EUROPE - The European Permanent Representatives Committee has agreed to amend two proposals within the credit rating agencies (CRA) directive with the view to reducing some funds' reliance on external credit ratings.

Following a regulation proposal published by the European Commission in November last year to amend the CRA directive, the Permanent Representatives Committee - which is part of the Council - confirmed the implementation of a number of proposals that would modify the current text.

Under the current CRA directive - which seeks to minimise conflicts of interest in credit rating activities and increase transparency and competition in the sector - a mandatory rotation rule would be introduced to force issuers of financial instruments who pay CRAs for their ratings to switch to a different agency every four years.

However, the new proposals agreed earlier this week aim to limit mandatory rotation to ratings of structured finance products with underlying re-securitised assets.

The committee, in its proposals, stressed that outgoing CRAs would not be allowed to rate re-securitised products of the same issuer for a period equal to the duration of the expired contract, though not exceeding four years.

"Due to the complexity of structured finance instruments and their role in contributing to the financial crisis," the committee added, "the draft regulation would also require issuers to engage at least two different CRA for the rating of structured finance instruments."

Nonetheless, the committee also agreed that mandatory rotation would not apply to small CRAs or to issuers employing at least four CRAs rating more than 10% of the total number of outstanding rated structured finance instruments each.

Regarding conflict of interest, the new proposals would require CRAs to disclose publicly if a shareholder with 25% or more of the capital or voting rights held 25% or more of the rated entity.

"And to ensure the diversity and independence of credit ratings and opinions, the proposal would prohibit ownership of 25% or more of the capital or the voting rights in more than one CRA," the committee said.

"Moreover, a shareholder holding at least 5% of the capital or the voting rights in a CRA would have to publicly disclose ownership of 5% or more of the capital or voting rights of any other CRA."

Finally, investors or issuers would be able to claim damages from a CRA if they suffered a loss due to an infringement committed intentionally or with gross negligence by the agency.

Following the agreement reached earlier this week, the commission will be asked to prepare a report by 1 July 2016, reviewing the situation in the credit rating market and, if necessary, follow it up with appropriate legislative proposals on some of the new provisions.