European Union Transparency Report. January 2012

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2 This Transparency Report is published in accordance with Article 12 and Annex 1, Section E.II of the EU Regulation on Credit Rating Agencies ((EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies, as amended by Regulation (EU) No 513/2011 of the European Parliament and of the Council of 11 May 2011 (hereinafter referred to as the EU Regulation)). It provides information on the operations of Fitch Ratings in the EU for the fiscal year ending September

3 Table of Contents 1. Legal Structure and Ownership Internal Control Mechanisms Ensuring the Quality of Credit Rating Activities Information on Allocation of Staff Record Keeping Policy Outcome of the Annual Internal Review of the Compliance Function Management and Rating Analyst Rotation Policy Information on Revenue Governance Statement Appendix Tables to Governance Statement

4 1. Legal Structure and Ownership Legal Structure The Fitch Ratings group of companies established in the EU are listed below. Each of these companies is incorporated in accordance with applicable national law and registered under the EU Regulation. Fitch Ratings Limited - established in England Fitch Ratings CIS Limited - established in England Fitch France S.A.S. - established in France Fitch Deutschland GmbH - established in Germany Fitch Italia S.P.A. - established in Italy Fitch Polska S.A. - established in Poland Fitch Ratings España S.A.U. - established in Spain Fitch Ratings Limited operates largely in the United Kingdom, although it has branches in Sweden, Dubai, South Korea and Taiwan. Fitch Ratings CIS Limited operates solely via a branch office in Moscow. Each of the other companies listed has operations based entirely within its country of establishment. Ownership The only entity to hold a material stake in any of Fitch Ratings CIS Limited, Fitch France S.A.S., Fitch Deutschland GmbH, Fitch Italia S.P.A., Fitch Polska S.A. and Fitch Ratings España S.A. is Fitch Ratings Limited. In turn, the only entity to hold a material stake in Fitch Ratings Limited is Fitch, Inc., Fitch s American rating agency. Fitch Ratings Limited: ownership Fitch, Inc. 100% Fitch Ratings CIS Limited: ownership Fitch Ratings Limited 100% Fitch France S.A.S.: ownership Fitch Ratings Limited %, Fimalac S.A % Fitch Deutschland GmbH: ownership Fitch Ratings Limited 100% Fitch Italia S.P.A.: ownership Fitch Ratings Limited 97%, Fitch, Inc. 3% Fitch Polska S.A.: ownership Fitch Ratings Limited 100% Fitch Ratings España S.A.U.: ownership Fitch Ratings Limited 100% Fitch Ratings Limited is 100% owned by Fitch, Inc. Fitch, Inc., in turn is 100% owned by Fitch Group, Inc., a holding company, which in turn is 60% indirectly owned by Fimalac SA of France and 40% indirectly owned by the Hearst Corporation of the US. Fimalac SA is a holding company listed in Paris. It operates in the financial services sector through Fitch Group, the parent company of Fitch Ratings. It is also present in the real estate sector, mainly through North Colonnade Ltd (the owner of an office building in London). Alongside these businesses, Fimalac is developing diversified investments, mainly through its Fimalac Développement subsidiary. It maintains its ownership interest in the Fitch Group, Inc. through Fimalac Services Financiers, a holding company. The Hearst Corporation is a privately held diversified media company in the US. Its major interests include magazine, newspaper and business publishing, cable networks, television and radio broadcasting, internet businesses, TV production and distribution, newspaper features distribution and real estate. It maintains its ownership interest in the Fitch Group, Inc. through Hearst Ratings II, Inc., a single purpose subsidiary. 3

5 2. Internal Control Mechanisms Ensuring the Quality of Credit Rating Activities Policy Framework All Fitch policies and procedures, and any subsequent amendments to such policies and procedures, are designed to be consistent with Fitch s Code of Conduct, which incorporates the global best practices outlined in the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies, as well as any applicable credit rating agency regulations. During the policy formulation stage, input is gathered from all relevant constituents within Fitch including, where appropriate, the senior staff of the relevant analytical groups, the Legal Group, the Global Operations Management Group and the Global Compliance Group. Once the proposals are finalised, they are subject to review and approval or amendment by Fitch s Chief Executive Officer and a panel of designated senior officers. Fitch s policies are also subject to regular review and approval at board level. The objectives that the Internal Control Framework is intended to serve include adherence to such policies: a) Fitch s Code of Ethics, which includes the Code of Conduct and policies addressing the management of conflicts of interest. b) Internal ratings process manuals, which provide detailed instruction regarding the ratings creation process. c) Criteria management policies, which govern the development, application and testing of Fitch s analytical criteria. d) Policies setting forth the obligations and operations of the Credit Policy Group. Levels of Control Control is exercised by the following bodies: a) Directly by the supervisors within the analytical groups, supported by the Global Operations Management Group. b) The Credit Policy Group, led by the Chief Credit Officer. c) The Global Compliance Group. d) Executive Management. e) Each EU company board, including the Independent Directors within the Fitch Ratings Limited board. Fitch s core control functions the Global Compliance Group, Global Operations Management Group and Credit Policy Group are operated at a regional, rather than local, level with staff based in Fitch s London office providing support and oversight to all of the offices within the EU group. The Analytical Groups and Global Operations Management Overall responsibility for ensuing that Fitch s policies and procedures are followed lies with the senior managers of the individual groups within Fitch (Global Group Heads of the analytical groups and Regional Group Heads at a geographical/jurisdictional level). These managers receive support from the Global Operations Management Group, which provides policy training and develops a number of applications and management reports to encourage compliance and facilitate the manager s monitoring and review of the overall compliance of their group. 4

