Ratings agencies will need 'sufficient' EU presence after Brexit - ESMA

LONDON (Reuters) - Credit rating agencies, which have their main European offices in London, may have to move significant numbers of staff to other parts of the European Union in time for Brexit, the EU’s markets watchdog said on Thursday.

ESMA, the European Securities and Markets Authority, recently asked S&P Global, Moody’s, Fitch and other rating firms for contingency plans if Britain leaves the EU single market when it quits the bloc in early 2019.

Steven Maijoor, head of Paris-based ESMA, told the Reuters Financial Regulation Summit that it would publish its guidelines from the consultation by the end of the year, but that it was likely to require the firms to move staff.

The big three rating agencies and smaller rival DBRS together employ thousands of staff in London but do also have some operations in other EU states.

“The assumption in these contingency plans is that the UK becomes a third country and there would not be an equivalence regime or anything like that,” Maijoor said.

To stay compliant with EU rules for providing ratings of countries and companies as well as more complex securities that played a role in the financial crisis, ratings agencies would have ensure many of the staff doing those jobs were in the EU.

“So this means sufficient presence in terms of analysts in the EU 27 and sufficient presence in terms of the senior management and compliance and control,” Maijoor said.

S&P has a market share of around 45 percent in the 28-country bloc, followed by Moody's MCO.N on just over 31 percent, and Fitch on around 16.5 percent, according to ESMA data. ESMA, which licences and regulates ratings agencies in the EU, does already have an "endorsement regime" where a ratings can be done by analysts outside the EU.

But under this system, there need to be “objective reasons” as to why the analyst is not EU-based. This could apply to more complex, exotic securities which require specific expertise not widely available.

“At the end of the day is a supervisory assessment,” Maijoor said.

Further details on the endorsement arrangement should also be defined by the end of the year. This is likely to put more onus on the rating agencies to make sure that their rating practices closely mirror the EU’s standards.

“So far we have built mainly on the philosophy that the regulatory supervisory system in the third country should be as strict as in the EU.”

“But what we have considered and proposed in the guidelines is to emphasise the obligation of the endorsing credit rating agency (to make sure) that the rating is produced in an environment as strict as it is in the EU.”

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Reporting by Marc Jones. Editing by Jane Merriman