Brussels, 02/06/2010 (Agence Europe) - On Wednesday 2 June 2010, the European Commission unveiled draft legislation amending EU Regulation 1060/2009/EC on credit rating agencies, whose role of issuing ratings of countries' ability to pay their sovereign debts is currently under the spotlight. The main aim of the new legislation is to give a new European supervisory authority - the European Securities and Markets Authority (ESMA) - to be set up as part of the EU's financial supervision package, the power to certify and supervise credit rating agencies. This will not change the oligopolistic nature of the market, dominated by the Big Three (Moody's, Standard & Poor's and Fitch) but would allow an EU agency to be set up. The Commission is looking into the feasibility of this option. The President of the Commission, José Manuel Durão Barroso, says that the Commission will be unveiling new ideas in September to encourage competition on the rating agency market. He said that he personally wanted existing EU bodies and credit risk insurance (hedging) companies to play a greater role. Echoing this, EU Internal Market Commissioner Michel Barnier said his own personal vision was for a 'more European' agency which dealt with sovereign debt risks in a proper and appropriate manner.
When ESMA has been set up, credit rating agencies would have to register with it. ESMA would examine its application. The Commission says this will simplify procedures and speed up the assessment process, reducing it from 6 to 3 months. In its daily work, ESMA would monitor the work of EU-certified credit ratings agencies and would be able to open investigations about potential breaches of EU legislation by examining documents supplied by the rating agencies, holding hearings of the agencies' representatives and assess the supply of information. Inspections might be made of rating agencies headquarters. If it desires, ESMA would be able to delegate some of its work to national authorities more au fait with the situation in the country in question.
Until the draft legislation unveiled today comes into force, the current procedures remain in force (EU Regulation 1060/2009), namely lodging registration requests with the European Securities Regulators' Committee, the granting of licences by the relevant national supervision authority and supervision by the College of Supervisors.
Penalties. In the event of a credit rating agency infringing EU law, ESMA would be able to levy proportionate penalties, like the obligation to publish special declarations, suspension of use of any rating in dispute until the dispute has been settled, a temporary ban on the issuing of ratings or withdrawal of the licence of a rating agency registered in the EU. Upon request from ESMA, the Commission could levy a fine on any credit rating agency infringing legislation listed in a new annex to Regulation 1060/2009, namely legislation on managing conflicts of interest, situations when the body to be rated pays for the rating itself, organisational and operational requirements, supervision and the publication of information. Fines will not be able to exceed 20% of the credit rating agency's turnover in the year before the infringement in question.
Anxious to increase transparency and competition on the financial ratings market, the Commission suggests that financial institutions wanting a credit rating for a structured financial product should make its request of all authorised ratings agencies. Agencies not paid by the companies or bodies to be rated would have the option of issuing their own rating. The Commission says this would give them the opportunity to get to know each other and this in turn would encourage a trade model whereby several clients pay an agency to rate structured financial product issued by third parties. (M.B. trans fl)