of economic trends, pricing analysis and other general data analysis as well as related distribution services. These services can be provided to Rating Subjectsand their Related Partieswhere the requirements in COB Rule 8.5.2(3) are met. These services are also unlikely to constitute other Financial Services.4. A Credit Rating Agencyshould separate operationally its Credit Rating Activitiesfrom any ancillary services it provides in accordance with COB Rule 8.5.2(3). For example, Rating Analystsand other key individuals involved in Credit Rating Activitiesshould not also be involved in the provision of such services.5. Where a Groupmember provides to a Rating Subjectof a Credit Rating Agencyany ancillary services, the Credit Rating Agencyand the Groupmember should not share Employeesor premises to ensure operational separation.
Credit Rating Agency fees
Credit Rating Agencymust not enter into fee arrangements for providing Credit Ratingswhere the fee depends on the rating outcome or on any other result or outcome of the Credit Rating Activities.
Other conflicts of interest
COB 8.5.4 COB 8.5.4
Credit Rating Agencymust not engage in any securities or derivatives transactions with, relating to, or in respect of, a Rating Subjector its Related Partyin circumstances where such a transaction would amount to, or pose a risk of, a conflict of interest with respect to its Credit Rating Activities.
COB 8.5.4 Guidance
Examples of investments which would not present conflicts of interest include investments in collective investment funds which might contain investments in a
Rating Subjector its Related Party.
COB 8.6 COB 8.6 Independence of Rating Analysts and other Employees
Policies and procedures
Credit Rating Agencymust have adequate policies, procedures and controls to ensure that its Employees, as far as practicable, avoid relationships which compromise or are reasonably likely to compromise the independence and objectivity of its Credit Rating Activities.
COB 8.6.2 COB 8.6.2(1) A
Credit Rating Agencymust ensure that its Employeeswho are directly involved in preparing or reviewing a Credit Ratingof a Rating Subjectdo not initiate, or participate in, discussions regarding fees or payments with the Rating Subjector a Related Partyof the Rating Subject.(2) A Credit Rating Agencymust ensure that its Employeeswho are directly involved in preparing or reviewing a Credit Ratingof a Rating Subject, and their Close Relatives, do not engage in any securities or derivative transactions with, relating to, or in respect of, the Rating Subjector a Related Partyof the Rating Subjectin circumstances where such a transaction would amount to, or pose a risk of, a conflict of interest with respect to the activities of the relevant Employee.
COB 8.6.2 Guidance
This Rule should be read in conjunction with COB Rule 8.2.2, pursuant to which,
Employeesof a Credit Rating Agencyneed to be independent and free from conflicts of interest. Such conflicts of interest include the appearance of being compromised as result of a personal relationship which he or his Close Relativeshave with a Rating Subjector a Related Partyof a Rating Subject. The Credit Rating Agency'spolicies and procedures should clearly set out where a personal relationship should be considered to create the potential for any real or apparent conflicts of interest and therefore be subject to the conflicts of interest provisions.
COB 8.6.3 COB 8.6.3(1) A
Credit Rating Agencymust ensure that its Employeeswho have a relevant material interest in a Rating Subjector its Related Partyare not involved in the preparation or review of the relevant Credit Ratingor able to influence that process.(2) For the purposes of COB Rule 8.6.3(1), an Employeeof a Credit Rating Agencyhas a material interest in a Rating Subjectif the Employee:(a) owns a security or a derivative relating to a Rating Subjector its Related Party, other than holdings in diversified collective investment funds;(b) has had a recent employment or other significant business relationship with a Rating Subjector its Related Partywhich may cause, or may be perceived as causing, conflicts of interest; or(c) has a Close Relativewho is currently employed by a Rating Subjector its Related Party.
COB 8.6.3 Guidance
Credit Rating Agencyshould, where it has a code of conduct/ethics, set out unacceptable conduct for Employees, such as soliciting money, gifts, or favours from anyone with whom the Credit Rating Agencydoes business, or accepting gifts offered in the form of cash or any gifts which are reasonably capable of influencing their opinions or decisions relating to Credit Ratings. There should also be guidance relating to minimal value of gifts or benefits that may be accepted, and clearance and disclosure procedures relating to such gifts and benefits. See also Guidance 2 under Rule 8.1.1.