6 The Credit Policy Group The Credit Policy Group (CPG) is independent of the analytical rating groups and is comprised of Group Credit Officers, Regional Credit Officers, supporting quantitative analysts and a Credit Market Research team. CPG is responsible for ensuring that rating criteria are appropriate and that rating committees take the actions necessary where Fitch has identified sustained shifts in risk profile. As such, CPG serves as a risk assessment function with respect to Fitch s analytical work. In fulfilling these responsibilities, the Regional and Group Credit Officers: Focus on credit, ratings and criteria issues for Fitch s rating groups globally. Use developing trends in issuance volumes, product innovations, or structural change to appropriately and constructively raise awareness of potential disconnects from current approaches. Link rating trends with current fundamentals, macro developments and expectations. Monitor that analytical groups are addressing new developments with an appropriate sense of urgency and rigor. Report on and make recommendations in certain cases. Develop and nominate areas of topical research that can be used to frame priorities or identify the next potential credit market development. Ensure sensitivity analysis and/or forecasts are utilized in each group where appropriate to help ensure that ratings are forward looking. Oversee, review and approve models used in rating analysis. Enhance tools used to screen for rating outliers and apply these across product segments, so that all such outliers can be reviewed for appropriateness. Leverage participation in various committees and discussions to ensure new or developing issues are shared and addressed across product groups. Oversee the analytical criteria review and approval process. While senior analysts from across the analytical groups are involved in the development and review of criteria, only members of CPG are permitted to vote in any criteria review committee. Separately, the Credit Market Research team within CPG conducts regular transition and default studies to monitor the performance of Fitch s ratings over time and across analytical sectors and geographical regions. The Global Compliance Group Compliance with Fitch s policies is monitored by the Global Compliance Group. The Group is responsible for assessing compliance with Fitch s policies and procedures pertaining to ratings assigned using Fitch s International rating scales, including Fitch s Code of Conduct and related policies concerning conflicts of interest. The group is headed by the Chief Compliance Officer, who is assisted by two Regional Compliance Officers who are responsible for i) Europe, the Middle East, Africa and Asia, and ii) the Americas respectively. The Regional Compliance Officer with responsibility for the EU is based in London. This Officer is charged with all of the responsibilities and authority outlined within Annex I, Section A (5) and Section A (6) of the EU Regulation with respect to each of Fitch s EU companies. The Chief and Regional Compliance Officers monitor and assess Fitch s compliance with its policies on an on-going basis by a variety of methods including reviewing copies of management reports that are produced for the Regional Group Heads on a regular basis, reports produced by three teams within the Global Compliance Group as described below and reports generated via Fitch s Violations Reporting (whistle blower) line. Compliance staff follow up with the appropriate managers within Fitch as necessary to address any issues identified, providing recommendations as appropriate. The Chief and Regional Compliance Officers also have responsibility for ensuring that appropriate investigations are conducted in response to possible breaches of Fitch s policies. 5

7 The core responsibilities of the three teams within the Global Compliance Group are set forth below: Regulatory Compliance: works with members of Fitch s in-house Legal Group and the Global Operations Management Group to support the incorporation of the obligations set forth in all applicable regulations into Fitch s policies and procedures. This team is also responsible for ensuring that Fitch meets any regulatory reporting obligations that it faces. This team also conducts regular reviews of Fitch's staff to identify any cases of policy non-compliance. Personal Conflicts Monitoring: monitors compliance with Fitch Ratings Worldwide Confidentiality, Conflicts of Interest and Securities Trading Policy via regular monitoring of employee trading activities, outside interests and other potential conflicts. This Group provides recommendations to manage all identified personal conflicts of interest. Compliance Audit: plans and conducts onsite reviews and engages in an on-going compliance programme. The compliance audit program includes a worldwide compliance audit program that is risk based and includes both onsite visits and remote audit testing. The results of the compliance audit are provided to senior management of the audited group, who are required to provide a management response to the compliance auditors findings and act upon the measures indicated in the management response. This management response, in turn, is reviewed by compliance auditors in subsequent follow up. Executive Management and Board Oversight Executive Management receive regular management reports in order to monitor the business activities across the EU. Additionally, in 2011 Fitch Ratings Limited, the senior-most credit rating agency within the EU, adopted the Fitch Ratings Limited Governance Charter to ensure robust board oversight of all the policies listed above and the supporting control framework. Supplemental procedures for implementing the responsibilities as set forth in the Governance Charter, and a schedule for such implementation were also adopted. The board-level reviews set forth within the procedures are conducted on behalf of the entire EU group of companies. Greater detail is provided in section 8 of this report. 6

