European Parliament and Council negotiators reached an agreement last night on new EU rules on credit rating agencies. The Greens believe the new rules represent another step forward for regulating this influential sector but regretted it was not possible to achieve more ambitions provisions change the market structure and to prevent conflicts of interest. Commenting on the outcome, Green finance spokesperson Sven Giegold said:
“The new legislation on credit ratings agencies, agreed last night, is another step forward for regulating this small but influential sector for our economies, which is playing a prominent role in the current sovereign debt crisis. However, we regret the new rules are not more ambitious in terms of addressing the market power of the ‚big three‘ agencies and potential conflicts of interest.
„The agreement will improve the transparency of ratings, notably by complementing the current problematic letter-based rating system (e.g. AAA) with an additional, more logical figure-based system, revealing historical default probability data. This will help improve the transparency of ratings, making information on the rated entity and the likelihood of default clearer and reduce the sentiment attached to the ‚triple A‘ rating.
„The rules fall short of tackling potential conflicts of interest however. The Greens wanted to prevent the crossholding of shares in rated entities but the final rules allow crossholdings of up to 10%. The Greens would also have preferred clearer provisions to make financial markets less reliant on ratings agencies.
„Importantly, rating agencies will also have to refrain from issuing policy recommendations or prescriptions to sovereign states under the final rules. The legislation also calls for ratings to take a broader view of risk, for example environmental risk. They also include a reference requiring the Commission to assess the possibilities for an independent European rating foundation, which the Greens believe would be crucial for addressing the ‚big three‘ dominance. We hope this will be acted on.“
Please find a summary of the results here:
| Items | ECON position with a focus on Green points: | Green points, partially or fully, in final deal |
| Cross-shareholdings | All crossholdings between the agency and rated entities and the rating agencies must be limited to 2 % | Crossholdings limited to 10 % |
| The centre-right in the European Parliament blocked our proposal for: crossholding of shares to prevent such conflicts of interest. (no crossholdings vis a vis rated entities, no crossholdings between CRAs) | ||
| Replacing letter based system (AAA etc.) with a figure based system (probability of default) | Complementing letter based system (AAA etc.) with a figure based system (probability of default) | Letter based system complemented with a figure based system covering available historical data of probability of default |
| We wanted to replace the letter based system for more clarity but couldn’t achieve that against liberal and conservative MEPs and the Council. | ||
| Rotation | Rotation limited to structured finance | Rotation limited to re-structured financial products. |
| A centre-right coalition blocked our proposals for broader rotation, but lighter and more workable regime than proposed by the Commission | ||
| Overreliance | Overreliance: No clear rule against automatic sale of assets in investment contracts. Additional amending directive IORPs to tackle overreliance | Overreliance: THe Text has no rule not allowing it but contains a recital highlighting the problem of automatic sale of assets in investment contracts. Additional amending directive IORPs to tackle overreliance |
| Transparency | transparency article to cover all financial instruments, not just structured finance | transparency article to cover just structured instruments (Council originally against even this limited provision), reference to other instruments such as covered bonds in review clause |
| Rating foundation | Call for the Commission to analyse potential for a rating foundation in a reference | Call for the Commission to analyse potential for a rating foundation in a reference |
| Policy recommendations & prescriptions for sovereign jurisdictions. | Policy related recommendations & prescriptions prohibited. | Policy related recommendations prohibited (but less legally watertight) |
| rules for lead analysts switching jobs | rules for lead analysts switching jobs, four year prohibition concerning previously rated entities | Rule for lead analyst switching jobs only indirectly covered by general rotation rule for lead analysts. |
| Environmental risks | Environmental risks to be part of methodology | Environmental risks assessment called for in recital |
| call for national special taxes on CRAs | coordinated tax (recital) | – |
| Alternative models | Our proposal for a a stronger and more explicit mandate for the Commission to explore in a comprehensive manner alternative allocation and payment models was not adopted | – |
| Liability | Tougher liability regime for erroneous ratings | not adopted because the Council was against such measures |