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Strasbourg - The European Union continues its regulatory crackdown on Tuesday with a draft law to rein in credit rating agencies and final approval of curbs on trading in government debt-related derivatives.
The bloc’s financial services chief Michel Barnier will unveil a measure to inject competition into the credit ratings sector dominated by the Big Three: Standard & Poor's, Moody’s and Fitch Ratings.
The mistaken downgrade by S&P of France's banking industry system will reinforce the EU's determination to regulate agencies more closely, Barnier said last week.
The draft law, part of a broad regulatory push prompted by the financial crisis, will propose a temporary “blackout” on sovereign debt ratings in exceptional circumstances.
EU policymakers also say a ratings downgrade of Greek debt last year made it more expensive and harder to mount the country’s first bailout package.
EU states and the European Parliament, which is meeting in Strasbourg this week, will have the final say on the measure, with some changes likely.
Parliament on Tuesday is also expected to give its final approval to an EU law that will restrict "naked" or uncovered selling of shares and sovereign debt. This refers to when a seller has made no prior arrangements to borrow the security.
It also bans naked sovereign credit default swaps (CDS), where there is no ownership of the underlying government debt the CDS contract "nsures" against default.
Policymakers want to crack down on what they see as speculation by hedge funds and others betting on falls in eurozone bond prices.
The draft law on ratings agencies, the EU's third measure to regulate the industry since the financial crisis began in 2007, will avoid trying to create an EU answer to the US dominance of the sector.
Instead, it will try to inject more competition by requiring users of ratings, such as companies and banks, to “rotate” or switch agencies on a regular basis so that some of the 10 or so smaller agencies registered in Europe, such as Euler Hermes, can pick up more business.
EU states such as Britain, which is expected to oppose the draft law, question how "blackouts" and other aspects would shore up credibility in the eurozone or stop agencies from outside the EU from issuing opinions.
