By Mary Keogh
MD – Global Regulatory Affairs, DBRS
On the heels of their November 21 technical advice to the EU Commission regarding the feasibility of a network of small- and medium-sized (SME) credit rating agencies (CRAs), ESMA, the EU’s financial regulator published their long awaited CRA market share report on December 16.
An upcoming EU Commission report is likely to suggest the need for a network of small- and medium-sized CRAs.
CRAIII requires ESMA to publish an annual market share report on all EU registered CRAs each year by December 31. This report lists the 22 groups of registered CRAs, of which 19 have less than a 10% market share based on annual turnover/revenue. The report essentially confirms that based on 2012 revenue alone, the EU ratings market is dominated by Moody’s and S&P, which combined have more than 70% market share, followed by Fitch at almost 18%.The report also provides the broad types of credit ratings issued by registered CRAs in 2013 based on information from CEREP, the public ratings repository.
This inaugural market share report is important context for Article 8d in CRAIII, which requires issuers or related third parties that intend to appoint at least two CRAs for the credit rating of the same issuance or entity to consider appointing a CRA with less than 10% of market share that is capable of rating the relevant issuance or entity.
Based on the stringent EU regulatory requirements and registration process, there are 19 qualified CRAs. CRAIII is the first regulation internationally to directly focus on CRA competition.
Unfortunately, after almost six months since adoption, the 10% market share measure is not working at all. The measure has not been effectively communicated nor monitored between regulators at any level including the local national securities commissions or to issuers or investors. There has been some traction regarding use of smaller CRAs for structured finance deals – CRAIII also requires two ratings on every deal. However, it is the traditional corporate bond ratings market that needs focus. Revising the 10% market share measure from comply or explain to a mandatory requirement would help; so too, would a requirement for two corporate ratings per issuer and/or revisiting the rotation of CRAs. The EU Commission must report to Parliament on the state of CRA competition in 2016. The May 2014 Parliamentary elections offer the possibility for that focus.
ESMA’s technical advice confirms that SME CRAs are mainly active in issuing corporate ratings and none cover the whole range of the five rating classes considered (non-financial corporates, financials, insurance, structured finance and sovereign and public finance). Only Fitch Ratings, Moody’s Investors Service and Standard & Poor’s issue ratings for all five possible rating classes. As regards to geographical coverage, six of the 19 SME CRAs have coverage that goes beyond one EU member state for corporate ratings.
The EU Commission is shortly due to issue a strategic report on the feasibility of an SME CRA network. No doubt it will say the EU market needs one. Rather, the question is what and how. At a minimum, there is compelling evidence and need for direct action and more regulatory support regarding the10% market share measure and for corporate ratings.
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