Wholesale financial markets rely on data to function effectively and efficiently. If wholesale data markets are working well, capital markets will function efficiently, and well-informed decisions will be taken on where and how to invest.
This market study is a key piece of work in delivering the UK Financial Conduct Authority’s (FCA) strategic aim to strengthen the UK’s position in global wholesale markets and our commitment to promoting competition and positive change. Well-functioning wholesale data markets will play a central role in achieving these goals.
Credit ratings data
Approximately 92% of revenue from UK credit ratings activities are from the ‘Big Three’ CRAs, Moody’s Investors Service, S&P Global Ratings, and Fitch Ratings, a position that has remained largely stable over the past five years. There have been numerous smaller CRAs that have entered or expanded into the UK market since the 2007/8 global financial crisis. There are currently 13 CRAs authorised to issue credit ratings in the UK.
Based on information gathered from firms, the profitability of the Big Three significantly exceeded that of smaller CRAs throughout the period for which we collected data (2017 to 2022).
Credit ratings are overwhelmingly paid for by debt issuing firms, with the resulting ratings given to CRAs’ data affiliates to license and distribute as part of data services. The credit ratings data market is highly concentrated amongst data affiliates of the Big Three CRAs: Moody’s Analytics, S&P Global Market Intelligence, and Fitch Solutions.
The FCA’s analysis indicates that, among credit ratings data originators, data affiliates of the Big Three account for a large majority of revenues from UK-domiciled end users, with the market estimated to generate revenues of up to £100 million ($126.8mn) annually.
In response to our survey, data users highlighted a perceived lack of transparency around how prices were set for credit ratings data, with some users suggesting they were paying significantly different prices to their peers. Fees schedules are not typically publicly available. Data users were unclear about pricing factors, and their respective weightings on end prices. Many larger firms indicated regulatory and end investor requirements meant they had to license credit ratings data from all of the Big Three CRA’s data affiliates, with ratings from challenger CRAs not viewed as a viable alternative. This limits many users’ choice of credit ratings data services. This situation may allow CRA data affiliates to price discriminate in ways which can limit competition, such as charging higher prices to firms who cannot switch service providers.
Market Data Vendors services
MDVs play a key role in the distribution of trading data and other sources of market data such as benchmarks and CRA data. In 2022, the UK revenue of our sample of MDVs was around £3.0 billion. Bloomberg is and has been historically the largest MDV followed by Refinitiv. Other smaller but significant MDVs are SPGMI, ICE and FactSet, followed by a long tail of smaller specialized providers.
There have been no major entrants in the last five years, and exit has occurred mainly via mergers and acquisitions. However, information from suppliers provides some evidence of existing firms in the market entering new market segments and developing new products and services. 1.18 Most of the buyers in this market are sophisticated users with procurement teams that review licences regularly. However, the majority of our demand-side respondents reported that they have little or no bargaining power when negotiating with the largest vendors. Well-established and large MDVs appear to hold market power resulting from switching costs and other frictions in the switching process.
Next steps
There are a range of potential outcomes at the end of a market study to address the identified issues. As well as making a market investigation reference (MIR) to the Competition and Markets Authority (CMA), the options include introducing, changing, or removing of rules; issuing guidance; encouraging industry-led solutions; firm-specific remedies and recommending action by other authorities, for example, recommending to the Treasury to provide us with new or extended powers.
The scope to make and change rules in some cases may be increased as the FCA bring retained European Union (EU) law across a range of different areas into its Handbook through the Future Regulatory Framework (FRF) Review reform process. If the FCA considers that the issues found are most effectively dealt with at the international level, the regulator will consider how to do this effectively. Alternatively, it may choose not to take any action.