Brussels blog

EU commissioner Michel Barnier

On what has been a bleak day for credit rating agencies after S&P’s faux French downgrade, here is a tiny bit of good news for the industry.

Michel Barnier, the commissioner overseeing European financial regulation, is on Tuesday unveiling plans to overhaul credit rating agencies, which take an unforgiving approach to many current industry practices.

While the main principles of the draft proposals will remain – powers to suspend ratings on stricken sovereigns, mandatory rotation of rating agencies, an approval process for their analysis methods – there are likely to be some last minute tweaks.

Given how tough the proposals were in the first place, these unsurprisingly take off some of the sharper edges. Negotiations are ongoing and the final details will be settled early next week. But there is likely to be movement on these areas, which mostly reflect concerns raised by the UK and competition officials:

1) Powers to suspend sovereign ratings: The exact circumstances when this can be used will be narrowed. It will make clearer that regulators can only suspend ratings on a stricken sovereign in exceptional circumstances, which include the country being in live negotiations for a bailout. How this would apply to Greece’s seemingly endless bailout talks, we’ll leave to lawyers to figure out.

2) Smoother introduction of rotation: Rules requiring bond issuers to rotate rating agencies are expected to be tweaked. This is partly to address the criticism that there are not yet enough credible rating agencies to enforce such a radical reform. The rules will be adjusted to ensure that issuers using two agencies will be able to retain one of them for longer than three years, the initially proposed time limit.  Other measures will be staggered.

3) Restrictions on mergers and shareholders: The Barnier drafts included a ban on the big rating agencies merging; this will be dropped. An idea to ban investors holding big stakes in more than one rating agencies is also being watered down.

In aggregate, the ratings agencies and many of their customers will still be squealing next week when the proposal is unveiled. If Barnier gets his way, the shake-up of the industry will be aggressive and far reaching. But some of the sting is being taken out.