8 3. Information on Allocation of Staff The tables below detail the total number of employees for each EU entity, as at the end of the financial year ending September 30, 2011, identifying: 1. The number of analytical staff employed within the ratings groups who work on new credit ratings and credit rating reviews (including supervisors) 2. The total number of analytical staff employed within the Credit Policy Group and therefore responsible for methodology or model appraisal 3. The total number of analytical supervisors within both the ratings groups and the Credit Policy Group 4. The total number of global group heads the senior-most managers of each analytical group 5. The total number of support staff Fitch France S.A.S Analytical staff employed within rating groups 24 Analytical staff employed within Credit Policy Group 1 Total Analytical Staff 25 Of which analytical supervisors 12 Of which global group heads 0 Total Support Staff 18 Total Staff 43 Fitch Deutschland Gmbh Analytical staff employed within rating groups 25 Analytical staff employed within Credit Policy Group 0 Total Analytical Staff 25 Of which analytical supervisors 4 Of which global group heads 0 Total Support Staff 17 Total Staff 42 Fitch Italia S.p.A Analytical staff employed within rating groups 20 Analytical staff employed within Credit Policy Group 0 Total Analytical Staff 20 Of which analytical supervisors 5 Of which global group heads 0 Total Support Staff 10 Total Staff 30 Fitch Polska S.A. Analytical staff employed within rating groups 12 Analytical staff employed within Credit Policy Group 0 Total Analytical Staff 12 Of which analytical supervisors 1 Of which global group heads 0 Total Support Staff 6 Total Staff 18 7

9 Fitch Ratings Espana S.A.U. Analytical staff employed within rating groups 18 Analytical staff employed within Credit Policy Group 0 Total Analytical Staff 18 Of which analytical supervisors 7 Of which global group heads 0 Total Support Staff 13 Total Staff 31 Fitch Ratings CIS Ltd Analytical staff employed within rating groups 21 Analytical staff employed within Credit Policy Group 0 Total Analytical Staff 21 Of which analytical supervisors 3 Of which global group heads 0 Total Support Staff 19 Total Staff 40 Fitch Ratings Ltd (Inc. branches) Analytical staff employed within rating groups 230 Analytical staff employed within Credit Policy Group 12 Total Analytical Staff 242 Of which analytical supervisors 72 Of which global group heads 2 Total Support Staff 246 Total Staff 488 Further information on senior management can be found in section 6 of this report. Notes to the Tables: a) Analytical supervisors are defined as those analytical employees holding a title of Senior Director or above. Quorum requirements for ratings committees require at least one analyst with a title of Senior Director or above to be present. b) Fitch does not maintain separate surveillance teams with respect to its corporate or public finance groups in Europe. Thus, the analytical staff in these areas work on both assigning new ratings and monitoring existing ones. In addition, while Fitch has historically maintained a separate structured finance surveillance group within Europe, which is based in London, simple segmentation between surveillance and new transactions analysts would be misleading as Fitch is increasingly running some groups on a fungible basis. As such, it is not appropriate to classify our structured finance analysts purely as new deal or surveillance analysts. c) New methodologies or models, and amendments to existing methodologies or models that would have a material impact on a given set of ratings are required under Fitch policy to be reviewed by a Peer Review Committee. While senior analysts from across the analytical groups participate in this process, only staff drawn from the Credit Policy Group are permitted to vote on the final outcome. d) Fitch has four global rating group heads worldwide. Each of these individuals has global responsibility for one or more rating product areas as follows: 1) corporates and REITS; 2) global infrastructure and United States public finance; 3) financial institutions, insurance, fund and asset management, sovereign and international public finance; and 4) structured finance and covered bonds. 8

10 4. Record Keeping Policy Fitch has in place global file maintenance and record-keeping policies and practices that are designed, collectively, to ensure that it maintains adequate records in accordance with all applicable laws and regulations including, but not limited to, the EU Regulation. The two main policies that are applicable to Fitch s rating-related records the File Maintenance and Recordkeeping Policy for Analysts, and the File Maintenance and Recordkeeping Policy for the Business and Relationship Management Group are published on Fitch s public website, and can be found by selecting the Code of Ethics link from any page on the website. Links to these documents are provided below. Additional details regarding the exact content of the information that must be included in certain documents referenced in the File Maintenance and Recordkeeping Policy for Analysts such as rating committee minutes are contained in internal manuals that provide detailed procedural guidance on the rating process. Other non-analytical groups, such as the Accounts Group, maintain separate internal recordkeeping policies. Collectively, these policies and procedures require that, among other things, Fitch maintains records for a period of at least five years that cover: (a) for each rating decision, the identity of the analysts participating in the determination of the credit rating, the identity of the committee chair, information as to whether the credit rating was solicited or unsolicited, and the date on which the credit rating action was taken; (b) (c) (d) (e) (f) (g) (h) records relating to fees received from each rated entity or related third party, or any user of ratings; records of each subscriber to Fitch s credit ratings or related services; records documenting the established procedures and methodologies used by Fitch to determine credit ratings; the internal records and files, including non-public information and work papers, used to form the basis of any credit rating decision taken; credit analysis reports, private credit rating reports and internal records, including non-public information and work papers, used to form the basis of the opinions expressed in such reports; records of the procedures and measures implemented by Fitch to comply with any applicable regulation; and copies of internal and external communications, including electronic communications, received and sent by Fitch and its employees in relation to credit rating activities. 9

