EU to curb power of rating agencies in rule shake-up
The EU has unveiled a plan to lessen the impact of credit ratings, an attempt to pull the rug from under the three main rating firms -- Moody's, Standard & Poor's and Fitch.
The proposals, unveiled yesterday in Strasbourg by the EU's internal market chief Michel Barnier, are the third clampdown on agencies in as many years, and build on existing rules that force firms to register in the EU before they can operate here. Mr Barnier said ratings agencies had made "serious mistakes" in the past and that the spate of sovereign downgrades since the start of the Greek debt crisis last year had compounded market instability.
Eurozone nations including Ireland and Portugal have undergone repeated downgrades of their debt, even as bailout plans were being put in place, a fact that Mr Barnier said "surprised" him.
Italy and Spain have also been in the agencies' sights as political and banking concerns stoked unease about their ability to service their debts.
"We can't let ratings increase market volatility further," he said.
"We need to rebuild our political sovereignty so we're not subject to the sovereignty of the markets."
Under the rule change, which will still have to be approved by governments and the European Parliament, investors including banks, fund managers and insurers are asked to conduct their own research into what they're buying rather than relying solely on ratings.
Banks that need to get outside ratings for structured products -- bespoke investments often backed by a series of derivatives -- will have to obtain two ratings before they can start selling them to investors.
Financial firms will also have to rotate the agencies they use every three years, or for firms that regularly use two ratings, every six years.
Lead analysts will have to step down from an account after four years, while agencies will be prevented from rating products or institutions where their shareholders have a financial interest.
Sovereign downgrades will have to be notified to governments at least 24 hours before they are made public -- as opposed to 12 hours now -- and can only be issued after markets close. Mr Barnier dropped a plan to suspend ratings for countries under EU and IMF bailout programmes after the proposal came up against "rigorous" opposition from his fellow commissioners, according to sources.
He also threw out a clause forbidding large agencies to take over smaller firms after it came up against competition concerns during the talks.
The move comes just days after S&P's incensed Paris by sending out an email to certain subscribers alerting them to a French debt downgrade.