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P 170856Z NOV 08
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UNCLAS SECTION 01 OF 02 BRUSSELS 001744 
SENSITIVE 
SIPDIS 
 
TREASURY FOR U/S MCCORMICK, A/S LOWERY, ERIC MEYER 
 
NSC FOR JOHN HERMANN, TED POSNER AND KRISTINA KVIEN 
 
STATE FOR E,EEB,EUR/ERA 
 
PLEASE PASS TO USTR 
 
NOT FOR INTERNET DISTRIBUTION 
 
E.O. 12958:  N/A 
TAGS: EFIN ECON ETRD EINV EUN
SUBJECT: EU PROPOSES TO REGULATE CREDIT RATING AGENCIES 
 
¶1. (SBU) SUMMARY.  On November 12, 2008, the European 
Commission published its proposal to regulate Credit Rating 
Agencies (CRAs).  The proposed Regulation seeks to introduce 
a new mandatory registration and surveillance regime, and to 
harmonize rules on CRAs throughout the EU, ensuring that 
ratings are not affected by conflicts of interest, that CRAs 
pay special attention to the quality of their ratings and 
rating methodology, and that they act in a transparent 
manner. 
 
MANDATORY REGISTRATION, IMPROVED CORPORATE GOVERNANCE AND 
ENHANCED TRANSPARENCY 
--------------------------------------------- ---------- 
 
¶2. (SBU) The proposed Regulation Q which, unlike a Directive, 
is applicable directly in its entirety to all Member States 
contains the following key provisions: 
 
MANDATORY REGISTRATION AND SURVEILLANCE - Credit rating 
agencies will be required to register in a central European 
database, established by the Committee of European Securities 
Regulators (CESR).  The database will gather historical 
rating information, allowing users to compare rating 
performance. CESR will serve as facilitator, but the 
responsibility for registration and surveillance of the 
credit rating agency will remain with the competent authority 
of the home Member State.  Supervisors will not approve 
ratings; only ensure compliance with the rules. 
 
AVOIDANCE OF CONFLICT OF INTEREST - CRAs will be required to 
disclose the names of rated companies that contribute more 
than 5% of their revenue.  They will also be forbidden to 
rate companies in which their analysts own shares or 
financial products. CRAs will be required to limit their 
activity to credit rating and related operations, excluding 
consultancy or advisory services. 
 
INDEPENDENT CORPORATE GOVERNANCE - Each agency will be 
required to have on its board at least three independent 
directors, at least one of them an expert in securitization 
and structured finance.  Their remuneration will be based on 
a fixed fee and their five year term is non-renewable. 
Analysts will have a four year rotation requirement, and 
their compensation must not be contingent on revenue from 
issuer. They will not participate in fee negotiations and 
will not hold financial interests in the rated entities. 
 
ENHANCED TRANSPARENCY - CRAs will be required to regularly 
disclose their methodologies, models and rating assumptions, 
and the general nature of their compensation policy. 
 
TRADITIONAL VERSUS STRUCTURED PRODUCTS - The proposal seeks 
to enable investors to distinguish between ratings for 
structured products and for traditional products. CRAs will 
have the option of either using a different rating scale for 
structured products, or to provide detailed information on 
the different risk categories. 
 
ALL CRAs WILL NEED TO REGISTER 
------------------------------ 
 
¶3. (SBU) No financial institutions in Europe will be allowed 
to trade rated instruments without that instrument carrying a 
rating from an-EU registered CRA.  This will essentially 
require all CRAs (the majority of which are from the U.S.) to 
register in the EU and fulfill the criteria above. 
 
COMMISSION PROPOSAL GOES BEYOND IOSCO 
------------------------------------- 
 
¶4. (SBU) The European Commission believes that the self- 
regulation regime currently applicable to Credit Rating 
Agencies Qbroadly failedQ.  Commissioner McCreevy noted to 
the press that the proposed regulation will help CRAs regain 
the market confidence they lost because of their role in the 
financial crisis.  The Commission acknowledges that the 
reference point for its proposal is the QIOSCO Code of 
Conduct Fundamentals for Credit Rating AgenciesQ, but it 
 
BRUSSELS 00001744  002 OF 002 
 
 
points out that it has "gone beyond these standards in those 
areas where we felt that more exacting measures would be 
appropriate".  Commissioner McCreevy stated at a press 
conference that the Financial Markets Regulatory Dialogue is 
the vehicle for discussing such regulatory matters with U.S. 
counterparts, but that the proposed regulation is not 
conditional on U.S. approval. 
 
OUTLOOK 
------- 
 
¶5. (SBU) The Economic and Monetary affairs Committee of the 
European Parliament will begin its examination of the 
Regulation proposal on December 1, under the leadership of 
Austrian Christian Democrat Ottmar Karas, rapporteur. The 
Commission aims for adoption before the summer of 2009. 
However Commission officials admit privately that that may be 
difficult to achieve. 
 
SILVERBERG