11 5. Outcome of the Annual Internal Review of the Compliance Function The Chief Compliance Officer produces an annual compliance report. The purpose of this document is to report to the board of Fitch, Inc. on Fitch s global compliance with regulations pertaining to Fitch s international credit ratings and policies and procedures, as well as to provide a description of any material changes to the policies, which comprise Fitch s Code of Ethics. The report covers all credit rating agencies globally that issue ratings under the trade name of Fitch Ratings, including all of Fitch s EU-based credit rating agencies. It draws on a wide range of findings, including audits and special reviews conducted by compliance audit staff and the compliance monitoring activities and follow-up conducted or directed by the Chief and Regional Compliance Officers. Such work includes on-going monitoring of securities trading and other potential conflicts of Fitch staff, employee certifications and employee reviews. The most recent report, which related to the 2011 fiscal year, was provided to the board members of each of Fitch s EU credit rating agencies on 23 December This report noted that all recommendations made by the Chief Compliance Officer within the compliance report for the 2010 fiscal year had been addressed during the 2011 fiscal year. 10

12 6. Management and Rating Analyst Rotation Policy Management Fitch maintains separate legal entities in the UK, France, Germany, Italy, Spain and Poland largely for fiscal reasons. In maintaining separate legal entities, Fitch complies with all local corporate law requirements as well as the applicable corporate governance requirements of the EU Regulation. Thus, each of Fitch Ratings Limited, Fitch Ratings CIS Limited, Fitch France S.A.S., Fitch Deutschland GmbH, Fitch Italia S.P.A., Fitch Polska S.A. and Fitch Ratings España S.A.U. is set up in a manner consistent with the applicable local corporate law. The individual board members of each of our EU companies are identified within the tables provided as part of Section 8 of this report. Separate from the board members, each of Fitch s smaller EU credit rating agencies - Fitch Ratings CIS Limited, Fitch France S.A.S., Fitch Deutschland GmbH, Fitch Italia S.P.A., Fitch Polska S.A. and Fitch Ratings España S.A.U. has an office head who has day-today responsibility for the smooth functioning of the office. These office heads are members of the global Business and Relationship Management Group and, as such, have no analytical responsibilities. They report to the head of EMEA Corporate and Public Finance Business and Relationship Management, who is based in London. The organisation of Fitch s analytical management is not structured around our corporate organisation. Each of the analytical staff employed within Fitch s EU subsidiaries reports to a regional group head, in some cases through a series of line managers. The regional rating group heads report to a global group head. Currently two of Fitch s four global rating group heads are based in London, and two are based in the United States of America. All four analytical group heads report to the President of Fitch Ratings, Paul Taylor, who is based in London. Fitch s core support functions including the Global Compliance Group and the Credit Policy Group are structured in a similar way, with local staff operating regionally and reporting to a regional group head, who in turn reports to a global head. Analyst Rotation Fitch s analyst Rotation Policy was developed to be consistent with the EU Regulation. It establishes, with respect to all Fitch credit rating agencies with over 50 staff, maximum permissible time periods for covering a rated entity as a primary analyst, secondary analyst, or committee chair of four, five and seven years respectively, followed by a minimum of two years away from interacting with the rated entity or voting in its rating committees. More elaborate rules are in place with respect to structured finance analysts, which require rotation around an originator and/or arranger. In certain circumstances, these rules require more frequent rotation than the general framework described above. As provided for within the EU Regulation, at the time of Fitch s registration under the Regulation, Fitch obtained an exemption from applying these requirements in full for Fitch Ratings CIS Limited, Fitch France S.A.S., Fitch Deutschland GmbH, Fitch Polska S.A. and Fitch Ratings España S.A.U. for practical reasons such as language considerations. As such, in all Fitch credit rating agencies in the EU with less than 50 employees, other than Fitch Italia S.P.A., Fitch limits its analyst rotation requirements to the rating committee chairs. However, it should be noted that various aspects of Fitch s rating committee quorum requirements are designed to ensure sufficient challenge to the recommendations of the primary and secondary analysts. The current version of Fitch s analyst Rotation Policy is reproduced in full overleaf. 11

