Credit Rating Services Bill Standing Committee on Finance Parliament 29 May 2012

1. Credit Rating Services Bill Standing Committee on Finance Parliament 29 May 2012

2. Agenda • Introduction to ASISA • ASISA process • What is a credit rating? • ASISA perspective • Clause 4 of the Bill

3. Introduction to ASISA • Formed in 2008 • Combined Life Offices Association, Investment Managers Association, Association for Collective Investment Schemes, Linked Investment Services Providers Association • Represents the majority of life insurance companies, investment managers, collective investment scheme management companies and linked investment services providers • Mandated by members to pro-actively engage with policymaker and regulator on policy, regulatory and other issues of common concern.

4. ASISA process • Collated written comments from members • Members nominated representatives to form part of the Working Group • Discussed and considered comments in a Working Group

5. What is a credit rating? • An assessment of the credit worthiness of companies and governments that issue debt • Based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities, in other words the likelihood of default • A poor credit rating indicates a credit rating agency's opinion that the company or government has a higher risk of defaulting

6. ASISA perspective • Considered the Bill from an investor’s perspective • ASISA members act on behalf of investors • Investors have limited control over choice of credit rating agency • Actions of issuer and credit rating agency may impact on investments • ASISA members thus support the objects of the Bill

7. ASISA perspective • ASISA members contract with clients in respect of exposure limits to credit rating bands • Credit exposure client is willing to accept is agreed with investment manager • Investors take comfort in an independent evaluation of credit exposure in their portfolios of assets

8. ASISA perspective • Larger investment managers employ expert resources to manage credit risk exposures • Procedures and processes similar to those applied by credit rating agencies • Smaller investment managers may not have access to these resources and may rely more heavily on credit ratings issued by credit rating agencies • From an investor’s perspective, the higher the rating, the lower the perceived risk.

9. ASISA perspective • If a credit rating is for example downgraded, it could result in forced selling • May cause large losses • Credit rating process must therefore be sound to avoid risk of inappropriate downgrading • Imperative that credit rating agencies are responsible and accountable • Integrity, transparency and reliability of credit rating process and credit ratings must be protected

10. Clause 4 of the Bill • “A regulated person must for regulatory purposes only use credit ratings that are issued or endorsed by credit rating agencies which are registered in accordance with this Act.” • May be misinterpreted to mean that a regulated person must only use credit ratings issued by credit rating agencies and no other ratings • Intention to require that where a regulated person is required in the applicable legislation to use credit ratings, those ratings must be issued by a registered credit rating agency.

11. Clause 4 of the Bill • Recommend that obligation must reside in primary legislation to avoid misinterpretation • If retained, suggest alternative wording: • “Where a regulated person uses published credit ratings for regulatory purposes, such a regulated person must only use credit ratings that are issued or endorsed by credit rating agencies which are registered in accordance with this Act.”

12. Thank you • ASISA and its members appreciate the opportunity to appear before the Committee