Scope Ratings and covered bonds rated relatively highly by it are set to benefit from proposals released by European regulators yesterday (Wednesday) whereby ratings from the new entrant into the covered bond market are treated on a par with its more established peers for CRR and LCR purposes.

The Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA) yesterday published draft Implementing Technical Standards (ITS) on credit assessments by External Credit Assessment Institutions (ECAIs).

According to Michael Weigerding, research analyst at Commerzbank, Scope’s ratings right up to triple-A have for CRR purposes hitherto been restricted to being treated as credit quality Step (CQS) 2, whereas double-A or triple-A ratings of Moody’s, Standard & Poor’s, Fitch and DBRS translate into credit quality Step 1. He said that according to the proposals Scope’s ratings – and those of other new entrants – will until end-2018 be mapped to credit quality Steps on the same basis as its peers’.

“For agencies like Scope, whose history of default rates is limited due to their more recent market entry, the authorities relaxed the standard conditions and relied more on modelled than on actual default rates,” said Weigerding.

“This is an important step for Scope in catching up with other agencies,” he added.

By the cut-off of end-2018 Scope and any other rating agencies treated likewise have to accumulate more than 496 ratings in the AAA/AA range, with these not showing a different migration or default behaviour than the established players, if they are to retain the equivalent treatment, according to Karlo Fuchs, head of covered bond ratings at Scope.

“We appreciate that the EBA has not only taken quantitative but also qualitative elements into account and extended the CQS1 also to Scope,” he said. “The three year window until the next review will give us time to also demonstrate on a quantitative basis that our ratings and methodologies are on a par with the large three rating agencies.

“To maintain the validity of the mappings the ratings of all credit rating agencies should regularly be tested to ensure they meet their regulatory purposes, however,” added Fuchs.

Weigerding noted that beneficiaries could include Deutsche Bank mortgage and Santander public sector covered bonds, which were among 17 programmes rated AAA by Scope in its first ratings of covered bonds in September.

“Covered bonds for which Scope’s assessment serves as second-best rating could improve their standard risk weight or LCR level for instance,” he said.

Weigerding noted that Scope’s ratings are not yet recognised within the European Central Bank’s collateral framework and that the move will not affect CBPP3 eligibility.

“Scope has some way to go before being fully recognised in the covered bond market,” he added, also pointing out that the proposals are yet to be adopted by the European Commission.