13 Rotation Policy Effective Date: January 25, 2012 Version: 5 Responsibility: Credit Policy Group A. General Principles Analyst rotation applies as follows: 1. Primary analysts may remain in this role for a maximum of four years with respect to a rated entity. They must then take a minimum of two years away from covering the rated entity. 2. Secondary analysts may remain in this role for a maximum of five years with respect to a rated entity. They must then take a minimum of two years away from covering the rated entity. If the secondary analyst becomes the primary analyst at any stage, this person can serve no more than four years in total before taking two years away from the rated entity. 3. With respect to points 1 and 2 above, during the two year off period, the analyst may not attend management meetings or vote at rating committees. Observer status at the rating committee is permitted. This applies to all product areas affected. 4. Chairs of rating committees may remain in this role for a maximum of 7 years. They must then take a minimum of two years away from the rated entity. During the two years off, they may not serve as the primary or secondary analyst, or as the committee chair. In addition, they may not attend management meetings or vote at rating committees. B. Application General Details 1. This policy applies to all analysts working on International credit ratings. 2. This policy does not apply to Private Ratings, issuers with only National Ratings and any non-credit rating opinions, such as, for example, Market Implied Ratings, Asset Manager Ratings and Servicer Ratings. 3. This policy shall be applied in full in all Fitch subsidiaries that have more than 50 employees, including employees of branches of Fitch subsidiaries where that subsidiary has more than 50 employees in total. It will also be applied to Fitch Italy. As a result, rotation will apply to analysts employed by Fitch companies in the following countries: United States of America United Kingdom Brazil India Italy Mexico Dubai Korea Taiwan 4. Rotation shall be applied to all committee chairs globally, irrespective of whether the chair is located in a subsidiary with less than 50 employees. 12

14 5. The details of this policy differ for Structured Finance (RMBS, CMBS, ABS, ABCP and Structured Credit) and Corporate and Public Finance. Analysts must refer to the Sections below for further details. 6. To the extent that the legal or regulatory requirements in any jurisdiction in which Fitch is located are inconsistent with any provision of this policy, Fitch personnel located in such jurisdiction shall comply with the requirements of the local jurisdiction pursuant to procedures approved by the GMD responsible for the area or an individual designated by the GMD to make decisions under this Policy (the Designated Person ). The head of Fitch s office in such jurisdiction shall record such procedures in the files of the office and notify the Global Compliance Group and group heads of their contents. C. Application Corporate and Public Finance 1. Analysts will rotate around rated entities. 2. From 2010, 50% of all primary analysts will be rotated after two years leading with respect to a rated entity and 50% after 3 years. This staggered rotation will continue beyond % of primary analysts will rotate again in 2016 and 2017 respectively and so on. 3. In the situation where 50% of primary analysts rotate in 2012 there are occasions when a completely new analytical team is introduced in a given year. In these circumstances the prospective new primary analyst may attend the management meeting for training in the year before assuming the primary analyst role. Likewise that person may attend but not vote at the rating committee in the year before assuming the primary analyst role, for training purposes. 4. Fitch has not adopted a formal rule for the introduction of rotation of secondary analysts except for the requirement that an analyst can serve for only five years as a secondary analyst or four years if the secondary analyst serves as a primary analyst at all during this period. 5. This policy shall be applied at the level of the issuer or rated entity, rather than at the level of a security. As such, corporate and public finance groups are not required to apply this policy separately to multiple securities that are issued by one issuer. 6. In cases where an issuer or rated entity has both National and International ratings, this policy shall be applied. D. Application Structured Finance 1. The rotation period will commence when the primary analyst s and secondary analyst s names are entered in Structured Finance Work Centre (SFWC). For transactions where a primary and secondary analyst have already been assigned, but which have not closed, the rotation period will commence on the effective date of this policy. 2. The party around which rotation must be applied will vary, depending on the nature of the transaction, as set forth below: a. Sole originator transactions 1. Primary and secondary analysts must rotate around the originator of securitised assets where there is a sole originator in a transaction. 2. Primary analysts may remain in place for up to four years from 2010 after which they must have a minimum two years away from this originator. 3. There is not a formal rule for the introduction of rotation of secondary analysts other than the requirement that an analyst can serve for only five years as a secondary analyst or four years if the secondary analyst becomes the primary analyst at any point during this period. 4. A further test also applies; if this test is met, rotation must occur earlier: If the same originator and arranger (an arranger is defined as the financial institution which has arranged the transaction) act together on three different transactions in a twelve month period, then the primary and secondary analysts must be rotated away from the originator immediately. (The same definition is used for a sponsor of a Special Purpose Vehicle (SPV). The term arranger and sponsor are frequently used in Structured Finance and are used interchangeably in this policy.) 13

