A second compromise text of the Danish Presidency of the Council of the EU on credit rating agency regulation proposes to limit mandatory rotation of rating agencies to structured finance instruments, meaning that covered bonds could escape the requirement.

Released last Tuesday (10 April), the second compromise text of a European Commission proposal to amend existing regulation of credit rating agencies (CRAs) amends article 6b to leave structured finance instruments as the only asset class subject to mandatory rotation of rating agencies, i.e. “Maximum duration of the contractual relationship with a credit rating agency”.

This latest amendment comes after the Presidency in a first compromise text sought to extend the amount of time before rotation kicks in from three to six years.

Ahead of an informal Ecofin meeting at the end of March the Presidency said that the number of capable credit rating agencies is limited and rotation may yet not be workable in practice, and that ministers would at the meeting debate whether to include the rotation requirement in the rules.

Covered bond market participants and industry representatives have expressed similar concerns, with the European Covered Bond Council setting out its opposition to mandatory rotation in a position paper on CRA III in February.

Speaking at an ECBC plenary in London on 29 March, Wolfgang Kälberer, head of EU affairs at the Association of German Pfandbrief Banks (vdp), said that rotation principle was very problematic for the market, in particular for frequent issuers, but that the European Parliament appeared to be increasingly questioning it, suggesting that a majority could oppose it, even though Member States appeared to still be in favour of rotation, albeit a more relaxed version.

“There will be a trialogue at the very end of the process, and I hope that we will get some relief,” he said.

Kälberer today (Tuesday) told The Covered Bond Report that while the Rapporteur of the parliamentary ECON committee, Leonardo Domenici, supports the principle of rotation, the majority of the committee, as comprised by Liberal and Conservative party representatives together with UK Conservatives, does not.

“We expect this majority to table amendments to the Rapporteur’s report and that if the amendments are voted into the report the rotation principle will fall,” he said. “It is then likely that the plenary would support the committee.”

Setting out its opinion on the commission’s CRA regulation proposal on 2 April, the European Central Bank said that it supports the intention relating to the introduction of a rotation rule, but that possible unintended consequences may need to be further assessed.

In addition, it said that it supports the commission’s proposal to assess by July 2015 the need to extend the scope of enhanced reporting obligations for structured finance instruments, inter alia, to covered bonds.

This was in the context of the ECB welcoming initiatives contributing to the enhancement of transparency requirements in the structured finance instruments and covered bond markets and the harmonisation of disclosure requirements in this area, it said.

It noted that transparency initiatives for covered bonds are a feature of other ongoing legislative projects, and said it needs to be considered in which EU legislative vehicles it is best that these initiatives are introduced, bearing in mind the importance of ensuring consistency.