Corporate Bond Market: The reference to rating scale in investment research under supervisory scrutiny

Summary: ESMA has indicated to some SSDA members that the reference to a rating scale to summarize credit quality in investment research could be considered as credit rating and as such reserved for registered credit rating agencies.

Investment research on corporate bonds in the Nordics has developed - over several years - as an important tool enabling medium and smaller sized corporates, to gain access to funding in the capital markets. Investment research on corporate bonds including the assessment of credit quality by reference to a rating scale, often referred to in the market as shadow rating, has provided a basis for investors to compare bonds and take a view on the appropriate risk premium.

In the aftermath of the financial crisis, the Credit Rating Agency Regulation ("CRAR") was conceived to regulate previously unregulated credit rating agencies. According to CRAR issuers of credit ratings shall be registered as Credit Rating Agencies. However, in Article 3(2) of CRAR there are specific exemptions for investment recommendations, investment research and/or opinions. Therefore Nordic market participants have continued to reference to rating scales in investment research after the regulation came into force. 

The Swedish Securities Dealers Association (SSDA) has been informed by some of its members that the European Securities and Markets Authority (ESMA) is currently pursuing an investigation on the reference to rating scales in investment research on corporate bonds. An outcome of this investigation could be that investment banks and investment firms will no longer be able to refer to rating scales when assessing credit quality of unrated corporate bond issuers.

The SSDA therefore believes it is important that market participants are informed of ESMAs investigation and are given the opportunity to discuss the potential effect of any change the investigation may result in.

For more information, please contact:

Kerstin Hermansson, 08-56 26 07 01 or Vigg Troedsson 08-56 26 07 02
Swedish Securities Dealers Association (SSDA) / Svenska Fondhandlareföreningen



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