EU Lawmakers Seek to Scrap Credit-Ratings Rotation Plan

European Union lawmakers voted to scrap most of a proposal to force businesses to rotate the credit-ratings company they hire to assess their debt, while backing tighter restrictions on sovereign-debt ratings.

The European Parliament’s economic and monetary affairs committee voted today in Brussels to scale back the proposed rotation requirement so that it would apply only to securitizations and other kinds of so-called structured finance. The stance brings the Parliament’s position largely into line with that of EU national governments, which must also approve the new rules proposed by the bloc’s regulators last year.

The European Commission, the 27-nation EU’s regulatory arm, proposed the rotation rule last year as part of a draft law to toughen regulation of the ratings industry amid concerns that some of its decisions exacerbated the euro-area debt crisis. The commission said rotation would boost competition and solve potential conflicts of interest.

“The debt crisis in the eurozone has shown that credit rating agencies have gained too much influence,” Leonardo Domenici, the lawmaker leading work on the rules for the parliament said in an e-mail. “In reaction we have strengthened rules on sovereign debt ratings and conflicts of interest.”

Under the commission’s original rotation proposal, companies would have been obliged to change the company that they pay to rate their credit every three years.

Partial Exemption

Lawmakers in the parliament voted to amend this so rotation for rating structured finance products would be required every five years, with a partial exemption for companies using more than two ratings companies. EU governments agreed to restrict forced rotation to so-called re-securitized debt.

Parliament and national governments must now begin discussions on a final compromise bill before the legislation can become law.

The assembly is already locked in negotiations with nations over another draft law to regulate bank capital rules and banker bonuses. Eight meetings held between the two sides have so far failed to broker a deal over key issues in that legislation.

For sovereign debt, the parliament’s amendments would require ratings companies to pick two to three dates a year for issuing assessments, with publication outside these dates subject to approval by the European Securities and Markets Authority.

Such ESMA approval would only be forthcoming in cases of “exceptional and unforeseen circumstances,” according to the text of parliament’s amendments.

Sovereign-Debt Ratings

National governments have rejected imposing such curbs on sovereign-debt ratings in their discussions on the draft law.

Lawmakers also called for the EU to begin making its own public assessments of governments’ creditworthiness. Still, Domenici withdrew earlier proposals for the EU to set up a so- called European Creditworthiness Authority to issue these ratings.

The assembly also called for ratings firms to give the percentage probability that a creditor will default.

“The idea to show rating results in figures and not in letters makes rating more rationale and efficient, which avoids psychologically driven decisions,” Sven Giegold, the lawmaker guiding work on the rules for the Parliament’s Green group, said in an interview before the vote.

The lawmakers also sought to bolster the commission’s proposals by calling for a ban on mergers between large ratings companies, and for all references to credit ratings to be repealed from EU financial regulation.

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net;

To contact the editors responsible for this story: Anthony Aarons at aaarons@Bloomberg.net;

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