On Monday, the Committee on Economic and Monetary Affairs (Committee) adopted amendments intended to“enhance the transparency, independence and good governance of credit rating agencies.” The amendments also seek to implement measures to ensure the "institutional cooperation of credit rating activities resulting in credit ratings of high quality to be used in, or having an impact” in, the EU. Credit rating agencies (CRAs) have been accused of contributing to the economic crisis for failing to detect deteriorating financial market conditions and to adjust their ratings on a timely basis.
The Committee's amended proposal would appoint the Committee of European Securities Regulators to serve as the sole "supervisory body over European rating agencies” as opposed to delegating that authority to national authorities as was originally proposed. The legislation, which seeks to avoid “existing or potential conflict of interest between the agency issuing the rating and the rated organization,” would require rotation of CRA analysts to “ensure that analysts that are in direct contact with issuers shall be involved in providing the credit rating services to the same rated entity, to its related third parties or to entities under common ownership, for a period not exceeding five years.” Also included in the proposed legislation is a requirement for CRAs to disclose their fee arrangements with their clients. Additionally, the Committee proposes to create a new, independent, non-profit CRA which will be tasked with the responsibility of improving the quality of credit ratings in Europe.
Some other key amendments address the following:
- Rating of entities or products that are located in a third country: The amendments include strict guidance regarding when the rating of entities or products that are located in a third country may be used within the European community.
- Rating methodologies: CRAs will be required to provide on their websites, at no cost to the user, “information on structured finance products, which explains assumptions, parameters, limits and uncertainties surrounding their models and rating methodologies, including simulations of stress scenarios undertaken by the agency when establishing the ratings.”
- Enhanced transparency: CRAs will be required to disclose “information about all structured finance products submitted for their initial review or a preliminary rating” regardless of whether the issuer requests the CRA to provide a final rating.
The amendments also requires that, no later than July 2010, the Commission must “present to the European Parliament, the Council and other institutions concerned, a report on further reform of the supervisory regime under this Regulation and, in accordance with the applicable procedure under the Treaty, any appropriate legislative proposal.”