Big Three ratings agencies defy new curbs to regain pre-crisis clout - watchdog

By Huw Jones

LONDON (Reuters) - Revenues and margins at Europe's "Big Three" credit rating agencies (CRAs) are back to pre-financial crisis levels and the trio are in line for more business, despite a welter of new rules aimed at reducing their influence, a regulator said on Monday.

Moody's (MCO.N), Standard & Poor's (MHFI.N) and Fitch (LBCP.PA) came under fire when securitised debt they rated highly turned toxic from 2007, sowing the seeds for a global market meltdown and costly bank bailouts.

Lawmakers on both sides of the Atlantic passed a raft of rules to better supervise the agencies and the United States even banned the use of ratings in some instances.

Yet the European Securities and Markets Authority (ESMA), which regulates the 27 rating agencies operating across the 28-country European Union, said as demand for rating securitised debt fell, ratings for high-yield corporate debt filled the gap.

"Data show that revenues and margins of the three largest CRAs have been growing materially since 2010, with 2013 figures back to the levels last seen before the financial crisis hit in 2008," ESMA said in its annual report on the agencies.

The Big Three still dominate, even though far more agencies now operate in Europe to offer competition. "This growth has not had a significant impact on the overall market shares of CRAs, which remain largely unchanged since 2013," ESMA said.

The European Union passed three sets of laws on ratings agencies in as many years since the financial crisis. One rule, known as 8d, requires an issuer appointing two agencies to include one with a market share of less than 10 percent, or state why this was not possible.

"We do not feel that 8d has been properly monitored or enforced thus far," said Alan Reid, managing director of DBRS agency, which has a 1.3 percent market share, among the two highest outside the Big Three.

ESMA said S&P has a market share of 40 percent in the European Union, Moody's has 35 percent and Fitch 16.2 percent.

TRACK RECORD

Nigel Phipps, managing director of government affairs at Moody's, said its market share reflected the high quality of its ratings and strong track record.

"There is also demand out there for a few players who have more of a global view, which takes a lot of upfront investment and expertise," Phipps said.

The demand for ratings may even grow further.

ESMA Chairman Steven Maijoor said the new rules had aimed to ensure financial stability and a high level of investor protection.

"Such objectives remain valid in the current economic and financial environment, where new policy initiatives at European level, like measures to stimulate alternative sources of funding to traditional banking, emphasise the need for high quality credit ratings," Maijoor said in a statement.

The EU's executive European Commission will on Wednesday set out plans to boost the ability of markets to provide funding for companies, in particular from high-quality securitised debt that applies lessons from the financial crisis.

ESMA is consulting on whether more needs to be done to increase competition. The Big Three are largely U.S. firms and some EU policymakers want a major home-grown rival though efforts so far have failed.

(Additional reporting by Marc Jones; editing by David Holmes and David Clarke)