The European Parliament voted last week in favor of strict rules to improve the transparency and independence of credit ratings.
The European Union (EU) lawmakers said they hold credit rating agencies, or CRAs, partially responsible for the current financial crisis, as they failed to adapt their ratings to deteriorating financial conditions and hadn't coped with the new risks created in the credit market by structured credit products.
However, a global credit rating agency regulatory framework that promotes consistency, greater transparency, and enhanced reliability is believed to be a key component to the efficient operation of the global credit markets.
Under new legislation, to operate in Europe CRAs will have to register and comply with a set of rules aimed at stopping conflicts of interest and improving the transparency and quality of ratings. CRA officials and analysts who approve ratings will be rotated at regular intervals to prevent them from getting too close to the companies they rate and which pay for ratings.
The Committee of European Securities Regulators (CESR) will be the first point of contact for CRA registration, while national authorities will rule on whether registrations should be withdrawn if the new rules are breached.
CRAs from outside the EU will have to be endorsed by a new EU body or certified by the European Commission. CRAs are expected to adopt different rating categories for structured finance instruments or provide additional information on the risks of these instruments.
Member states will have six months to implement the new provisions, or 18 months in the case of the provisions relating to rating agencies from outside the EU.
Standard & Poor's said in a statement the new registration and regulation system "should play an important part in building confidence in credit ratings and markets in the region." S&P said financial markets wanted to see a coordinated, cross-border approach to CRA oversight.
Moody's Investors Service said it would take the steps needed to comply with the regulation and that it was "hopeful that its implementation will contribute to confidence in the quality, consistency and transparency of credit ratings globally." Moody's said it was closely studying the regulation and would work closely with CESR and other regulatory bodies on how to implement it.
Fitch Ratings said that there are certain provisions in the new regulation that require further clarification including the form and type of disclosure required for data related to structured finance transactions and the specific types of data quality checks expected of the credit rating agencies.
Fitch acknowledged the value of analyst rotation, certain rules requiring such rotation may need to be clarified to prevent the unintended loss of analytical expertise from the rating process and the resulting potential deterioration in the quality of ratings.
