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Following is a question by the Dr Hon David Li and a reply by the Acting Secretary for Financial Services and the Treasury, Ms Julia Leung, in the Legislative Council today (March 4):
Question:
The outbreak of the financial tsunami has sparked efforts around the world to address weaknesses in the existing financial systems with a view to restoring confidence in the financial markets. Several observers have pointed out that international credit rating agencies (CRAs) must share part of the blame for the crisis. In this regard, will the Government inform this Council whether it had, in the past 12 months:
(a) evaluated, or will evaluate, the role of CRAs with respect to the future development of Hong Kong as a financial centre;
(b) coordinated, or will coordinate, with other regulatory authorities in the region to re-examine the role and function of CRAs; and
(c) assessed if there was scope for the establishment of an Asia-based international CRA in Hong Kong; if so, of the results?
Reply:
President,
The ratings assigned by credit rating agencies represent their opinion on the ability of the borrower or issuer to meet its financial obligations. Credit rating is thus a key reference for investors to assess the safety of an investment. Having Hong Kong entities rated in an impartial and unbiased manner could induce investor confidence and help develop Hong Kong as an international financial centre, a longstanding objective of the Government.
During the global financial market turmoil in the past year, concerns have been expressed by the market for the timeliness of downgrades by credit rating agencies, particularly for the US subprime products in 2007. Specifically, users of ratings are concerned about the business practices and business models adopted by credit rating agencies that might affect their impartiality and independence.
Investors and users in Hong Kong have mainly relied on three international credit rating agencies for their provision of rating services. They are Moody's, Standard & Poor's and Fitch. As their services are global in nature, our regulators, namely the Securities and Futures Commission and the Hong Kong Monetary Authority, have been following closely international and regional initiatives that promote appropriate oversight of credit rating agencies.
There have been active discussions on how to improve the corporate governance of credit rating agencies at various international and regional fora including the Group of Twenty, Financial Stability Forum, International Organisation of Securities Commissions or IOSCO, Asia-Pacific Economic Cooperation, Asian Development Bank and Association of Southeast Asian Nations Plus Three. These discussions have focused on how to encourage credit rating agencies to meet the highest standards of the IOSCO to avoid conflicts of interest, provide greater disclosure to investors and to issuers, and differentiate ratings for complex products. We shall continue to keep abreast of and as appropriate, participate in the international and regional deliberations. Consideration will be made on whether, and if so, how such deliberations and resultant recommendations, if any, are applicable to Hong Kong.
We note that a market proposal to establish an Asia-based international credit rating agency has been floated. We welcome any business initiatives to increase competition in the existing credit rating market, which would be beneficial to the efficiency of our financial system through provision of better quality information. While acknowledging such benefits, we are mindful that the sustainability of any new credit rating agency hinges on its ability to build up its track record fast enough to win a critical mass of rating users, and to comply with the highest IOSCO standards on independence, professionalism and impartiality. We look forward to hearing market views on the business case for establishing such a credit rating agency.
Ends/Wednesday, March 4, 2009
Issued at HKT 15:46
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