CRA measures "a mixture of the unnecessary and the inadequate"

16-Jan-2013 @ 16:0

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Anthea McIntyre Anthea McIntyre

Anthea McIntyre Anthea McIntyre

The European Parliament today (Wednesday) approved new legislation aimed at restricting the influence of Credit Ratings Agencies (CRAs). The new laws impose a rotation regime on certain categories of work and set a strict timetable for when and how often agencies may issue judgments of sovereign debt.

The rules originally proposed by the European Commission were significantly changed during their passage through Parliament following determined pressure from British Conservative MEP Ashley Fox.

Initial suggestions included banning CRAs altogether from commenting on sovereign debt and even creating the EU's own credit-rating agency to replace them in this role.

Mr Fox told MEPs the package now approved by parliament was an improvement, but the measures were still a mixture of the "unnecessary and the inadequate".

He said: "Credit rating agencies have been guilty of bad behaviour in recent years, but governments should not use them as a scapegoat for their own economic problems.

"The decision to place restrictions on when rating agencies can publish sovereign ratings is clearly politically motivated by those countries that aren’t best pleased about their recent downgrades. It is foolish and unnecessary. The fixed calendar will only serve to build up anticipation before each of the three permitted dates, creating greater volatility in the market. We need more information in the market, not a blackout on bad news.

The legislation approved today by the Parliament seeks to open up competition in a market where 95 per cent of ratings are made by three companies - Moody's, Standard and Poor and Fitch. Mr Fox believes some of the measures go about this in the wrong way. For example, the legislation imposes a rotation regime for CRAs in complex bond issuances known as resecuritisations.

He said "While I would have preferred to see the entire deletion of the rather bizarre mandatory-rotation proposal, I am pleased that its scope has been significantly reduced. We need to take steps to make entry into the Rating Market easier"

The measures would also introduce civil liability for CRAs, meaning they could be sued over the financial consequences of a faulty rating.

Mr Fox commented: "I am glad that the appalling idea of a reversed burden of proof was dropped from the proposal. Civil liability for ratings agencies will serve to increase reliance on ratings and to reduce the incentive to conduct internal assessments, which is the opposite of what the Commission says it wishes to achieve.

"It is also another barrier for badly-needed new entrants to the ratings market to overcome. I believe that the real problem lies with a lack of competition - there is not enough of it in the ratings market. This report takes a few small steps to improve that situation but I doubt we will see the dominance of the big-three challenged for a long time."

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