LONDON (Reuters) - The European Union’s securities watchdog has proposed tougher conditions on the use of credit ratings compiled outside the bloc, potentially making it harder for rating agencies in Britain to offer their services in the EU after Brexit.
London hosts the world’s “Big Three” rating agencies, Moody‘s, Standard & Poor‘s, and Fitch, which dominate ratings on companies and countries globally.
Under EU rules, ratings compiled in a “third country” can be used by European customers only if they are endorsed by an EU-regulated rating agency.
A rating compiled by Moody’s in New York, for example, can be used in the EU after endorsement by one of agency’s bloc-based entities.
The European Securities and Markets Authority (ESMA) authorises and supervises rating agencies in the EU, and on Tuesday it published a consultation paper to tighten up guidance on the use of ratings from outside the EU.
ESMA Chairman Steven Maijoor said a substantial proportion of credit ratings used in the EU were being introduced through the endorsement route.
“The need to update the current guidelines provides ESMA with the opportunity to reassess its approach to endorsement more broadly, based on our supervisory experience, and taking into account the extensive use of the endorsement regime in practice,” Maijoor said in a statement.
Moody’s said it would be reviewing the ESMA paper in detail.
S&P and Fitch had no immediate comment.
There would no longer be an “automatic” endorsement of non-EU ratings, ESMA said.
Instead, an EU regulated agency would have to “demonstrate” that the third country agency which compiled the rating meets regulatory requirements on an ongoing basis that are as strict as those in the EU - a much tougher condition.
The amended guidance would also make clear that ESMA has powers to request information directly from the endorsing rating agency about the conduct of the third country agency.
EU policymakers have repeatedly called for a “home grown” rating agency in Europe, but none has been able to take on the “Big Three”, and hence the bloc could - after Brexit - be even more reliant on ratings compiled outside the EU.
After Britain leaves the EU, ratings agencies in London will be supervised by a UK regulator which has yet to be identified.
Reporting by Huw Jones; Editing by Mark Potter