Credit Rating Agencymust establish policies and procedures for reviewing the past work of a Rating Analystwho leaves the employment of the firm to join a Rating Subjector its Related Partywhere the Rating Analysthad been involved in producing or reviewing the Credit Ratingassigned to such Rating Subjector Related Party.
Remuneration and reporting lines
Remuneration and reporting lines Guidance
Credit Rating Agencyis required, pursuant to GEN Rule 5.3.31, to have remuneration structures and strategies which, amongst other things, are consistent with the business objectives and identified risk parameters within which the firm operates, and provide for effective alignment of risk outcomes and the roles and functions of the relevant Employees. The requirements set out in this section are designed to augment those remuneration requirements set out in GEN.
Credit Rating Agencymust ensure that Employeesinvolved in the provision of Credit Ratingshave reporting lines and remuneration arrangements that are designed to eliminate, or effectively manage, actual and potential conflicts of interest.
COB 8.6.6 COB 8.6.6
Credit Rating Agencymust ensure that its Employeesare not remunerated, or their performance evaluated, based on the amount of revenue generated or expected from the Credit Ratingsin which the Employeewas involved.
COB 8.6.6 Guidance
Employeesintended to be covered by this Rule are Rating Analystsand other Employeeswho are directly involved in producing or reviewing a Credit Rating, or who are able to influence the credit rating process (such as the senior management).
Credit Rating Agencymust conduct formal and periodic reviews of its remuneration policies and practices relating to Employeeswho participate in, or who might otherwise have an effect on, the rating process to ensure that those policies and practices do not compromise the objectivity of the Credit Rating Activities.
COB 8.7 COB 8.7 Transparency and disclosure
Policies and procedures
COB 8.7.1 COB 8.7.1(1) A
Credit Rating Agencymust, subject to (2), have adequate policies, procedures and controls to ensure that it discloses in a timely manner:(a) its Credit Ratingsand any updates thereof;(b) its policies for distributing Credit Ratingsand updates thereof;(c) the methodologies and models used and key assumptions made in preparing its Credit Ratingsand any updates thereof; and(d) any other significant element relating to (a), (b) or (c) above.(2) A Credit Rating Agencyis not required to disclose information where the information is subject to confidentiality requirements.
COB 8.7.1 Guidance1. The level of detail required in the disclosure of information concerning methodologies, models and key assumptions should be such as to give adequate information to the users of
Credit Ratingsto enable them to perform their own due diligence when assessing whether, or to what extent, reliance can be placed on those Credit Ratings(see COB Rule 8.8.1). Disclosure of information must not, however, reveal confidential information of, or relating to, the Rating Subjector its Grouppursuant to COB Rule 220.127.116.11. The information referred to in Guidance No. 1 should generally include the meaning of each rating category and the definition of default or recovery, and the time horizon the Credit Rating Agencyused when making a Credit Rating.3. A Credit Rating Agencyshould adequately and clearly disclose applicable risks which may affect a Credit Rating, including a sensitivity analysis of the relevant assumptions and an explanation of how various market developments affect the parameters built into the methodologies and models and may influence or impinge on the Credit Rating(for example volatility).4. If the nature of a Credit Ratingor other circumstances make a historical default rate inappropriate or otherwise likely to mislead investors, the Credit Rating Agencyshould provide appropriate clarifications.5. A Credit Rating Agencyshould provide information to assist users of its Credit Ratingsto develop a greater understanding of what a Credit Ratingis, and the limitations on the use of Credit Ratingswith respect to the particular type of financial product that the Credit Rating Agencyrates. A Credit Rating Agencyshould clearly indicate the attributes and limitations of each Credit Rating, and the limits to which the firm verifies information provided to it by the Rating Subject, its Related Partyor any external source.
