The Forex Industry and the Financial Rating Agencies

The forex industry is one of the largest sectors of global economy with large amounts of money being traded. It also involves a large number of players across many countries. It is therefore important to have independent financial/ credit rating agencies so as to analyze the credit worthiness of the players that are involved in the forex industry.

If you have been seeking information regarding these agencies as well as their role in the global forex industry, then you will find this piece extremely useful as it delves into explaining all the details about them in a very well detailed, concise, and in a way that is easily understandable. Move on to the next paragraphs to learn all these and much more.

The Roles of Financial Rating Agencies

Financial agencies are an integral part of the forex industry. This is because they play a very central role in the market. These agencies perform the following functions:

• Credit, Debt and Bond ratings

As their names suggest, this is the main role of the financial rating agencies. They do so by evaluating the debtor’s ability to repay the debt that is lent to them and hence the likelihood of default.

For national governments, the agencies issue a sovereign credit rating. The rating evaluates the creditworthiness of the country by taking into account the current economic conditions as well as the political stability of the given country. 

Armed with these ratings, institutional investors are able to qualify as well as quantify the ease of doing business and the investment atmosphere of the country in question.

The agencies also issue the same ratings for individual companies as well as to certain kinds of securities, including preferred stock and corporate bonds. All these ratings can be offered for short term or long term obligations.

• Financial Advice

Occasionally, the rating agencies may be called upon by financial institutions and even sometimes non-financial ones such as law firms, to help in the analysis of their metrics. In this scenario, they usually play an advisory role.

Major Financial Rating Agencies

There are several rating agencies in the world, but for a long time now, there have been 3 major financial rating in the world which controls about 95% of the global market share. This section is dedicated to providing an overview of these ‘Big Three’, as they are known.

• Standard and Poor’s

This is the oldest, having been established by Henry Varnum Poor in the 1860s in the USA before merging with Standard Statistics (established in 1906) in the early 1940s. It today controls an estimated 40% of the market share.

• Moody’s Investors Service

The company as it is known today was established in 1914, even though the founder, John Moody and his associates had been publishing financial statistical reports since the turn of the century. By the 1970s it had cemented its position and today also controls approximately 40% of the market share.

• Fitch Ratings

It is dually headquartered in New York and London, having been founded in 1913. It holds a market share of 15% and is credited with formulating the D through AAA system of rating that has become the standard in the industry.