As 2013 drew to a close, the SEC issued its annual report to Congress on credit rating agencies (called nationally recognized statistical rating organizations, or NRSROs). The reports began after ratings agencies gave top ratings to mortgage-backed securities that subsequently tanked, helping to create the financial crisis of 2008-2009.
In the latest report, the SEC listed the 10 firms currently registered as NRSROs and reviewed “the state of competition, transparency, and conflicts of interest among NRSROs.”
In addition to pointing out that the credit rating market is dominated by the big three agencies–S&P, Fitch and Moody’s–the report broke down the concentration of reports by category (financial institutions, insurance companies, corporate issuers, asset-backed securities and government securities) by each of the 10 registered firms. It also said that, despite the existence of economic and regulatory barriers to entry into the field, “smaller NRSROs have made notable progress in gaining market share in some of the ratings classes.”
However, barriers do still exist, with smaller NRSROs citing contractual and statutory obstacles, such as contracts from institutional fund managers that require minimum ratings requirements and then specify certain NRSROs’ ratings.
Another handicap for smaller firms cited by the report is lack of access to information needed to assign ratings, especially for asset-backed securities. When a rating is paid for by the issuer of a security, the ratings agency makes use of nonpublic information to determine the security’s rating; other NRSROs in the past may not have been able to review such data to make their own determinations.