EU lawmakers dilute rating agency plan-source

LONDON, June 19 Mon Jun 18, 2012 7:01pm EDT

LONDON, June 19 (Reuters) - A central plank of European Union moves to rein in credit rating agencies will be diluted by lawmakers on Tuesday despite their calls during the financial crisis for tough action.

The sector, dominated by the "Big Three" -- Standard & Poor's, Moody's and Fitch Ratings -- was slammed for giving high ratings to securitised debt linked to U.S. home loans, leading to the 2007-09 market crisis.

Policymakers worry ratings carry too much clout and blamed the timing of Greek debt downgrades for making an EU bailout harder. Investors are on tenterhooks as Moody's is expected to downgrade some of the world's top banks this month.

A draft EU reform of the sector, the third in as many years, would force all companies that use ratings to "rotate" or switch agency every three years to boost standards and competition.

Banks and businesses whose debt is rated by several agencies at the same time balked at the prospect, saying there were not enough global agencies for them to switch to.

The European Parliament's economic affairs committee votes on the draft on Tuesday and there is agreement to dilute rotation, requiring it every five years and only for ratings of structured products, a far cry from the original plan.

"There is broad parliamentary support for this definition of rotation," a parliamentary source said.

EU states, which have joint say, have already agreed an even bigger rowback to cover only a subset of structured products.

Parliament is expected to give investors the power to sue agencies that breach rules. There would be a reversal of the typical burden of proof so that it would be up to the agency to disprove any claim.

Parliament is also set to force agencies to restrict changes on sovereign debt ratings from the 27 EU countries to two or three fixed dates each year.

Regulators could agree to extra changes only if they agree there are exceptional circumstances, creating a rule agency officials say would amount to "censorship".

Lawmakers are also likely to ban ratings agencies from using any non-public information to compile ratings.

After the vote, negotiations between lawmakers and EU states start on a final text that will come into force later this year or in 2013.

EU countries are expected to challenge some of parliament's decisions, in particular reversing the burden of proof and any ban on use of non public information.

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