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EUROPEAN COMMISSION SETTING THE STAGE FOR TOUGHER REGULATIONS FOR CREDIT RATING AGENCIES

European Commission is bent on setting the stage for a tougher regulatory regime for credit rating agencies.  Internal Market and Services Commissioner Charlie McCreevy said: “I want Europe to adopt a leading role in this area. Our proposal goes further than the rules which apply in other jurisdictions. These very exacting rules are necessary to restore the confidence of the market in the ratings business in the European Union ”

The European Commission has put forward a proposal for a Regulation on credit rating agencies. Credit rating agencies will have to comply with rigorous rules to make sure (i) that ratings are not affected by conflicts of interest, (ii) that credit rating agencies remain vigilant on the quality of the rating methodology and the ratings and (iii) that credit rating agencies act in a transparent manner. The proposal also includes an effective surveillance regime whereby European regulators will supervise credit rating agencies. New rules include the following:

  • Credit rating agencies may not provide advisory services.
  • They will not be allowed to rate financial instruments if they do not have sufficient quality information to base their ratings on
  • They must disclose the models, methodologies and key assumptions on which they base their ratings
  • They will be obliged to publish an annual transparency report
  • They will have to create an internal function to review the quality of their ratings

Credit rating agencies should have at least three independent directors on their boards whose remuneration cannot depend on the business performance of the rating agency. They will be appointed for a single term of office which can be no longer than five years. They can only be dismissed in case of professional misconduct. At least one of them should be an expert in securitization and structured finance.  Some of the proposed rules are based on the standards set in the International Organization of Securities Commissions (IOSCO) code. The proposal gives those rules a legally binding character. Also, in those cases where the IOSCO standards are not sufficient to restore market confidence and ensure investor protection the Commission has proposed stricter rules.

The proposal is available at: http://ec.europa.eu/internal_market/securities/agencies/index_en.htm

BIIA Newsletter November 2008 Issue

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