EU applies stricter rules for credit rating agencies

Credit rating agencies (CRAs) will have to follow stricter rules as of Thursday, June 20, following relevant legislation that enters into force after the agreement of the Council and the European Parliament.

The new rules that were adopted last January, define the way CRAs will rate public debt, as well as the financial standing of private enterprises. Rules are deemed to be stricter than before, and ensure that a rating agency can be held liable when causing damage to an investor or an issuer.

To avoid market disruption, rating agencies will set up a calendar indicating when they will rate Member States. Such ratings will be limited to three per year for unsolicited sovereign ratings.

The ratings will only be published after close of business and at least one hour before the opening of trading venues in the EU.

Furthermore, investors and Member States will be informed of the underlying facts and assumptions on each rating which will facilitate a better understanding of credit ratings of Member States.

Commissioner for Internal Market and Services Michel Barnier stated that under the new legislation, credit rating agencies will have to be more transparent and accountable when rating sovereign states.

He added that the new rules will also contribute to increased competition in the ratings industry currently dominated by a few market players and will reduce the over-reliance on ratings by financial market participants.