By Huw Jones and Marc Jones
LONDON (Reuters) - The European Union's markets watchdog has tightened its grip over the use of credit ratings compiled outside the bloc in a taste of what the "Big Three" ratings agencies in London face after Brexit.
For a credit rating compiled outside the EU to be used for regulatory purposes in the bloc, it must be "endorsed" by a credit rating agency authorized by EU's European Securities and Markets Authority, or ESMA.
More than two thirds of credit ratings that can be used for regulatory purposes in the EU are introduced through the endorsement regime. Nearly all endorsed credit ratings relate to non-EU issuers and financial instruments, it said.
The world's "Big Three" rating agencies, Moody's, Standard & Poor's and Fitch have their European bases in London.
On Friday, ESMA updated its rules on endorsement that will come into force in January 2019, spelling out how it will be more intrusive in policing the regime to ensure investor protection.
The tougher guidelines mean in practice that ESMA can obtain information about the internal workings of ratings agencies based outside the bloc, normally the preserve of local regulators only.
"The updated guidelines make clear that ESMA can, and will, exercise its powers to request information from EU credit rating agencies about endorsed credit ratings," ESMA Chair Steven Maijoor said in a statement.
The changes to the rules puts the onus on the EU-based rating agency to "verify" and "demonstrate" that the conduct of the non-EU rating compiler "fulfils requirements that are at least as stringent as the EU requirements".
The watchdog can fine an EU agency that fails to do so.
"ESMA clarifies that it has the power to request periodical information directly from the endorsing EU credit rating agency about an endorsed credit rating and the conduct of the third-country CRA," the watchdog said.
"When a credit rating is endorsed there must be an objective reason for elaborating the rating outside the EU."
Fitch said it would work with ESMA to comply and remain "best placed to serve the needs of market participants from our dual headquarters in London".
S&P and Moody's had no immediate comment. DBRS said it would comply with regulations that allow it to work in the EU.
When Britain leaves the EU in March 2019, these operations will be treated as foreign agencies whose ratings would need to be endorsed by an agency inside the bloc.
The big agencies already have operations in several EU states, but may now need to move staff from London to them given tougher conditions for endorsement set out by ESMA on Friday.
The watchdog also said the endorsement regime will continue to apply to Argentina, Australia, Brazil, Canada, Hong Kong, Japan, Mexico, Singapore and the United States when other revisions to the bloc's rating agency rules come into force in June 2018.
Ratings agencies have questioned the need for tougher endorsement requirements for ratings from non-EU countries whose rules ESMA has already deemed "equivalent" to EU standards.
ESMA said the endorsement regime contains additional safeguards to ensure the quality of the rating activities.
Critics have told ESMA the new guidelines may lead to "geographical re-alignments" for big agencies, with the extra administrative costs passed on to customers.