15 5. Surveillance analysts commence work on transactions from the date a transaction closes and may perform this role for up to four years. They shall rotate around the originator, unless there is no clear single originator in which case they shall rotate around the arranger or sponsor of the SPV whose securities have been rated or the entity which has made a shelf filing for that transaction. (A shelf filing is defined as an arrangement where the ability to issue securities is set up in advance of issuance so that securities can be issued when market conditions allow.) 6. Surveillance analysts who are analysing transactions as at the effective date of this policy may remain in place for up to four years from this date, after which they must have a minimum of two years away from the originator, sponsor or entity which has made a shelf filing, as the case may be. b. Multi originator transactions 1. Primary, secondary and surveillance analysts shall rotate around the arranger of the transaction or sponsor of the SPV. 2. They must do so on the same dates/time periods identified for sole originator transactions, without the further rotation tests applied. c. Captive transactions 1. If the originator of the assets also arranges/structures the transaction the primary, secondary and surveillance analysts must rotate around the originator. 2. The rotation dates/time periods shall be the same as for sole originator transactions without the further rotation test applied. E. Committee Chairs in All Analytical Groups 1. The rotation period commences on the date of the first rating committee after the effective date of this policy. This applies to both Corporate and Structured Finance % of committee chairs must step away from the chair role after six years and the remaining 50% of chairs must step away after seven years. 3. Chairs must have two years away from the entity as described in the respective corporate and structured finance analyst sections in this policy after completing their period as chair. 4. Chairs will be determined by a formal selection process, consistent with the instruction provided in Section IX of the Rating Procedure Manual (RPM) for the relevant analytical group. 5. In Structured Finance: a. If a preliminary committee occurs for a transaction, the rotation period commences on the date of this preliminary committee. b. For sole originator transactions the same test as stated in section D 2 a 1 will apply. This means that chairs must rotate around the originator of securitised assets where there is a sole originator in a transaction. The test identified in section D 2 a 4 will not apply. c. For multi originator transactions the same tests will apply as for primary and secondary analysts. This means that the chair shall rotate around the arranger/sponsor of the SPV. F. Independent Committee Members 1. In addition to the analyst rotation requirements contained within this policy, all rating committees must comply with all relevant instruction contained within the Rating Process Manuals for the product areas. This includes instruction with respect to the participation of independent committee members at rating committees. 14

16 7. Information on Revenue Description of Business Activities Fitch s European business activities are based on the provision of independent analysis and rating opinions regarding a variety of risks in the financial markets. These activities cover both the provision of rating opinions to issuers and their agents, and the provision of ratings-related subscriptions to investors and other interested parties. Such rating activities include the development and provision of analytical opinions using a number of rating scales, ratings-related data and peer analysis tools, rating models, surveillance products, research products and other analytical services. These scales, products and services all reflect Fitch s independent risk analysis. Fitch s rating opinions do not comment on the suitability of any particular type of investment or the appropriate level of risk for any user of these rating opinions. In preparing its rating opinions, Fitch is indifferent to the rating or assessment levels achieved and neither suggests nor cautions against individual target levels of rating or assessment. Consequently, Fitch does not provide advisory or consulting services to any entity. None of Fitch Ratings Limited, Fitch Ratings CIS Limited, Fitch France S.A.S., Fitch Deutschland GmbH, Fitch Italia S.P.A., Fitch Polska S.A. or Fitch Ratings España S.A. provides any ancillary services as defined by the EU Regulation. Thus, all revenue received by Fitch within the EU is derived from rating activities. Revenue The table below provides, for each of Fitch s EU companies, the revenue derived from rating activities during the fiscal year ending September 30, Total Revenue per Statutory Accounts Fitch Ratings Ltd* (GBP, 000) 116,352 Fitch Ratings CIS Ltd (GBP, 000) 6,803 Fitch France S.A. (EUR, 000) 15,359 Fitch Deutchland GmbH (EUR, 000) 12,541 Fitch Italia SpA (EUR, 000) 7,736 Fitch Ratings Espana SA (EUR, 000) 11,416 Fitch Polska S.A. (PLN, 000) 10,496 * Includes Fitch Ratings Ltd. s branches in Taiwan, Korea, Sweden, Dubai and Japan. Fitch Ratings Ltd. s branch in Japan was converted to a subsidiary in calendar Q

