Rating Firms Offered Partial Repreive on EU Rotation Rule
Companies that issue large amounts of debt instruments may win an exemption from European Union plans to force them to rotate the credit-ratings providers that assess their debt.
They would avoid the rotation rule if they simultaneously hire at least four ratings firms, under proposals by Denmark, which holds the six-month presidency of the EU.
The measure would scale back a draft law by Michel Barnier, the region’s financial services chief, that would have forced businesses to change every three years the rating company that gauges their creditworthiness.
While Barnier has said rotation would boost competition and solve potential conflicts of interest, regulators have warned that the requirement may worsen the quality of ratings in the short term.
Denmark’s compromise plan, published on the EU website, follows discussions with officials from the other 26 national governments in the region. The ratings law requires approval by national governments and by lawmakers in the European Parliament, before it can come into effect.
Denmark has already proposed to limit the rotation rule to structured finance instruments, such as securitizations, and to lengthen the period that a business can hire the same ratings firm from three years to six.
The new Danish exemption plans, dated April 20, add to these earlier proposals.
Companies seeking to benefit from the exemption would have to ensure that each of the ratings suppliers they hire rates at least 10 percent of the structured finance instruments they issue, Denmark said in the document.
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