The European Securities and Markets Authority (ESMA) has published its Discussion Paper (DP) on the validation and review of Credit Rating Agencies’ (CRAs) methodologies.
The DP provides background on validation practices in the credit rating industry, shares good practice observed by ESMA in its recent supervisory investigation in validation and seeks stakeholders’ views on the validation and review of CRAs’ methodologies.
In particular, the DP requests views on how CRAs should demonstrate rating methodologies’ ‘discriminatory power’, ‘historical robustness’, ‘predictive power’ or, where there is limited quantitative evidence, that the methodologies are ‘sensible predictors of credit worthiness’. In addition, the DP asks how CRAs should meet the requirement in both Articles 7 and 8 of Commission Delegated Regulation (EU) No 447/2012 on rating methodologies that the CRAs shall have ‘processes in place to ensure that systemic credit rating anomalies highlighted by back-testing are identified and are appropriately addressed’.
The purpose of this DP is to help ESMA develop further its views on the quantitative and qualitative techniques used as part of the validation of methodologies required under the CRA Regulation.
ESMA will hold an open hearing on 25 January 2016 and the consultation will close on 19 February 2016.