CRA Guidelines on the validation and review of methodologies now available in all EU languages

On 23 March 2017, the European Securities and Markets Authority (ESMA) has published the official translations of 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, furthering ESMA’s work towards CRAs improving the quality of credit rating methodologies and credit ratings for the purpose of protecting investors and financial stability.

The Guidelines will 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 become effective in two months from 23 March 2017..