Govt to regulate credit rating activity
Pedestrians cross the street in Central. Credit rating services will become the 10th type of financial activity regulated by the SFC. Scott Eells / Bloomberg |
Agencies and analysts will need SFC license
The Hong Kong government announced Friday that it plans to regulate credit rating activity, requiring both credit rating agencies and their rating analysts to be licensed and regulated by the Securities and Futures Commission (SFC).
The government will add credit rating services to the Securities and Futures Ordinance (SFO), in order to create a regulatory regime for credit rating agencies operating in the city, the government said in a statement.
“Under the regulatory regime, both corporate credit rating agencies in Hong Kong and their individual rating analysts will need to be licensed and be subject to the general obligations which are common to all persons licensed or registered under the SFO,” a government spokesman said Friday.
Credit rating services, which currently operate in an unregulated local environment, will become the 10th type of financial activity regulated by the city’s financial watchdog.
The new regulatory measure, which is expected to come into effect on June 1, will be tabled before the Legislative Council next week.
“Standard & Poor’s welcomes the SFC’s proposed approach to regulating credit rating agencies,” Ping Chew, managing director and head of Greater China at S&P told China Daily in an e-mail reply.
“S&P believes that regulation can play an important part in restoring confidence in ratings and we welcome any proposal that would, on a globally consistent basis, increase transparency and preserve the analytical independence of credit reporting agencies’ opinions, methodologies and analytical processes,” Chew said.
The new regime will cover all three major multinational credit rating agencies operating in the city – Standard & Poor’s, Moody’s and Fitch – as well as some smaller agencies with offices in Hong Kong, the SFC said in July 2010, before it carried out a two-month public consultation on the issue.
The 2008 global financial crisis shone a light on the failure of many credit rating agencies to fully unmask the inherent risks of complicated financial instruments for investors even when the market conditions continually deteriorated.
A January 2011 report by the Financial Crisis Inquiry Commission – a 10-member commission appointed by the US government to investigate the causes of the financial crisis between 2007 and 2010 – said the three credit rating agencies were “key enablers of the financial meltdown”. They added that the mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval.
“Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havoc across markets and firms,” said the report.
On April 2, 2009, G20 leaders in London issued a “declaration on strengthening the financial system”, which called for all credit rating agencies to be registered, comply with the International Organization of Securities Commissions code, and have regulatory oversight.
Since the declaration, a number of jurisdictions such as the European Union, the US, Japan and Australia have announced regulatory measures to strengthen supervision on credit rating agencies.
Starting in June 2011, the European Union will prohibit any credit rating issued by a non-EU agency, unless it operates within a regulatory regime that is equivalent to or as stringent as the EU regime.
China Daily
(HK Edition 02/19/2011 page2)
http://www.chinadaily.com.cn/hkedition/2011-02/19/content_12042883.htm