17 8. Governance Statement Corporate Governance Code Each of Fitch Ratings Limited, Fitch Ratings CIS Limited, Fitch France S.A.S., Fitch Deutschland GmbH, Fitch Italia S.P.A., Fitch Polska S.A. and Fitch Ratings España S.A.U. is set up in a manner consistent with the applicable local corporate law. The individual board members of each of our EU companies are identified in the tables that follow as part of Section 8 of this report. Fitch Ratings Limited, Fitch Ratings CIS Limited, Fitch France S.A.S., Fitch Deutschland GmbH, Fitch Italia S.P.A., Fitch Polska S.A. and Fitch Ratings España S.A.U., operate in accordance with their by-laws and all applicable laws and regulations, including the EU Regulation. Fitch is not aware of any external corporate governance code that applies to its EU companies. However, in 2011 Fitch Ratings Limited, the senior-most Fitch credit rating agency within the EU, adopted the Fitch Ratings Limited Governance Charter, along with supplemental procedures for implementing the responsibilities of the board of directors under the EU Regulation as set forth in the Governance Charter, and a schedule for the implementation of such procedures. The Governance Charter was adopted at the level of Fitch Ratings Limited because, as provided for within the EU Regulation, at the time of its application for registration under the Regulation, Fitch applied for an exemption from the requirement to appoint independent directors to each of Fitch Ratings CIS Limited, Fitch France S.A.S., Fitch Deutschland GmbH, Fitch Italia S.P.A., Fitch Polska S.A. and Fitch Ratings España S.A.U.. This request was based on the small size of these companies, the intra-regional nature of the analytical teams in these companies, and the fact that as Fitch adopts and applies global policies, procedures and methodologies, it wished to ensure that the implementation of these policies, procedures and methodologies would be assessed in the same manner across each of its EU companies in order to ensure a fully consistent application. Fitch was granted this exemption with respect to each of the companies listed. Thus, the independent directors on the Fitch Ratings Limited board undertake their oversight responsibilities with respect to Fitch s entire EU operations. To ensure that any entity-specific issues are adequately considered, joint board discussions in which the board members of each of Fitch s EU companies (including Fitch Ratings Limited) participate, are held ahead of each Fitch Ratings Limited board meeting. These discussions cover the topics scheduled for discussion within the Fitch Ratings Limited board procedures. Relevant extracts from the Fitch Ratings Limited Governance Charter are reproduced in full overleaf. The sections of the Charter that have not been reproduced address specific details necessary to address the mission statement. 16

18 Excerpts from the Fitch Ratings Ltd. Board of Directors Governance Charter (as approved on 20 April 2011) I. Introduction This Governance Charter has been adopted by the Board of Directors (the Board ) of Fitch Ratings Ltd. (the Company or FRL ) to assist the Board in the exercise of its responsibilities under applicable law, including Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (the Regulation ). The provisions of this Governance Charter reflect the Board s commitment to the highest standards of corporate governance and regulatory compliance for global credit rating agencies. II. Mission Statement A. The primary responsibility of the Board is oversight of the management of the Company, in accordance with its fiduciary responsibilities and standards established by law. The Board has delegated responsibility for the day-to-day running of the Company to a senior management team of good repute and with sufficient skill and experience to ensure the sound and prudent management of the Company. In particular, as required by the Regulation, the Board will oversee, the following: 1) The establishment, maintenance and enforcement of policies and procedures which ensure the appropriateness, and independence from all political and economic constraints, of all credit rating activities. 2) The establishment, maintenance and enforcement of policies and procedures to identify, manage and disclose any conflicts of interest. 3) The effectiveness of the Company s internal control system with respect to compliance with the Regulation and in particular with the policies and procedures for determining credit ratings. 4) The compensation of the independent members of the Board and the Chief Compliance Officer. B. The Role of the Independent Directors In addition to the Independent Directors general duties to the Company, the Independent Directors shall monitor the following: 1. The development of the credit rating policy and of the methodologies used by the Company in its credit rating activities. 2. The effectiveness of the internal quality control system of the Company in relation to credit rating activities. 3. The effectiveness of measures and procedures instituted to ensure that any conflicts of interest are identified, eliminated or managed and disclosed. 4. The compliance and governance processes, including the efficiency of the review function referred to in paragraph III below. 17

19 [..] VII. Board Composition At least one-third of the members of the Board, but not fewer than two members of the Board, shall be independent within the meaning of point 13 in Section III of Commission Recommendation 2005/162/EC of 15 February 2005 and shall not be involved in credit rating activities (all such members, the Independent Directors ). The Board shall determine whether any potential Independent Director is requisitely independent and shall consider the specific circumstances of each candidate, including whether the individual is free of any business, family or other relationship, with the Company, its controlling shareholder or the management of either, that creates a conflict of interest such as to impair his judgment. Each Independent Director shall immediately disclose to the Board any circumstances which may in any way compromise his independence and the Board shall determine whether such Independent Director can continue to be an Independent Director. If the Independent Director is determined to not be requisitely independent, he or she shall immediately resign from the Board. Each Independent Director shall be appointed for a term not to exceed five years and cannot be re-appointed as an Independent Director at any time after the expiry of such term. Upon becoming an Independent Director, such Independent Director shall sign a resignation letter resigning from the Board and any committee thereof as of the last day of such term. The dismissal of an Independent Director aside from in the circumstances stated above shall take place only in the cases of misconduct or professional underperformance. The majority of the members of the Board, including the Independent Directors, shall have sufficient expertise in financial services. If and for so long as the Company issues credit ratings of structured finance instruments, at least one Independent Director and one other member of the Board shall have in-depth knowledge and experience at a senior level of the markets in structured finance instruments. 18

