Citing the growing use of credit ratings that aren’t publicly disclosed, the European Securities and Markets Authority (ESMA) has launched a consultation on the potential risks and benefits of ratings that receive limited distribution.
The regulator is seeking feedback, including data and analysis, on the purpose of credit ratings that are either solely for private use, or distributed to a limited set of subscribers — and the risks that may arise from disparate access to rating information compared with publicly-disclosed ratings.
In a notice issued Thursday, ESMA said the growing use of private ratings “raises questions about the purposes and market needs these products are intended to serve; how they are produced, distributed and used in practice; and the potential benefits and risks associated with selective access to rating information.”
In particular, it’s seeking insight into how the limited distribution of credit ratings “may affect diligence and market discipline” — and how these ratings are used by investors and others to support credit assessments and investment decision-making.
Among other things, ESMA said it’s interested in understanding how these products are designed and used in practice, “including whether selective access to rating information affects transparency, comparability and rating quality.”
It’s also seeking to understand how safeguards — such as conflict of interest, disclosure and distribution controls, governance mechanisms and methodologies — are used to mitigate potential risks.
The consultation is open until May 31.
ESMA said it’ll review the feedback generated by the consultation in the second quarter, with the aim of determining whether reforms are needed to address the growing use of private ratings.