Finishing What Congress Started: Restoring Competition to Credit Ratings

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Richard Sibthorpe is the Head of Canada and Global Investor Strategy at Morningstar DBRS, where he oversees Canadian operations and global investor expansion. He brings over 25 years of capital markets experience building debt capital markets franchises across Toronto, London, and New York where he advised government, corporate, and infrastructure sector clients on public and private market transactions.

Nearly two decades ago, Congress passed the Credit Rating Agency Reform Act (CRARA) to improve credit rating quality by fostering accountability, transparency, and competition among credit rating agencies. The law was a response to growing concerns about market concentration — S&P and Moody’s controlled roughly 80% of the global ratings market at the time. Critics warned that this market concentration allowed the legacy agencies (i.e., S&P, Moody’s, and Fitch) to set their own standards with little competitive pressure. I’ve watched this market evolve since then. It’s clear that the need for increased competition amongst ratings agencies has never been higher.

Despite CRARA, the competitive situation has worsened. The numbers are staggering. S&P and Moody's now each control over 94% of the U.S. public investment grade corporate bond market by issuance volume (with Moody's reaching 98%).¹ This isn't just high market coverage in the credit rating sector; it represents one of the most severe concentrations in any market. This concentration reflects decades of benefits from recognition requirements and dated investment guidelines.

Credit ratings are an indispensable part of the infrastructure of our capital markets. They help institutional investors determine which bonds they can buy, how much capital financial institutions ought to set aside, and ultimately, the cost of capital for businesses across America. So when competition fails in this space, everyone pays the price. 

The Divergence Problem

The U.S. public corporate bond credit ratings market presents the starkest competitive failure, in what is the largest market segment. While the structured finance market has seen new entrants gain traction in credit ratings, public corporate credit ratings remain locked in the same competitive stranglehold that existed twenty years ago. 

In the aftermath of the financial crisis, competition in structured finance ratings has measurably improved. New entrants have gained traction and market coverage has become more distributed. Diversity of credit opinion has increased and market participants have benefited as more views on credit quality are made available. This demonstrates that competition is entirely possible when barriers to entry are addressed. 

Yet corporate bond credit ratings remain frozen in their pre-crisis configuration. The difference isn’t the complexity of the analysis; the difference is the switching costs and structural barriers. In structured finance, generally speaking, switching costs between credit rating agencies from one transaction to the next are nominal. In corporate finance, those costs are prohibitively high, thanks to legacy investment mandates of investors, restrictive bond index eligibility definitions, and decades of embedded regulatory references that all point back to the same two firms. 

The Entrenchment Machine

The perpetuation of this market dominance isn’t accidental. It's engineered through multiple interlocking mechanisms that create a nearly impenetrable moat around the legacy agencies.

Let’s start with the index construction problem. S&P’s iBoxx indices, which track global bond market performance and serve as benchmarks for countless investment strategies, only recognize credit ratings from the legacy ratings agencies. Smaller agencies are simply excluded from consideration. It’s the equivalent of Major League Baseball only allowing players to play in the major leagues if they are selected by three specific scouts, regardless of whether there are other qualified scouts capable of evaluating talent. Lest you think this practice is just a fair market dynamic, the iBoxx index is owned by S&P in an inherent conflict to promoting competition.

The index construction problem is amplified by widespread investor guidelines that embed the same restrictions deep into corporate bond markets. Investment mandates for mutual funds, pension plans, and insurance companies routinely specify that bonds must carry credit ratings from S&P and/or Moody’s (and sometimes Fitch) to qualify for purchase, regardless of whether other nationally recognized statistical rating organizations (NRSROs) have assessed the same securities. These guidelines aren’t based on regulatory requirements; they’re private contractual choices that have calcified into industry standard practice. A corporate issuer could obtain credit ratings from other qualified NRSROs, but if major institutional investors won’t recognize those credit ratings in their investment guidelines, then this is nothing more than an illusory choice. The result is a self-reinforcing cycle: investors demand S&P/Moody’s credit ratings because those are what indexes recognize, and issuers pay for S&P/Moody’s credit ratings because those are what investors demand. Competition based on quality becomes functionally impossible when alternatives are excluded from consideration. 

Now look at government policy. When the Federal Reserve launched its pandemic-era corporate credit facilities, the initial eligibility requirements accepted credit ratings only from the legacy rating agencies. Never mind that the 2006 Reform Act explicitly sought to promote competition; when crisis struck, regulators defaulted to the familiar. This pattern repeats at the state level. California Public Employees Retirement System (CalPERS), the nation’s largest public pension fund, explicitly limits its “authorized NRSROs” to S&P, Moody’s, and Fitch in multiple investment programs, directly excluding smaller NRSROs. Similar restrictions across state pension systems collectively affect over $1 trillion in assets. Fund managers literally cannot invest in bonds rated by smaller competitors, no matter how rigorous the analysis of such competitors.

Framework for Reform

The solution isn’t radical restructuring or heavy-handed intervention. What we need is targeted transparency and regulatory housekeeping. In other words, the kind of incremental reform that removes artificial barriers without picking winners.