20 Internal Controls and Risk Management Pertaining to Financial Reporting The Chief Financial Officer of Fitch Ratings Limited and Head of the European and Asian Accounting Group is responsible on a day-today basis for ensuring that the production of all relevant financial reports and accounts is in accordance with all statutory requirements and that controls are in place to ensure operational risks such as error and fraud are addressed appropriately. The adequacy of the controls within the Accounts Group are reviewed on an on-going basis by the senior accounts staff and are also considered by Fitch s external auditors during the annual external audit process. The adequacy of internal controls within the Accounts Group is also formally considered by the board during any statutory approval of the accounts. Information Pertaining to Voting Rights, Shareholders Meetings, Powers and Rights and the Composition on the administrative, Management and Supervisory Bodies Please refer to the appendix tables that follow for this information with respect to each of Fitch Ratings Limited, Fitch Ratings CIS Limited, Fitch France S.A.S., Fitch Deutschland GmbH, Fitch Italia S.P.A., Fitch Polska S.A. and Fitch Ratings España S.A.U. 19

21 Appendix Tables to Governance Statement Fitch France SAS (the Company ) Note: A reference in the fourth column of this table to an Article is to an Article of Association of the Company, as updated after the Extraordinary General Meeting of 1 December The following information shall be included in the Transparency Report: 1. Fourth Council Directive 78/660/EEC of 25 July 1978 ( 78/660/EEC ), Article 46(a)(1)(d) The information required by Article 10(1), points (c), (d), (f), (h) and (i) of Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids ( 2004/25/EC ), where the company is subject to that Directive. See sections 2 to 6 below /25/EC, Article 10(1)(c) Significant direct and indirect shareholdings (including indirect shareholdings through pyramid structures and cross-shareholdings) within the meaning of Article 85 of Directive 2001/34/EC ( 2001/34/EC ) /25/EC, Article 10(1)(d) The holders of any securities with special control rights and a description of those rights. Not applicable. The Company does not fall within the scope of Article 85 of Directive 2001/34/EC as it does not have shares which are officially listed on a stock exchange or exchanges situated or operating within one or more Member States. None /25/EC, Article 10(1)(f) Any restrictions on voting rights, such as limitations of the voting rights of holders of a given percentage or number of votes, deadlines for exercising voting rights, or systems whereby, with the company s cooperation, the financial rights attaching to securities are separated from the holding of securities /25/EC, Article 10(1)(h) The rules governing the appointment and replacement of board members and the amendment of the articles of association. Article 10(3) Where the shares are encumbered by beneficial ownership (usufruit), the bare owner shall be entitled to the voting right for all collective decisions, unless otherwise agreed between the bare owner and the beneficial owner and notified by registered letter with acknowledgment of receipt sent to the Company. Appointment/Replacement of Board Members 20

22 Fitch France SAS (the Company ) Note: A reference in the fourth column of this table to an Article is to an Article of Association of the Company, as updated after the Extraordinary General Meeting of 1 December Article 16 Appointment. The Board of Directors is comprised of three (3) members, including the Company s Chairman who is a legal member. The members of the Board of Directors are chosen by the shareholders from individuals or legal entities, who may be shareholders or non-shareholders, who fulfil the conditions of satisfactory good character, qualifications and professional experience. The majority of the members of the Board of Directors must have sufficient expertise in financial services and at least one of the members of the Board of Directors must have in-depth knowledge and high-level experience of structured financial products. Term of office. The Members of the Board of Directors are appointed pursuant to a collective decision of the shareholders for a term of office of five (5) years starting with effect from that decision. Their offices shall come to an end, except in the event of dismissal, death, incapacity or early resignation, on the date of the shareholders collective annual decision voting on the financial statements for the fifth year after such appointment. In the event of resignation, death, incapacity or dismissal during the course of the financial year of one or both directors, the Chairman must either convene within one month following such an event an extraordinary general meeting to effect their replacement or he must effect their replacement on a temporary basis up until the date of the next annual general meeting of shareholders voting on the financial statements for the previous year, at the end of which one or two new directors shall be appointed pursuant to a collective decision of the shareholders. 21

23 Fitch France SAS (the Company ) Note: A reference in the fourth column of this table to an Article is to an Article of Association of the Company, as updated after the Extraordinary General Meeting of 1 December The members of the Board of Directors who are individuals may have an employment contract with the Company, subject to the latter not preventing the proper performance of their role. The members of the Board of Directors who are legal entities shall be represented by their legal representatives or any duly authorised individual. The members of the Board of Directors will expressly be mentioned in the Company s extrait K bis. Dismissal. The members of the Board of Directors, whether individuals or legal entities, may be dismissed at any time at will. The decision relating to dismissal shall be taken pursuant to a collective decision of the shareholders. Dismissal shall not give any right to compensation. Amendment of Articles of Association Article 20(1)(c) provides that amendments to the Articles of Association must be carried out pursuant to a collective decision by the shareholders /25/EC, Article 10(1)(i) The powers of board members, and in particular the power to issue or buy back shares. Article 16 Role. The Company s collegial management body is the Board of Directors whose specific role is to ensure: a) the sound and prudent management of the company; b) that the credit rating activities are independent, in particular, of all political and economic influences or restrictions; c) that conflicts of interest are adequately identified, managed and disclosed; 22