Communication of information
COB 8.7.2 COB 8.7.2
Credit Rating Agencymust ensure that its communications relating to its Credit Ratings, Credit Rating Activitiesand its other business are clear, fair and not misleading.
COB 8.7.2 Guidance1. A
Credit Rating Agencyshould, taking into account the nature, scale and complexity of its operations, have a function within its organisation charged with the responsibility for communicating with market participants and the public on questions, concerns or complaints it receives.2. The objective of this function should be to help ensure that the Credit Rating Agency'sofficers and management are informed of those issues that such officers and management would reasonably need to be informed about when setting and implementing the Credit Rating Agency'ssystems and controls.
COB 8.8 COB 8.8 Disclosure and presentation of Credit Ratings
COB 8.8.1 COB 8.8.1(1) Subject to the confidentiality requirements applicable to a
Credit Rating Agency, it must ensure that its Credit Ratings:(a) are published promptly, and as far as practicable, on a n ive basis and free of charge;(b) contain sufficient information to enable users of such Credit Ratingsto understand how the Credit Ratingwas reached, including information relating to the methodologies, models and key underlying assumptions used;(c) contain a clear statement if the Credit Ratingis initiated by the Credit Rating Agencyon its own initiative (unsolicited), and information relating to the Credit Rating Agency'spolicy relating to providing unsolicited Credit Ratings;(d) contain sufficient information about the historical default rates of its Credit Ratingswhich are of the same category as the Credit Ratingbeing published so that interested parties can understand the historical performance of its Credit Ratings; and(e) include any other information relevant to the particular Credit Rating, as specified in this module.(2) A Credit Rating Agencymust ensure that any press release which accompanies a Credit Ratingcontains key elements underlying the Credit Rating.(3) Before publishing a new or an updated Credit Ratingor withdrawing a Credit Rating, the Credit Rating Agencymust, to the extent practicable and appropriate, give to the Rating Subjectsufficient advance notice to enable that Personto draw to the attention of the Credit Rating Agencyany factual errors on which the Credit Rating Agencymay have based the relevant Credit Rating.(4) Subject to the confidentiality requirements applicable to a Credit Rating Agency, any information which the Credit Rating Agencyis required to publish pursuant to any Rules must also be made available on the website of the relevant Credit Rating Agency.
COB 8.8.1 Guidance
In relation to Rule 8.8.1(3), a
Credit Rating Agencyshould inform the Rating Subjectat least 12 hours before publication of a new Credit Ratingor an update or withdrawal of an existing Credit Ratingof the principal grounds on which such Credit Ratingis based in order to give the Rating Subjectan opportunity to draw to the attention of the Credit Rating Agencyany factual errors. The Rating Subjecthas the meaning given to it in GEN Rule 2.27.1(3) and should be read in conjunction with COB Rule 8.1.1(2).
Specific Disclosure - Fees and Charges
COB 8.8.2(1) A
Credit Rating Agencymust include in its announcements relating to Credit Ratingsand its annual report the general nature of its arrangements relating to fees and charges with, or relating to, the Rating Subjectincluding:(a) whether the Credit Rating Agencyor any member of its Groupreceives any fees, charges or other monetary benefits which are unrelated to the provision by the Credit Rating Agencyof its Credit Ratings, and if so, the proportion of such benefits relating to the aggregate fees and charges in respect of the provision of Credit Ratings; and(b) if the Credit Rating Agencyreceives 10% or more of its aggregate annual revenue from a single Rating Subjector its Related Party, information about that source.(2) Where a Credit Rating Agencyis a member of a Group, the 10% aggregate annual income referred to in (1)(b) may be calculated by aggregating the net revenue of all Credit Rating Agencieswithin the Group.
Specific Disclosure – Structured financial products
COB 8.8.3 COB 8.8.3A
Credit Rating Agencymust, where the Rating Subjectis a structured financial product disclose in its Credit Ratingswhether the Relevant Informationis made publicly available by the Rating Subject, or whether all, or some of, such information remains non-public.
