Status: Please note you should read all Brexit changes to the FCA Handbook and BTS alongside the main FCA transitional directions. Where these directions apply the 'standstill', firms have the choice between complying with the pre-IP completion day rules, or the post-IP completion day rules. To see a full list of Handbook modules affected, please see Annex B to the main FCA transitional directions.

Article 4 Assessing that a credit rating methodology is rigorous

  1. (1)

    A credit rating agency shall use and apply credit rating methodologies which:

    1. (a)

      contain clear and robust controls and processes for their developments and related approvals that allow suitable challenge;

    2. (b)

      incorporate all driving factors deemed relevant in determining creditworthiness of a rated entity or a financial instrument which shall be supported by statistical, historical experience or evidence;

    3. (c)

      consider the modelled relationship between rated entities or financial instruments of the same risk factor and risk factors to which the credit rating methodologies are sensitive;

    4. (d)

      incorporate reliable, relevant and quality related analytical models, key credit rating assumptions and criteria where these are in place.

  2. (2)

    A credit rating agency shall list and provide a detailed explanation of the following points with regard to the credit rating methodologies used regarding:

    1. (a)

      each qualitative factor, including the scope of qualitative judgement for that factor;

    2. (b)

      each quantitative factor, including key variables, data sources, key assumptions, modelling and quantitative techniques.

  3. (3)

    The detailed explanation referred to in paragraph 2 shall include the following:

    1. (a)

      a statement of the importance of each qualitative or quantitative factor used within that credit rating methodology including, where relevant, a description of and justification for related weightings assigned to those factors and their impact on credit ratings;

    2. (b)

      an assessment of the relationship between the key assumptions used in that credit rating methodology and the critical risk factors derived from macroeconomic or financial data; and

    3. (c)

      an assessment of the relationship between the key assumptions used in credit rating methodology and the volatility of credit ratings produced by that methodology over time.

  4. (4)

    A credit rating agency shall use credit rating methodologies and their associated analytical models, key credit rating assumptions and criteria that promptly incorporate findings or outcomes from an internal review or a monitoring review undertaken by one or more of the following:

    1. (a)

      the credit rating agency’s independent members of the board;

    2. (b)

      the credit rating agency’s review function;

    3. (c)

      any other relevant person or committee involved in the monitoring and reviewing of credit rating methodologies.