The new European Supervisory Authorities, which came blinking into the sunlight on 1 January 2011, were created with supervisory powers and regulatory roles. The day-to-day supervision of financial market participants will be carried out at the national level, the European Supervisory Authorities (ESAs) supervising indirectly by facilitating coordination and cooperation between national authorities. In relation to their regulatory role, the ESAs have been given the power to draft technical standards and issue guidelines and recommendations to the European Commission.

The only current exception to this is ESMA and the CRAs.

The European Securities and Markets Authority (ESMA) has been granted direct supervisory powers over credit rating agencies (CRAs), and Steven Maijoor (Chair of ESMA) announced recently that he viewed it as essential that ESMA builds effective supervision of CRAs, partly because this will "set the benchmark for the future".

As part of this building process, ESMA has published a Consultation Paper on the interpretation of Article 4(3) of the Regulation on CRAs (the Regulation), which provides that ratings issued outside the EU can be used inside the EU if they fulfil the endorsement regime under Article 4(3).

The current market interpretation of Article 4(3) is that to fulfil the endorsement regime the conduct of a third country CRA must be such that the issuing of the credit rating fulfils EU-equivalent requirements, with the emphasis on conduct and fulfilling. So far so good. ESMA's recent consultation, however, proposes that Article 4(3) should be interpreted such that any third country CRA must operate within a regime of enforceable rules that are as stringent as the ones that exist in Europe.

The responses to this consultation make interesting reading. Of the 15 respondents, 13 challenged ESMA's interpretation. The two non-dissenters accepted ESMA's interpretation, but with the caveat that ESMA's current timescale – to bring its new interpretation into force by 7 June 2011 – was unworkable, and should be extended by a year to 18 months. The dissenters based their objection largely on the fact that nowhere in the world – with the exception of Japan – has there been found a regime of CRA regulation that is equivalent to Europe's. As such, they felt, to require third country ratings to be issued in such a regime was "too stringent".

It was surprising to see the regulator and the market participants take such contradictory stances and it will be interesting to see the final interpretation of Article 4(3) adopted by ESMA. However, it may be even more interesting to see if, in its regulatory role, ESMA takes such a hard line in the interpretation of third country provisions in other EU legislation, such as the Alternative Investment Fund Managers Directive.