Ratings & Indices

Its role in the system

The "price of trust" in the financial system. A credit rating tells an investor in a single symbol how likely a borrower is to repay — and that determines the rate at which states and companies borrow. Indices set the "yardstick" by which markets and fund performance are measured, and they determine where passive investors' money automatically goes.

Functions

1. Credit ratings — an assessment of the ability of a state, bank, company or an individual bond issue to pay its debt on time, on a scale from AAA to D (S&P, Moody's, Fitch; 🇪🇺 smaller ESMA-registered agencies such as Scope and Creditreform).
2. Structured product ratings — assessment of securities backed by pools of loans (MBS, CLO); these are exactly what failed in 2008.
3. ESG ratings — an assessment of how a company manages environmental, social and governance risks (MSCI, Sustainalytics); "green" funds rely on them. 🇪🇺 Since July 2026 this is a licensed activity: a provider needs ESMA authorisation, must disclose its methodology and data sources, must show the E, S and G components separately, and must avoid a conflict of interest between rating a company and selling it other services.
4. Indices and benchmarks — the calculation of equity indices (S&P 500, MSCI World, FTSE 100) and interest rate benchmarks to which funds, derivatives and loans are tied.
5. Market classification — the decision as to which country is "developed" and which is an "emerging market", and which companies enter an index; every such decision redirects enormous flows of capital.

What makes it special

• The "issuer pays" model, and a market split three ways: a credit rating is usually paid for by the entity being rated. This gives the agency access to inside information but creates a conflict of interest — the key reason for the failure of 2008. Three agencies dominate the world — S&P, Moody's, Fitch — and new entrants find it hard to break in because investors and regulators are used to their scales. Index providers (MSCI, FTSE Russell, S&P Dow Jones Indices) earn differently: from licences to the funds, exchanges and banks that use their indices.
• The rating is built into the rules: bank capital ratios, central bank collateral requirements and pension funds' investment mandates all use the rating as a threshold. When an issuer falls below "investment grade" (BBB− / Baa3), many investors are forced to sell — a downgrade can set off a mass sell-off.
• Who regulates: 🇺🇸 the SEC registers agencies (NRSRO status); 🇪🇺 ESMA is the sole direct supervisor of credit rating agencies, and from 2 July 2026 also of ESG rating providers; indices and benchmarks fall under 🇪🇺 the BMR regulation and 🌍 the IOSCO principles.
• An opinion, not a guarantee: legally a rating is the agency's "opinion". ESG ratings from different providers for the same company often diverge substantially, because they measure different things.
• 🇨🇳 China: a national scale on which almost everyone is top-rated: most bonds are rated by domestic agencies (China Chengxin, Dagong, Lianhe, Pengyuan) on a national scale — roughly four out of five domestic ratings are AAA or AA, and for the same issuers the global agencies land about six to seven notches lower. The reason is not leniency: the market assumes the state will stand behind state-owned enterprises and local government financing vehicles, so real differences in risk barely show up in the symbol. Since 2019 the global agencies' local subsidiaries have also been allowed to rate inside the country.
• 🇯🇵 Japan: two home-grown agencies beside the big three: JCR and R&I are registered with Japan's FSA, and JCR also holds US NRSRO status, so its opinions are recognised outside the country. It is the domestic agencies that cover most of the local corporate bond market: Japanese investors are used to their scale, so an issuer borrowing at home is rated first of all against it.

Why it matters

When ratings or benchmarks mislead, the whole system errs with them: investors buy risk dressed up as safety, banks count capital on a false basis, and millions of contracts are tied to a rate that is not true.

Links to other zones · 16

• Banking & Credit InstitutionsRatings & Indices touches Banking & Credit Institutions twice: borrower ratings enter the capital calculation, and the bank's own rating sets its funding cost.
• Corporations & Corporate FinanceA rating from Ratings & Indices decides at what price Corporations & Corporate Finance borrow in the bond market and whether pension funds may hold the paper; losing investment grade makes funding dearer at once.
• Credit InformationRatings & Indices work at the top of the market and Credit Information at the retail end: agencies rate issuers and bond issues, bureaus score millions of individuals and small businesses.
• Debt marketA rating from Ratings & Indices decides who may hold a Debt market bond and at what yield; a downgrade of a country or a company makes its borrowing dearer overnight.
• DerivativesRatings & Indices underlies Derivatives: index futures and options, credit derivatives tied to events and ratings, and interest rate swaps priced off benchmarks such as SOFR or €STR.
• Development BanksRatings & Indices underpins Development Banks: agencies weigh the strength of the shareholder governments and their callable capital, and that judgement sets the cost of every bond.
• Exchanges & platformsRatings & Indices cannot work without quotes: an index is calculated from the prices of Exchanges & platforms, and a decision to add a company to an index instantly moves demand for its shares there.
• Financial Market InfrastructureFinancial Market Infrastructure registers and supervises the agencies and benchmark administrators of Ratings & Indices (🇺🇸 SEC, 🇪🇺 ESMA).
• Financial Media & DataRatings & Indices reach the market through Financial Media & Data — terminals and news wires — and are frequently owned by the same groups: LSEG with FTSE Russell, S&P Global with S&P Dow Jones Indices.
• Fiscal PolicyThe sovereign rating in Ratings & Indices is the borrowing cost of Fiscal Policy, and finance ministries keep a permanent dialogue with the agencies.
• InsuranceA financial strength rating in Ratings & Indices shows whether an Insurance company will still be able to pay a claim in ten years; without one, corporate clients and reinsurers stay away.
• Investment & Pension FundsETFs and index funds inside Investment & Pension Funds replicate the indices of Ratings & Indices; mandates block purchases below investment grade, and ESG funds rely on ESG ratings.
• Regulation & SupervisionRatings & Indices carry regulatory weight because Regulation & Supervision uses them as a threshold: a fall below investment grade forces supervised firms to sell a bond whether they want to or not.
• Sovereign Wealth FundsWhen Ratings & Indices providers reclassify a country between developed and emerging market status, its weight in the benchmarks changes and index-following Sovereign Wealth Funds rebuild their portfolios.
• State Insurance & GuaranteesRatings & Indices agencies treat State Insurance & Guarantees and export cover as a hidden part of sovereign debt, while banks, leaning on the sovereign rating, put an ECA-covered loan in their safest category.
• Stock marketIndices in Ratings & Indices are the thermometer of the Stock market, and inclusion means automatic demand from passive funds.

Regulation and supervision

Careers in this zone · 6

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