User:Mysidae/Business models
Done.
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Business models
[edit]Credit rating agencies generate revenue from a variety of activities related to the production and distribution of credit ratings.[1] The sources of the revenue are genereally the issuer of the securities or the investor. Most agencies operate under one or a combination of business models: the subscription model and the issuer-pays model.[2] However, agencies may offer additional services using a combination of business models.[1][3]
Under the subscription model, the credit rating agency does not make its ratings freely available to the market, so investors pay a subscription fee for access to ratings.[2][4] This revenue provides the main source of agency income, although agencies may also provide other types of services.[2][5] Under the issuer-pays model, agencies charge issuers a fee for providing credit rating assessments.[2] This revenue stream allows issuer-pays credit rating agencies to make their ratings freely available to the broader market, especially via the Internet.[6][7]
The subscription approach was the prevailing business model until the early 1970s, when Moody's, Fitch, and finally S&P adopted the issuer-pays model.[2][4] Several factors contributed to this transition, including increased investor demand for credit ratings, and widespread use of information sharing technology—such as fax machines and photocopiers—which allowed investors to freely share agencies’ reports and undermined demand for subscriptions.[8] Today, eight of the nine nationally recognized statistical rating organizations (NRSRO) use the issuer-pays model, only Egan-Jones maintains an investor subscription service.[6] Smaller, regional credit rating agencies may use either model. For example, China's oldest rating agency, Chengxin Credit Management Co., uses the issuer-pays model, while ratings from the Beijing-based Dagong Global Credit Rating are unsolicited.[9][10]
Critics argue that the issuer-pays model creates a potential conflict of interest because the agencies are paid by the organizations whose debt they rate.[11] However, the subscription model is also seen to have disadvantages, as it restricts the ratings' availability to paying investors.[6][7] Issuer-pays CRAs have argued that subscription-models can also be subject to conflicts of interest due to pressures from investors with strong preferences on product ratings.[12] In 2010 Lace Financials, a subscriber-pays agency later acquired by Kroll Ratings, was fined by the SEC for violating securities rules to the benefit of its largest subscriber.[13]
A 2009 World Bank report proposed a "hybrid" approach in which issuers who pay for ratings are required to seek additional scores from subscriber-based third parties.[14] Other proposed alternatives include a "public-sector" model in which national governments fund the rating costs, and an "exchange-pays" model, in which stock and bond exchanges pay for the ratings.[12][15] Crowd-sourced, collaborative models such as Wikirating have been suggested as an alternative to both the subscription and issuer-pays models, although it is a recent development as of the 2010, and not yet widely used.[16][17][16]
- ^ a b "Securities and Exchange Commission: Action Needed to Improve Rating Agency Registration Program and Performance-related Disclosures" (pdf). United States Government Accountability Office. 2010. pp. 60–61.
- ^ a b c d e Gerard Caprio (2012). "Handbook of Key Global Financial Markets, Institutions, and Infrastructure". Academic Press. ISBN 0123978734.
- ^ Lianna Brinded (38 November 2007). "Moody's to boost investor confidence with new data feed". Financial News.
{{cite web}}: Check date values in:|date=(help) - ^ a b Pragyan Deb; Gareth Murphy (2009). "Credit Rating Agencies: An Alternative Model" (PDF). London School of Economics.
{{cite web}}: Unknown parameter|form=ignored (help) - ^ "General Principles for Credit Reporting" (PDF). World Bank. September 2011.
In some countries, credit rating agencies are starting to provide other types of services, including credit reporting services.
{{cite web}}: Unknown parameter|form=ignored (help) - ^ a b c Stephen Foley (14 January 2013). "Issuer payment: model resistant to reform". Financial Times.
- ^ a b "Issuer-pays model ensures ratings are available to the entire market". The Economic Times. 6 May 2010.
- ^ John (Xuefeng) Jiang; Mary Harris Stanford; Yuan Xie (2012). "Does it matter who pays for bond ratings? Historical evidence" (PDF). Journal of Financial Economics.
{{cite web}}: Unknown parameter|form=ignored (help) - ^ Katie Hunt (31 October 2012). "China ratings firms challenge US dominance". BBC.
- ^ Norbert Gaillard (2011). "A Century of Sovereign Ratings". Springer. p. 90. ISBN 146140522X.
- ^ Gwynneth Anderson (April 2011). "New raters enter the Fray". Treasury & Risk.
- ^ a b Damien Fennell; Andrei Medvedev (November 2011). "An economic analysis of credit rating agency business models and ratings accuracy" (PDF). Financial Services Authority. p. 19.
{{cite web}}: Unknown parameter|form=ignored (help) Cite error: The named reference "FSA" was defined multiple times with different content (see the help page). - ^ Jeannette Neumann; Aaron Lucchetti (6 September 2010). "Ratings Firm is Fined in Misstate Case". The Wall Street Journal.
- ^ Katie Hunt; Emanuel Salinas; Constantinos Stephanou (October 2009). "Credit Rating Agencies: No Easy Regulatory Solutions" (pdf). The World Bank Group.
{{cite web}}: More than one of|author1=and|author=specified (help) - ^ "Report of the Committee on Comprehensive Regulation for Credit Rating Agencies" (pdf). Securities and Exchange Board of India. December 2009.
- ^ a b John Greenwood (28 January 2012). "Wiki joins rating game". Financial Post.
- ^ Yali N'Diaye (26 November 2012). "Crowd Sourced Rating Firms Join Forces;Target SEC Registration". MNI. Deutsche Boerse Group.