UPDATE 1-EU's McCreevy to propose rating agency register

(Adds more details, background)

By Huw Jones

BRUSSELS, July 3 (Reuters) - Credit rating agencies, widely criticised as too slow to warn about the risks in products at the heart of the U.S. subprime crisis, will be required to register in the European Union, a top official said on Thursday.

"I intend to propose in October a registration and external oversight regime for rating agencies, whereby European regulators will supervise the policies and procedures followed by the CRAs (credit rating agencies)," EU Internal Market Commissioner Charlie McCreevy said.

"Reforms to the corporate and internal governance of rating agencies will form a part as well," McCreevy said in a speech.

Rating agencies -- a sector dominated by Standard & Poor's (MHP.N), Moody's (MCO.N) and Fitch (LBCP.PA) -- are resigned to a registration system in the 27-nation EU as they are already required to register in the United States, bringing them under formal supervision of the Securities and Exchange Commission.

"The fact is that CRAs significantly contributed to the market turmoil by greatly underestimating the credit risk of structured credit products," McCreevy said.

Agencies gave high ratings to structured products backed by risky home loans that defaulted, leaving the products untradeable.

Banks with such products on their books have been forced to write down more than $300 billion leaving markets still unsettled a year into the subprime crisis.

Agencies are keen that regulatory approaches adopted in the EU and the United States are consistent.

"International convergence is desirable but on many issues, Europe must take the lead," McCreevy said.

He said steps taken by rating agencies to avoid conflicts of interest -- they are paid by the companies they rate and sometimes advise on designing the products they rate -- are insufficient.

Agencies abide by a voluntary code of conduct which has just been beefed up but has been dubbed by McCreevy as a toothless wonder which has not produced the desired effects.

McCreevy's proposal will need approval by EU states and the European Parliament but speedy adoption is likely.

EU finance ministers next Tuesday will endorse the principle of registration and external oversight of agencies and senior lawmakers in the bloc's assembly also favour this approach.

Ratings play a central role in financial markets, used by investors to base decisions, used to determine the amount of capital banks set aside to cover risk.

EU finance ministers are also set to adopt changes to the way agencies present ratings for structured products, making them different to how ratings for standard bonds are presented so that investors are better warned of the risks.

For related article click on [ID:nL02519056] (Reporting by Huw Jones; Editing by Dale Hudson/Elaine Hardcastle)