Reform Act Does Not Harm Duopoly

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Von Dr. Oliver Everling | 21.Juni 2008

„For the past twelve years, we have found many an occasion to write a GIA Bulletin about the U.S. Securities and Exchange Commission (SEC) and its regulatory posture vis-à-vis the global rating agencies“, recalls Roger P. Nye, President, Global Investment Advisors, Inc., Carlsbad, California, USA (www.gia-inc.com). „All the media coverage and talk in Congress have finally resulted in a law being passed�??The Credit Rating Reform Act�??and signed by President Bush on September 29, 2006. What does the law say, what does it mean, and will it make any difference for issuers?“

The new law means basically two things, says Nye: First, the SEC now has clear jurisdiction over the agencies and can issue rules to prevent conflicts of interest and misuse of nonpublic information. Up to 2006, the industry has been virtually unregulated. Some say the lack of regulation contributed to the accounting scandals at the beginning of the decade. Second, the law also spells out how credit rating agencies can register with the SEC and be designated as „nationally recognized.“ The SEC had never clearly explained its opaque process for recognizing agencies. The result was that many smaller agencies that wished to enter the industry were effectively barred from doing so. Now there should be more competition.

The bottom line, as Nye draws it: issuers will have a broader choice of agencies as more agencies enter the market and prove their worth. However, the new law is not likely to dent the dominant position of the Big Two. Both Moody’s and S&P command more than a 40% market share each and generate operating profit margins greater than 50%. The law will not change that dominance significantly, foresaw Nye already in 2006.

„The new rules are more about making sure ratings have high standards and are ethical and transparent. However, that doesn’t change the overall economics of the business.“ Because the Big Two have well-established reputations and a global reach across virtually all debt classes, says Nye, it will be difficult, if not impossible, to challenge their position. That does not mean that there is no room for local and regional rating agencies around the world.

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