Bloomberg News

EU Set to Scrap Most of Forced Credit-Rating Rotation Plan

June 13, 2012

The European Union is poised to scrap most parts of a proposal that would force businesses to rotate the credit-ratings company they hire to assess their debt.

The European Parliament’s largest political groups agreed to scale back the proposed rotation requirement so that it would apply only to securitizations and other kinds of so-called structured finance, said Jean-Paul Gauzes, a French member helping to craft the legislation. The stance brings the Parliament’s position largely into line with that of EU national governments, which must also approve the new rules proposed by the bloc’s regulators last year.

“We are against rotation,” Gauzes told reporters today in Strasbourg, France. “We have a compromise that says we accept rotation for structured products.” The assembly’s economic and monetary affairs committee will vote on the draft law on June 19, according to the assembly’s website.

The European Commission, the 27-nation EU’s regulatory arm, proposed the obligatory rotation rule last year as part of a draft law to toughen regulation of the ratings industry amid concerns that some of their decisions exacerbated the euro-area debt crisis. The commission said rotation would boost competition and solve potential conflicts of interest.

Under the original proposal, companies would have been obliged to change the company that they pay to rate their credit every three years.

Parliament Deal

Under the parliament deal, rotation for rating structured finance products would be required every five years, with a partial exemption for companies using more than two ratings companies, according to a copy of the agreement obtained by Bloomberg News.

EU governments agreed last month to restrict rotation to so-called re-securitized debt. The verdict by the Parliament’s economic committee next week will set the stage for a vote by the full 754-seat assembly.

Gauzes said the Parliament’s main political groups also agreed to restrict credit-ratings companies’ right to issue assessments of the creditworthiness of governments.

Under the Parliament’s proposed compromise, ratings companies would have to pick two to three dates a year for issuing assessments of sovereign debt, with the possibility granted exceptionally at other times subject to approval by the European Securities and Markets Authority, according to Gauzes.

Political Faction

He is a member of the European People’s Party, the assembly’s biggest political faction ahead of the No. 2 Socialists.

Leonardo Domenici, the Italian Socialist member chiefly responsible for guiding the rules through the EU Parliament, had said that unsolicited sovereign ratings should be banned.

National governments have rejected imposing such curbs on sovereign-debt ratings in their discussions on the draft law.

Parliament lawmakers will call for the EU to begin making its own public assessments of governments’ creditworthiness, and to weigh the setting up of a so-called European Creditworthiness Authority, according to the document setting out the compromise deal.

The compromises also call for all references to credit ratings to be removed from EU financial regulation.

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net; Jonathan Stearns in Strasbourg, France, at jstearns2@bloomberg.net.

To contact the editors responsible for this story: Anthony Aarons at aaarons@Bloomberg.net; James Hertling at jhertling@bloomberg.net.


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