15 February 2012

ECON Committee published draft report on CRAs

The rapporteur’s (Leonardo Domenici) proposals:

The specific points covered by the amendments are:

1. to do away with the present definition of a ‘credit rating’ as an ‘opinion’, ratings are redefined as an ‘information service’;
2. unsolicited sovereign debt ratings are prohibited, and the Commission is called upon to determine whether any existing institution could rate the Member States’ creditworthiness or to set up a body for that purpose;
3. the rules in force need to be carefully reviewed, going beyond what is already provided for in the proposed new regulation, with a view to removing completely the obligations imposed on public and private stakeholders to allow automatically for ratings and their consequences (this applies particularly to contractual provisions whereby securities are automatically sold in the event of downgrading or reimbursement is brought forward if the rating falls below a certain level);
4. cross-shareholdings are prohibited where the management or control of more than one rating agency is concerned; and rating agencies may not hold shares, or have financial interests, in rated entities;
5. restrictions may be imposed on the merger and acquisition activity of rating agencies which have already generated a substantial volume of rating business in the EU;
6. limits may be imposed on market shares in terms of the quantity and/or value of ratings of financial operators and structured products;
7. ESMA is given the task of submitting an annual assessment of the effectiveness and performance of CRAs, measured against clear-cut criteria;
8. ESMA should draw up new proposals on payment models making the selection and remuneration of rating agencies fully independent of the rated entities.

The prime aim is thus to open a discussion that will allow for the different approaches and points of view but nonetheless serve to restore CRAs to their rightful place, implying that their ratings should be treated as information to take into account, but not that the agencies themselves should enjoy special status or automatically influence the activities of economic and financial operators and public institutions through harmful procyclical effects. It must no longer happen that the timing and form of disclosure result, as is too often the case, from unilateral decisions of the rating agencies, even when the information imparted is not fundamentally new or original, least of all as regards the state of, and the prospects for, general government.

Full report

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