Data providers and ratings agencies: global trends

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Ratings agencies haven't come out particularly well from the credit crunch. Their reputation for offering a reliable method of gauging the default-risk of investments is in tatters and serious questions have been raised about the viability of their business model.

Agencies' current tenuous situation comes from their decision to move away from their core business of rating the actual companies or governments issuing debt, in favour of rating complex financial derivative products issued by banks. Their profits boomed in the process: Moody's net income went from $289m in 2002 to $754m in 2006.

Retrospectively, ratings agencies appear to have been out of their depth. In the run-up to the sub-prime crisis, ratings agencies issued AAA ratings to complex derivatives like CDOs, which are now worth close to nothing.

In July 2008, the US Securities Exchange Commission (SEC) ruled that ratings agencies had failed to protect investors because of sloppy working practices and inadequate numbers of staff. Its case was fuelled by a series of incriminating emails sent by staff at unspecified agencies, including one which said: "It could be structured by cows, and we would rate it."

Ratings agencies have been criticised by regulators, governments and the markets themselves for failing to see the crisis coming. Their share prices have taken a beating as a result (albeit not as much of a beating as some banks'): between August 2007 and August 2008 shares in Moody's fell 32%, and shares in McGraw Hill, which owns Standard & Poor's, fell 27%. Both companies have made staff redundant.

The crisis could lead to a longer-term shift in the way ratings agencies operate. They are accused of a conflict of interest - namely, that they are paid by the investors that issue the bonds, and those investors want them to issue an AAA rating.

As a result, ratings agencies now face closer scrutiny, and the possibility of a new business model. It has been suggested, for example, that bond issuers pay fees into an independently managed central pool, which then asks ratings agencies to allocate ratings, creating a Chinese wall between agencies and their clients.

For data providers, the big news this year was April's merger between Canada's Thomson Corporation and the UK's Reuters to create Thomson-Reuters. In terms of business development, data providers have been busy implementing strategies to take advantage of emerging markets, most notably in China and India, as well as Dubai.

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