First, the SEC needs to adapt how it measures and reports on competition. The current approach in the SEC’s Annual Staff Report on NRSROs counts the total number of outstanding credit ratings, which obscures actual competitive dynamics. An agency that rates every debt instrument issued by a single company receives the same statistical weight as an agency that rates an equivalent number of instruments but across many different companies. This metric dramatically overstates the presence of competition. 

A more nuanced presentation would show market coverage or issuer-level participation (i.e., how frequently each NRSRO’s credit ratings appear across corporate bond issuers). Such a presentation would align with the SEC’s own acknowledgment that “barriers to entry continue to exist in the credit ratings industry, presenting competitive challenges for the small and medium NRSROs.”² If we're going to have data, let's have data that effectively illuminates the problem. 

Second, the SEC should publish a consistent, data-driven mapping of credit rating performance across all NRSROs. This isn't a novel concept; the UK, Canada, Australia, and the European Union already do this. A regulatory mapping table would allow investors to compare how different credit rating scales actually perform over time, not just in theory but in practice. In addition to public market benefits, it would provide objective data on private credit ratings’ quality where public performance information is particularly scarce. 

The beauty of this approach is that it doesn't require the government to certify anyone as “better” or “worse.” It simply provides transparent, objective information and lets the market decide. It’s the difference between mandating competition and enabling it.

Third, we need a regulatory impact assessment focused specifically on small and medium NRSROs. Executive Order 14267 directs federal agencies to reduce anti-competitive regulatory barriers. The credit rating industry is an ideal candidate for such a review. Are compliance costs scaling appropriately with firm size, or are they inadvertently creating a regulatory moat around the largest players? Are reporting requirements proportionate to the actual risks posed by different market participants? 

Fourth, we need to revisit longstanding industry restrictions that promote anti-competitive behavior and do not allow for greater diversity of credit opinion. The most direct way to tackle this is in revisiting the very prescriptive bond index eligibility criteria and expanding the scope so that investors and issuers benefit from greater choice. 

Finally, the SEC should consider whether its oversight resources are properly balanced between asset classes. If competition has demonstrably improved in structured finance while remaining stagnant in corporate bonds, perhaps that tells us where regulatory attention is most needed. This isn’t about reducing oversight over structured finance; it's about recognizing that different market segments present different competitive challenges and allocating resources accordingly. 

Why Diversity of Opinion Matters

At its core, this isn’t just about market share or regulatory process. It’s about the fundamental question of how we assess credit risk in our financial system.

All opinions are subject to error, including those based on sophisticated statistical models and decades of historical data. When the same two firms provide the overwhelming majority of credit opinions, we create systemic vulnerabilities. We concentrate methodology risk, we reduce the diversity of analytical approaches, and we create conditions where commercial considerations can subtly influence the methodology development process.

The market dominance of the legacy NRSROs creates perverse incentives. When issuers have no realistic alternative, rating agencies face less pressure to innovate, less urgency to get calls right, and less accountability when they get them wrong. The lack of competition doesn’t just harm smaller rating agencies; it ultimately undermines investor confidence in the entire system. 

When multiple credible voices offer independent analysis, investors can triangulate across different perspectives. They can understand where agencies agree and where they diverge, and form more nuanced views of credit risk. Markets become more resilient because they're not dependent on the judgment calls of just two institutions. 

The Path Forward

The suggested reforms aren’t revolutionary and they’re consistent with the Credit Rating Agency Reform Act’s original vision. Congress understood in 2006 that competition was essential to credit rating quality. The insight was right — implementation fell short. 

I’m unpersuaded by arguments that the current system works well enough, and that the largest rating agencies have earned their position through superior analysis. The structured finance market proves that competition and quality can coexist, and that competition doesn’t create instability. The 2008 financial crisis demonstrated the risks of overreliance on a small number of gatekeepers. And the basic principles of economic theory remind us that excessive market dominance rarely serves the public interest. 

The credit markets continue to grow, and the credit rating industry matters too much to leave it frozen in an outdated market structure. Public bond issuance by corporates, the most prominent segment of the U.S. fixed income markets, should be allowed to evolve and maintain its competitiveness in growing competition with Private Credit. We have the tools to promote competition without disrupting markets. We have examples from other jurisdictions showing it can work. And we have a regulatory mandate, nearly two decades old, that tells us we should. 

It’s time to finish what the 2006 Reform Act started. Not through dramatic intervention, but through the kind of incremental, evidence-based reform that removes barriers and lets markets function.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1]  No, this isn’t double counting. Bonds are often rated by multiple agencies. Of 5,588 bonds analyzed, S&P rated 5,270 (94.3%) and Moody's rated 5,511 (98.6%).Market share calculations based on Bloomberg Terminal data as of December 31, 2024, analyzing all U.S. public investment-grade corporate bonds (excluding utilities and financials).

^[2]  ​​See https://business.cch.com/srd/20250129-jan-2025-ocr-staff-report.pdf

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