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The European Parliament and Council have struck a compromise on the reform of credit rating agencies, which will toughen up rules on sovereign debt ratings. Under the compromise, reached on the evening of 27 November, cross-ownership of agencies will also be limited in order to prevent conflicts of interest and guarantee their independence.

The compromise agreement between the EP and the Council must now be finalised at the technical level, before being formally adopted by the European Parliament in plenary (probably in January 2013) as well as by the Council of the EU.

"It was a very difficult process, but we have taken the existing legislation a step forward on a path that will have to be explored further," said rapporteur Leonardo Domenici (S&D, Italy). Jean-Paul Gauzes (France), shadow rapporteur for the EPP group, told Europolitics he was "surprised to see how member states defended the points we wanted to change on the role of agencies".

Among the most sensitive questions, on which the parties have finally agreed, is the imposition of a calendar for unsolicited sovereign debt ratings, which are ratings of a member state that could have a negative impact (lowering ratings).

To recall, the Commission has proposed reinforcing rules by imposing more frequent reviews of sovereign ratings (every six months) for agencies.

The EP initially proposed an amendment that would impose a calendar for the publication of sovereign debt ratings. Subsequently, the insitution recommended imposing a calendar for the publication of unsolicited sovereign debt ratings. These ratings are issued without the request of the rated entity. The Council resisted this until the very last minute, before finally agreeing on the introduction of this calendar, which was fiercely defended by Parliament. The compromise is as follows: credit ratings agencies must fix three dates per year when they can issue unsolicited ratings, before 31 December of the previous year, Europolitics understands.


Parties have also agreed on rules aiming to limit cross-shareholdings in order to resolve conflicts of interest between agencies and rated entities. The aims is to put an end to excessive concentrations and ensure the independence of these agencies. More specifically, on the thorny question of limiting the participation of shareholders in different credit ratings agencies (limitation of cross-shareholding), the Council and Parliament have agreed on the following measure: an investor who holds a share of at least 5% in a credit ratings agency will not be authorised to hold shares of 5% or more in anotherratings agency.

A ratings agency must also respect the obligation of transparency if one of its shareholders, who holds 5% or more of its capital, also holds 5% or more of the rated entity. Furthermore, a shareholder who holds 10% or more of the capital or voting rights in the agency cannot hold more than 10% of the rated entity. An agency will not be authorised to rate an entity where the agency holds more than 10% of the rated entity.

Credit ratings agencies must also "follow stricter rules that will make them more responsible for mistakes in case of negligence or intent," said Internal Market Commissioner Michel Barnier, adding that this is important "because ratings have a direct impact on the financial markets and the wider economy, and thus on the prosperity of European citizens".

Overall, if a ratings agency has committted any of the infringements listed as having an impact on a credit rating, either intentionally or through gross negligence, an investor or issuer may claim damages from that agency for losses due to the infringement.

The reform includes measures to reduce reliance on external ratings (for example, financial institutions will be obliged to reinforce their own evaluation of solvency) and to increase competition in the sector (such as the inclusion of the principle of rotating agencies and the obligatory participation of small ratings agencies under certain conditions).


In 2011, the Commission presented a proposed regulation modifying Regulation (EC) No 1060/2009 on credit ratings agencies, and a draft directive amending the directives on the use of ratings by Undertakings for Collective Investment in Transferable Securities (UCITS) and on hedge fund managers.

The reform has four main objectives:1. to prevent financial institutions from relying exclusively on credit ratings; 2. to create rules on sovereign debt ratings; 3. to increase the diversity and independence of credit rating agencies; and 4. to make credit rating agencies liable.
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Publication:European Report
Date:Nov 29, 2012

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