COB 8.8.3 Guidance1. The information which a
Credit Rating Agencyprovides relating to structured financial products should include sufficient information such as information relating to the profit and loss statement and cash flow analysis to enable users of the Credit Ratingsto understand the basis of the Credit Rating. Such information should also include the degree to which, in accordance with its analysis, the Credit Ratingis sensitive to changes in market conditions.2. A Credit Rating Agencyshould differentiate ratings of structured finance products from traditional corporate bond ratings, preferably through a different rating symbology. A Credit Rating Agencymust also disclose how this differentiation operates.3. A Credit Rating Agencyshould use reasonable efforts to encourage the Rating Subjectto disclose to the public all Relevant Information to enable investors and users of the Credit Ratingsto conduct their own due diligence relating to that product.
COB 8.9 COB 8.9 Confidential information
Credit Rating Agencymust have policies, procedures and controls to ensure that it and its Employeesdo not:(a) use any information given to or obtained by the Credit Rating Agencyon a confidential basis ("Confidential Information") for a purpose other than that for which it was given or obtained;(b) disclose the Confidential Informationto any other Person, except:(i) in accordance with (a);(ii) with the prior written consent of the Personto whom a duty of confidentiality in respect of such Confidential Informationis owed; or(iii) where obliged to do so by any legislation applicable to the Credit Rating Agency; and(c) disclose any pending Rating Actionexcept to the Rating Subjector as agreed with the Rating Subject.
Subject to COB Rule 8.9.1(b), a
Credit Rating Agencyand its Employeesmust not disclose Confidential Informationin any manner, including in press releases, through research conferences, to future employers, or in conversations with investors, other issuers, other persons, or by other means.
Credit Rating Agencymust have adequate measures to ensure that it and its Employees:(a) take all reasonable steps to protect all property and records belonging to or in possession of the Credit Rating Agencyagainst fraud, theft or misuse; and(b) do not share Confidential Informationentrusted to the Credit Rating Agencywith any third parties except where permitted under COB Rule 8.9.1(b).
COB 8.10 COB 8.10 Record keeping
COB 8.10.1 COB 8.10.1(1) A
Credit Rating Agencymust, for a minimum of six years, maintain sufficient records in relation to each activity and function of the Credit Rating Agencyand, where appropriate, audit trails of its Credit Rating Activities. These must include, where applicable, the following:(a) for each Credit Rating:(i) the identity of the Rating Analystsparticipating in the determination of the Credit Rating;(ii) the identity of the individuals who have approved the Credit Rating;(iii) information as to whether the Credit Ratingwas solicited or unsolicited;(iv) information to support the Credit Rating;(v) the Accounting Recordsrelating to fees and charges received from or in respect of the Rating Subject;(vi) the internal records and files, including non-public information and working papers, used to form the basis of any Credit Rating; and(vii) credit analysis and credit assessment reports including any internal records and non-public information and working papers used to form the basis of the opinions expressed in such reports;(b) the Accounting Recordsrelating to fees received from any person in relation to services provided by the Credit Rating Agency;(c) the Accounting Recordsfor each subscriber to the Credit Rating Agency'sservices;(d) the records documenting the established procedures, methodologies, models and assumptions used by the Credit Rating Agencyto determine Credit Ratings; and(e) copies of internal and external communications, including electronic communications, received and sent by the Credit Rating Agencyand its Employeesthat relate to Credit Rating Activities.(2) For the purposes of (1), the six year period commences from the date the Credit Ratingis disclosed to the public or distributed by subscription.
COB 8.10.1 Guidance1. Information to support a
Credit Ratingincludes information received from the Rating Subjector information obtained through publicly available sources or third parties and verification procedures adopted in relation to information such as those obtained from public sources or third parties. In accordance with GEN Rule 5.3.24, records should be kept in such a manner as to be readily accessible.2. Where a Credit Ratingis subject to on-going surveillance and review, the Credit Rating Agencyshould retain records required under COB Rule 8.10.1 in relation to the initial Credit Ratingas well as subsequent updates where such records are required to support the latest Credit Rating.