Companies that issue resecuritized debt would have to change their credit-ratings provider at least every four years under a deal among European Union governments to spur competition and counter possible conflicts of interest, an EU official said.
Investors would also be empowered to seek compensation for losses caused by malpractice or gross negligence at ratings companies, said the official, who isn’t authorized to be cited by name.
Today’s deal is a “positive step that strengthens the possibilities for more actors to enter the market and reduces overreliance on ratings in the financial system,” Ole Sohn, Denmark’s minister for business and growth, said in an e-mail, without giving details on the accord by diplomats from the bloc’s 27 nations.
The agreement would curtail proposals by Michel Barnier, the EU’s financial services commissioner. He sought last year to force businesses to switch ratings firms every three years, and said that the rule should apply to all of a company’s debt issuance.
Today’s deal limits the so-called rotation rule to resecuritizations, such as collateralized debt obligations that are repackaged and used to back another round of securitized debt, the official said.
Barnier will continue to make the case “for having a sufficient scope of rotation to ensure more competition,” Stefaan de Rynck, the commissioner’s spokesman, said in an e- mail.
Barnier’s plans were criticized by ratings companies and some governments which warned that the measure could reduce the caliber of ratings, so harming investor confidence in EU firms and making it more expensive for them to raise funds.
Diplomats backed part of Barnier’s proposals, including a plan to hand greater oversight powers to the European Securities and Markets Authority. Oversight of sovereign debt assessments would also be increased, following criticism from governments that downgrades have stoked the EU’s fiscal crisis.
The new rules mean that the EU is “reducing the risk of conflicts of interest between a credit rating agency and its clients and improving transparency around credit ratings, pricing policies,” Sohn said.
The final version of the draft law must be negotiated by Denmark, which holds the EU presidency until the end of June, and by lawmakers in the European Parliament, before it can come into effect.
Leonardo Domenici, the legislator guiding adoption of the rules in the parliament, has said that Barnier’s rotation plans are “excessively complex” and may need to be scrapped.
Domenici has called for the scope of the draft law to be expanded in other areas, notably to include a ban on ratings of sovereign debt that haven’t been requested by the government issuing the securities.
The parliament is scheduled to adopt its negotiation position on the legislation on June 7.
To contact the reporter on this story: Jim Brunsden in Brussels at firstname.lastname@example.org
To contact the editor responsible for this story: Anthony Aarons at aaarons@Bloomberg.net.