The European Parliament voted yesterday to keep the recommendation for ratings rotation on all structured finance products.
In May 2012, the European Council announced that it had revised its stance on ratings rotation and recommended that the regulation be applied only to re-securitized assets.
The Council and the European Parliament have both seperately been working to meet the requirements set under the European Commission's(EC) credit rating agency (CRA)directive. The directive serves as the European Union's rules on CRAs.
The more stringent decision of the Parliament's economic and monetary committee announced yesterday is "disappointing," said Richard Hopkin, a managing director at the Association for Financial Markets in Europe (AFME).
This is "because there has been a lot of hostility to securitization from certain sectors of the European Parliament," he said.
The idea of ratings rotation was first proposed by the EC under CRA 3. The proposals for a directive and a regulation set out to amend existing legislation on these agencies. The aim was to reduce investors' over-reliance on external credit ratings, mitigate the risk of conflicts of interest in credit rating activities and increase transparency and competition in the sector.
Issuers would have to periodically change the agencies that rate it or a given deal according to a set timetable.
The European Council's decision was largely seen as a step toward addressing some of the securitization industry concerns over the rotation regulation. "Although there remain issues on what is a re-securitization or what is not a re-securitization, the bottom line is that the old-style re-securitization market is relatively immaterial today," Hopkin said.
However, Parliament's extension yesterday of the terms of rotation to five years from three years — after five years an issuer must rotate off one of the rating agencies it uses and cannot have that agency back on until four years have gone by — is viewed as only a very minor tweak to the original terms set under CRA 3.
The European Parliament's decision applies rotation "only" to structured finance, and not as suggested under CRA 3, to all financial instruments. Christian Aufsatz, a securitization research analyst at Barclays Capital, said that the decision is yet "another example where the asset class is singled out and treated more negative in regulation."
"The reason for that is that in the opinion of the regulators, structured finance ratings were inflated," he said. "As far as I know, rating agencies need not to be rotated for structured finance if a deal is rated by four rating agencies or more and each rating agency rates more than a certain percentage of that issuer/originator. This is to increase competition in the European rating landscape."
A spokesperson at Fitch Ratings said that the policymakers need to think very carefully about the full ramifications of any proposals designed to foster greater competition.
"It remains our view that some of the ideas currently being discussed could give rise to unintended and unwelcome consequences for the market although it is encouraging that some of those measures are now under serious scrutiny," the spokesperson said. "It is however still too early to make a full assessment and we will monitor developments carefully."
The next step in the process is for the European Council, the European Parliament and the EC to come up with a compromise that is expected to happen over the next few months.
