MS23/1.3: Market Investigation Reference Notice

Following the launch of a wholesale data market study relating to benchmark providers in March 2023 (please see EventID 20018 for more information), the Financial Conduct Authority (FCA) has published a notice in this context. Therein, the FCA seeks view on its decision to refrain from referring this matter to the Competition & Markets Authority (CMA) for further investigation pursuant to section 131A of the Enterprise Act 2002.
##### Background
To recall, in the March market study, the FCA sought views from a whole array of financial market participants, including fund managers, on the current functioning of the markets for benchmarks, credit ratings data, and market data vendor services. The study followed findings from a review of the market on trading data which revealed significant issues as to the pricing, market power, and contract „abuse“ by market data vendors, including benchmark providers.
##### Update on the March 2023 market study
The FCA has now published a first update on the study which serves as the basis for the above noted decision. In this update, the Authority outlines its preliminary findings both from respondents to the March 2023 market study and from its own initiative to further explore this matter.
The key findings are as follows:
(1) Market for benchmark data
As of August 2023, the UK Benchmarks Register includes 36 UK benchmarks administrators and 10 third country administrators. The market generated an estimated £600 million in aggregate UK revenues in 2022. Notably, three providers have consistently dominated the market since 2017, while newer entrants remain small, signaling a high market concentration and leading to limited switching among users.
Competitive dynamics among benchmark administrators are influenced by network effects, strong brand awareness, barriers to entry, and vertical integration. Also, some administrators may possess market power, reducing their incentives to compete on price and quality.
(2) Market for credit rating data
In the UK credit ratings data market, the Big Three CRAs (Moody’s Investors Service, S&P Global Ratings, and Fitch Ratings) contribute to about 92% of revenue, indicating a high market concentration. Smaller CRAs have entered the market, but the Big Three’s profitability surpasses that of smaller players.
Credit ratings data is mostly paid for by debt-issuing firms and controlled by data affiliates of the Big Three CRAs. Free ratings data under UK regulation is underutilized due to concerns about quality and licensing terms.
Pricing transparency is a concern, with users often paying different prices, and fee schedules not publicly available. Larger firms often license data from all Big Three affiliates due to regulatory requirements.
(3) Market data vendors sector
In the Market Data Vendors sector, UK revenue in 2022 was around £3.0 billion. Bloomberg is the largest vendor, followed by Refinitiv. Established market data vendors have market significant power due to related switching costs of users.
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##### Grounds for the FCA’s decision to refrain from referring this matter to the CMA for further investigation
The FCA notes that it has a wide range of tools at its hand to address the issues raised and found so far, including the high market concentration and powers of individual firms as regards price and contract negotiations. For instance, it could make rule adjustments, issue guidance to the noted sectors, facilitate and encourage solutions developed within the sectors, or recommend actions to the HM Treasury in this context. The submission of a Market Investigation Reference to the CMA is thus only one course of action the regulator may take. Hence, as of now, it is the opinion of the FCA, that it shall first await the final results of the study and deploy above noted tools – if so needed to seek remedies from current shortcomings in the functioning of the market. Therefore, it has issued the above noted notice to seek public comment on this decision.