Companies that issue securitized debt may have to change their credit-ratings provider at least every four years as part of a possible European Union compromise to promote competition in assessing such securities.
Businesses would be able to sidestep the rotation rule if they use at least four ratings suppliers at the same time, according to an EU document on the proposed measures obtained by Bloomberg News.
The rule, intended to “mitigate the risk of conflict of interest and to enhance competition,” would apply to securitized debt and other types of so-called structured finance instruments, according to the draft compromise drawn up by Denmark, which holds the EU’s presidency. “Smaller” credit-ratings companies would be exempt from the measure.
The Danish proposal would water down plans by Michel Barnier, the region’s financial services chief, that would have forced businesses to switch ratings company every three years. Barnier proposed that the measure should apply to all of a company’s debt issuance, not just structured finance.
The Danish plan, dated May 7, follows discussions with officials from the other 26 national governments in the region.
Finance ministers reached an agreement last month to water down the mandatory rotation plans which some regulators said may worsen the quality of ratings in the short term. Denmark has previously proposed that rotation should only take place every six years.
Companies seeking to benefit from the exemption would have to ensure that each of the at least four ratings suppliers they hire rates more than 10 percent of the structured finance instruments they issue, Denmark said in the document.
The credit-ratings law requires approval by national governments and by lawmakers in the European Parliament, before it can come into effect. Denmark is targeting a May 15 deal among ministers on the rules, which would also allow investors to sue ratings firms in cases of gross negligence or misconduct.