shopyield.com

AP is reporting that the EU is proposing regulations for credit rating agencies on Wednesday… I bet the SEC will be issuing the Final Rule for NRSROs soon also… somehow I think there is some international coordination going on… which is good considering the global scope of activities of the raters…

~~~~ “ EU moves toward regulating US credit rating agencies amid debate over role in crisis 

BRUSSELS, Belgium (AP) — European Union officials are moving toward imposing significant new regulatory burdens on credit ratings agencies, saying they are too important for the stability of the world’s financial markets for EU officials to ignore any longer.

The European Commission will propose on Wednesday how regulators should start getting in the game, with a set of rules that go beyond U.S. proposals amid a sense that banks and others relied on top ratings given to mortgage-based securities that turned out to be far riskier than they appeared.

The EU regulatory focus could mean big changes for New York-based Standard & Poor’s, a business segment of publisher McGraw-Hill, and Moody’s Corp., in order to keep working in Europe. Most investments require two ratings, and these two companies mop up the bulk of the market.

“This business is much too important for the stability of the financial markets for us to sit by and watch from the sidelines,” the EU’s financial services chief, Charlie McCreevy, said recently.

French President Nicolas Sarkozy went even further in one of many recent volleys on the need for a radical overhaul of the world’s financial system that hinted he wouldn’t object to doing away with rating agencies entirely.

“Do we keep them?” he asked. “What do we replace them with. … Should they only be American?”

Once the EU rules are published, they will need to be approved by EU governments — who said in July they wanted more oversight — and the European Parliament. Rules could enter into force as early as 2010.

The U.S. regulator, the Securities and Exchange Commission, is tackling the issue of the agencies’ role in the subprime credit crisis with draft rules demanding more disclosure about the debt they rate and potential conflicts of interest, and even the gifts they get from clients.

But the EU wants to go farther with stringent rules, aiming to make the agencies prove they are competent and independent enough for the financial industry to rely on. It will likely demand the agencies register in the EU for the first time, may hold their ratings up to scrutiny and will require them to show their analysts are sufficiently well-trained and experienced to understand the risks they are assessing.

They would also need to prove that analysis is not swayed by conflicts of interest, because agencies are paid by the banks who issue the debt they rate. Within a company, that might mean separating sales staff from analysts and measures to deter analysts leaving an agency to immediately start work at a client bank.

The EU rules could also end their lucrative consultancy businesses that help banks structure investments — packaging risky and safer debt together — to win a top rating.

The U.S. also is considering banning rating agencies from doing consulting work for issuers of debt. Securities and Exchange Commission Chairman Christopher Cox told a U.S. Senate committee earlier this year that he saw no reason why such work “could not be prohibited.”

Neither S&P, Moody’s or Fitch Ratings Inc., which has headquarters in London and New York, would comment on the EU’s draft rules until they are published. S&P has spoken out before, saying it believed that the EU is going too far and the new rules would give regulators the possibility of quizzing analysts to see how they decide on ratings.

“Effectively this is an open door for interference with the content of the rating and this causes us an enormous amount of concern,” Ian Bell, S&P’s senior European legal counsel, said in a speech to the Eurofi financial services conference in September.

One cause is an international agreement designed to protect banks and insurance companies against excessive risk. Called Basel II, it effectively restricted pension funds and insurers to top-graded products for their investment choices. But instead of making them more cautious, it led many to seek out far riskier, high-return investments that they often recorded off their balance sheets.

Banks sought to meet the demand by wrapping good debt up with riskier assets — such as solid mortgages with subprime housing loans to people with shaky credit. Some of these extremely complex asset-backed securities were granted a top-grade AAA rating and to some may have seemed the same as more traditional AAA investments.

Some experts warn that the new rules won’t solve the basic problem: an uncertain world where credit ratings have become too important as a gold standard determining the likelihood that a debt will be repaid.

“We all like to shoot the messengers, shoot the speculators, shoot anything in sight that is a good target,” said Richard Portes, economics professor at the London Business School. “It’s the market structure that is fundamentally wrong here … the way in which those rating agencies are hard wired into the regulatory system.”

Portes suggested breaking the link with the Basel II system and the way that credit rating agencies make their money so that users who want to buy investments — instead of the issuers who sell them — pay for the ratings.” ~~~~