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

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

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.

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

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

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

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 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. 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 ASISA perspective

“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. 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.” Clause 4 of the Bill

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