Moody's Investors Service - Role in Capital Markets

Role in Capital Markets

Moody's Investors Service's closest competitors are Standard & Poor's (S&P) and Fitch Group. Together, they are sometimes referred to as the Big Three credit rating agencies. While credit rating agencies are sometimes viewed as interchangeable, Moody's, S&P and Fitch in fact rate bonds differently; for example, S&P and Fitch ratings measure the probability that a security will default, while Moody's ratings seek to measure the expected losses in the event of a default. Although Fitch has a smaller percentage of the market, it is still much larger than other rating agencies. All three operate worldwide, maintaining offices on six continents, and rating tens of trillions of dollars in securities. However, only Moody's Corporation is a free-standing company.

Moody's Investors Service and its close competitors play a key role in global capital markets as a supplementary credit analysis provider for banks and other financial institutions in assessing the credit risk of particular securities. This form of third party analysis is particularly useful for smaller and less sophisticated investors, as well as for all investors to use as an external comparison for their own judgments.

Credit rating agencies also play an important role in the laws and regulations of the United States and several other countries, such as those of the European Union. In the United States their credit ratings are used in regulation by the U.S. Securities and Exchange Commission as Nationally Recognized Statistical Rating Organizations (NRSROs) for a variety of regulatory purposes. Among the effects of regulatory use was to enable lower-rated companies to sell bond debt for the first time; their lower ratings merely distinguished them from higher-rated companies, rather than excluding them altogether, as had been the case. However, another aspect of mechanical use of ratings by regulatory agencies has been to reinforce "pro-cyclical" and "cliff effects" of downgrades. In October 2010, the Financial Stability Board (FSB) created a set of "principles to reduce reliance" on credit ranges agencies in the laws, regulations and market practices of G-20 member countries. Since the early 1990s, the SEC has also used NRSRO ratings in measuring the commercial paper held by money market funds.

The SEC has designated seven other firms as NRSROs, including, for example, A. M. Best, which focuses on obligations of insurance companies. Companies with which Moody's competes in specific areas include investment research company Morningstar, Inc. and publishers of financial information for investors such as Thomson Reuters and Bloomberg L.P.

Especially since the early 2000s, Moody's frequently makes its analysts available to journalists, and issues regular public statements on credit conditions. Moody's, like S&P, organizes public seminars to educate first-time securities issuers on the information it uses to analyze debt securities.