Regulation shapes capital markets — now more than ever — and it creates winners and losers. Business models that flourished pre-crisis might struggle today, while other propositions might find the regulatory wind beneath their wings.
Surely though, few regulations are as forcefully targeted at three specific firms as rating agency regulation (the drive to create UK “challenger banks” might be an exception; the forced flagellation of Lloyds’ pre-TSB IPO ads is a particularly cruel twist).
Under “CRA 3”, the EU’s third iteration of ratings agency regulation, it says that “where an issuer or a related third party intends to appoint at least two credit rating agencies for the credit rating of the same issuance or entity, the issuer or a related third party shall consider appointing at least one credit rating agency with no more than 10 % of the total market share”.
Enforcement is on a comply-or-explain basis. Where issuers do not appoint a second rating agency with less than 10% market share, they must document their decision.
DBRS, who according to itself is “well positioned to provide an alternative rating opinion”, says that a notable percentage of issuers are not familiar with the article in question, another group do not have a consistent view of its application, and the third group “intend to ignore the legislation until they are formally mandated to follow it”.
It is also no doubt public spiritedly “actively making the market… aware of this measure and conversing with regulators to understand the status of implementation”.
The intellectual underpinning for a regulatory attempt to pick winners is that rating agencies are seen (by regulators) as especially distasteful utilities (as are British banks). Their functions must continue to be performed, but not via a competitive market. Business can and will be won by regulatory fiat.
The sovereign debt provisions in CRA 3 seem to have passed off without the predicted disasters — agencies must now publish a timetable for rating reviews, and notify sovereign officials appreciably before they notify the market — but the window is closing to have the European Securities and Markets Association back your fledgling rating agency.
As DBRS says: “There has been no substantive implementation of this measure. We do, however, expect ESMA and national regulators to take steps, including market communication in the coming months.”
Get in there while you still can.