November 17, 2017 / 10:01 AM / a year ago

EU watchdog tightens grip over use of foreign credit ratings

LONDON, Nov 17 (Reuters) - The European Union’s markets watchdog has tightened its grip over the use of credit ratings compiled outside the bloc in a taste of what the “Big Three” ratings agencies in London face after Brexit.

For a credit rating compiled outside the EU to be used for regulatory purposes in the bloc, it must be “endorsed” by a credit rating agency authorised by EU’s European Securities and Markets Authority or ESMA.

More than two thirds of credit ratings that can be used for regulatory purposes in the EU are introduced through the endorsement regime. Nearly all endorsed credit ratings relate to non-EU issuers and financial instruments, it said.

ESMA on Friday updated its rules on endorsement that will come into force in January 2019, spelling out how it will be more interventionist in policing the regime.

“The updated guidelines make clear that ESMA can, and will, exercise its powers to request information from EU credit rating agencies about endorsed credit ratings,” ESMA Chair Steven Maijoor said in a statement.

The changes to the rules puts more onus on the EU based rating agency to “demonstrate” that the conduct of the non-EU rater “fulfils requirements that are at least as stringent as the EU requirements”.

“ESMA clarifies that it has the power to request periodical information directly from the endorsing EU credit rating agency about an endorsed credit rating and the conduct of the third-country CRA,” the watchdog said.

“When a credit rating is endorsed there must be an objective reason for elaborating the rating outside the EU.”

The world’s “Big Three” rating agencies, Moody’s, Standard & Poor’s and Fitch have their European bases in London.

When Britain leaves the EU in March 2019, these operations will be treated as foreign agencies whose ratings would need to be endorsed by an agency inside the bloc.

The big agencies already have operations in several EU states, but may now need to move staff from London to them given the new conditions for endorsement set out by ESMA on Friday.

The watchdog also said the endorsement regime will continue to apply to Argentina, Australia, Brazil, Canada, Hong Kong, Japan, Mexico, Singapore and the United States when other revisions to the bloc’s rating agency rules come into force in June 2018.

Reporting by Huw Jones; editing by Jason Neely

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