Euro MP seeks credit rating agency market share caps

Tue Feb 28, 2012 11:24am EST

* EU lawmaker wants to toughen up draft ratings law

* Corporate treasurers worried by proposed changes

* S&P says draft law may disrupt Europe's bond market

By Huw Jones

LONDON, Feb 28 (Reuters) - Credit rating agencies should have their market share capped in the European Union to promote more competition in a sector dominated by the "Big Three", a report from an EU member of parliament said.

The big rating agencies such as Moody's Investors Service , Standard & Poor's and Fitch Ratings should not be allowed to have more than a quarter of the market for ratings in banks, insurers, companies or structured finance products, the report said.

"To enhance competition among credit rating agencies, for each of the following rating areas, a threshold should be established beyond which credit rating agencies would be prohibited from increasing their coverage of solicited ratings," said the report, made available to the media.

EU politicians have accused the ratings agencies of contributing to the financial crisis, and making it harder to rescue euro zone countries like Greece because of rating downgrades at sensitive moments.

The proposed market share curbs echo a similar approach in another draft EU law to shake up auditing, a global sector dominated by the "Big Four" auditors, KPMG, Deloitte, Ernst & Young and PricewaterhouseCoopers. They are also under the gun for perceived failings in pre-crisis auditing of banks.

Industry experts estimate that the "Big Three" rating agencies' market shares in individual asset classes often top 80 percent or more as issuers typically have two or in some cases three ratings.

If approved, such curbs could force issuers to drop some ratings or use a less well-known agency which investors outside the EU may not be familiar with, experts say.

There are about 15 authorised credit rating agencies in the EU, but most are very small apart from the three main agencies.

The report was written by Leonardo Domenici, an Italian centre-left member of the European Parliament, who is sponsoring a draft EU law to reform the rating agency sector. It will be discussed by the assembly's economic affairs committee on Wednesday morning.

Big users of credit ratings are already alarmed by the proposals.

"This raises issues both of practicality and of consistency in the application of a credit rating agency's methodologies," the European Association of Corporate Treasurers (EACT) said on Tuesday ahead of the debate.

Parliament and EU states have joint say on the draft ratings law and Domenici is seeking to strengthen several elements though he may not find broad support on all of them.

He also wants bans on unsolicited ratings on government debt and on producing credit outlooks for sovereign issuers.

EU Internal Market Commissioner Michel Barnier had mulled a ban on ratings on debt of governments being bailed out when he drafted the law but he was forced by other commissioners to ditch the idea as being too interventionist.

EACT said a ban on credit outlooks would result in more rather than less market volatility.

Domenici also wants to ban rating agencies from having stakes or other financial interests in the companies they rate.

ROTATION

Domenici backs the Commission's plan for "rotation" or mandatory switching of rating agency by issuers every three years, a step EACT said is "impractical" and won't encourage greater competition or improve the quality of ratings.

S&P said on Tuesday that care should be taken to avoid measures that inadvertently disrupt and isolate the European debt market, that would handicap Europe's access to bond finance and could increase rather than reduce dependency on ratings.

The rating agencies are hoping that the concerns of their clients, such as corporate treasurers, will carry enough clout in Brussels to water down the more radical elements of the proposals.

Banking associations, major users of ratings for products they sell, have already sounded the alarm over mandatory rotation.

The rating agencies' regulator in the EU, the European Securities and Markets Association (ESMA) has also said public authorities should not intervene in ratings.

Domenici backs the Commission's desire to see ESMA effectively vet methodologies used to compile ratings. Regulators fear this would force them to give seals of approval on ratings while issuers say this would kill off diversity in ratings methodology.

"The EACT and issuers see such a possible outcome as an eventual threat to financial stability," EACT Chairman Richard Raeburn said.