Credit rating agencies: ESMA publishes guidelines on methodologies

ESMA has published its final guidelines on the validation and review of credit rating agencies' (CRAs') methodologies. The guidelines clarify how CRAs should validate and review their methodologies to help protect investors and financial stability.

The guidelines aim to increase the quality of the quantitative measures used by requiring CRAs to review their methodologies':

• discriminatory power, meaning their ability to rank the rated entities in accordance to their future status (defaulted or not defaulted) at a predefined time horizon;
• predictive power, by comparing the expected behaviour of the credit ratings to the observed results; and
• historical robustness, through the assessment of other elements of the methodology such as the stability of the credit ratings assigned by the methodology.

The guidelines take effect on 23 May 2017.