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Strict rules to improve transparency and independence of European credit rating were endorsed by the European Parliament on Thursday in Strasbourg when MEPs adopted a legislative report with 569 votes in favour, 47 against and 4 abstentions.
According to Members, credit rating agencies failed to detect the worsening of the financial market conditions and to adapt their ratings in time. They also failed to adapt to the new risks of the credit market, e.g. structured credit products (derivatives) and hedge funds.
Main objectives of the new legislation
The approved regulation sets up an obligation for all CRAs wishing to operate in the EU to register and comply with a set of rules.
The approved provisions aim at enhancing transparency, independence and good governance of credit rating agencies, thus improving the quality and reliability of credit ratings and consumer's trust.
The main objectives of the regulation are:
Credit rating agencies: enhancing independence and transparency
Avoiding existing or potential conflict of interest between the agency issuing the rating and the rated organisation is a key aim of the legislation. Long lasting relationships with the same rated entities may compromise independence of analysts those in charge of approving credit ratings. Therefore, the agreed text proposes that those analysts and persons approving credit ratings should be subject to a rotation mechanism.
At Parliament's representatives' request, the rotation will take place on an individual basis rather than changing the entire team of the company. The aim is to avoid negative consequences on CRA performance.
A greater European dimension in the registration and supervision of CRAs
The compromise reached provides for a greater role for the Committee of European Securities Regulators (CESR), which will be in charge of registering CRAs' according to the new rules. This would provide a single point of entry for the submission of applications and thus cost reduction for agencies. CESR should receive applications for registration and inform competent authorities in all Member States. CESR will also make this information available to the public.
National authorities will take the decision on CRAs registration and compliance with the rules and on possibility of withdrawing an agency's registration should the rules be breached.
Moreover, a college of supervisors, representing the 27 Member States authorities, will also be established, to provide a platform for an exchange of supervisory information among national authorities and to improve coordination of their activities.
The agreement is regarded as a first step forward and the Commission is asked to report on its application by July 2010 with a view to possible new proposals for further streamlining.
Ratings from non-EU agencies will need endorsement
Non-European ratings will have to be endorsed by an EU agency, established according to this new regulation. This agency will be responsible for determining and monitoring on an ongoing basis whether rating activities of non-EU CRAs comply with the requirements.
For smaller non-EU agencies, which have no presence in the EU, a specific certification regime will be established. The Commission will decide, on a case by case basis, on the equivalence of the legal framework of the third country with EU rules and therefore on the possible use of that rating within the Community.
Disclosure of rating methodologies
Under the proposed regulation, each CRA would have to disclose to the public the methodologies used to adopt their ratings.
The company would also need to ensure that the issued ratings are based on all available information. It would also adopt all necessary measures to ensure all used information is of sufficient quality and from reliable sources.
Structured products
According to the compromise, CRAs should play an important role in raising awareness of the users of credit ratings about the specificities of the structured finance products compared with traditional ones. Therefore credit rating agencies should either use different rating categories when rating structured finance instruments or provide additional information on the different risk characteristics of these products.
Transparency report
Finally, if the legislation is adopted, a CRA would have to publish annually a transparency report including information on ownership, the outcome of the annual internal review of the independence compliance and a description of the management and analyst rotation policy.
Entry into force and transition period
The Regulation will be directly applicable in the whole EU 20 days following its publication in the Official Journal. Member States will have six months to take the necessary measures to implement the new provisions. As an exception, the provisions on the use of ratings from non EU agencies, this transition period will last 18 months. Three years later, the Commission will evaluate the effectiveness of the regulation, including the reliance on credit ratings in the EU.
Main objectives of the new legislation
The approved regulation sets up an obligation for all CRAs wishing to operate in the EU to register and comply with a set of rules.
The approved provisions aim at enhancing transparency, independence and good governance of credit rating agencies, thus improving the quality and reliability of credit ratings and consumer's trust.
The main objectives of the regulation are:
- To ensure that credit rating agencies avoid conflicts of interest;
- To increase transparency by setting disclosure obligations;
- To ensure an efficient registration and supervision framework at EU level;
- To improve the quality of the methodologies and the quality of ratings.
Credit rating agencies: enhancing independence and transparency
Avoiding existing or potential conflict of interest between the agency issuing the rating and the rated organisation is a key aim of the legislation. Long lasting relationships with the same rated entities may compromise independence of analysts those in charge of approving credit ratings. Therefore, the agreed text proposes that those analysts and persons approving credit ratings should be subject to a rotation mechanism.
At Parliament's representatives' request, the rotation will take place on an individual basis rather than changing the entire team of the company. The aim is to avoid negative consequences on CRA performance.
A greater European dimension in the registration and supervision of CRAs
The compromise reached provides for a greater role for the Committee of European Securities Regulators (CESR), which will be in charge of registering CRAs' according to the new rules. This would provide a single point of entry for the submission of applications and thus cost reduction for agencies. CESR should receive applications for registration and inform competent authorities in all Member States. CESR will also make this information available to the public.
National authorities will take the decision on CRAs registration and compliance with the rules and on possibility of withdrawing an agency's registration should the rules be breached.
Moreover, a college of supervisors, representing the 27 Member States authorities, will also be established, to provide a platform for an exchange of supervisory information among national authorities and to improve coordination of their activities.
The agreement is regarded as a first step forward and the Commission is asked to report on its application by July 2010 with a view to possible new proposals for further streamlining.
Ratings from non-EU agencies will need endorsement
Non-European ratings will have to be endorsed by an EU agency, established according to this new regulation. This agency will be responsible for determining and monitoring on an ongoing basis whether rating activities of non-EU CRAs comply with the requirements.
For smaller non-EU agencies, which have no presence in the EU, a specific certification regime will be established. The Commission will decide, on a case by case basis, on the equivalence of the legal framework of the third country with EU rules and therefore on the possible use of that rating within the Community.
Disclosure of rating methodologies
Under the proposed regulation, each CRA would have to disclose to the public the methodologies used to adopt their ratings.
The company would also need to ensure that the issued ratings are based on all available information. It would also adopt all necessary measures to ensure all used information is of sufficient quality and from reliable sources.
Structured products
According to the compromise, CRAs should play an important role in raising awareness of the users of credit ratings about the specificities of the structured finance products compared with traditional ones. Therefore credit rating agencies should either use different rating categories when rating structured finance instruments or provide additional information on the different risk characteristics of these products.
Transparency report
Finally, if the legislation is adopted, a CRA would have to publish annually a transparency report including information on ownership, the outcome of the annual internal review of the independence compliance and a description of the management and analyst rotation policy.
Entry into force and transition period
The Regulation will be directly applicable in the whole EU 20 days following its publication in the Official Journal. Member States will have six months to take the necessary measures to implement the new provisions. As an exception, the provisions on the use of ratings from non EU agencies, this transition period will last 18 months. Three years later, the Commission will evaluate the effectiveness of the regulation, including the reliance on credit ratings in the EU.
REF. : 20090422IPR54187
