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Basel
ii Compliance Professionals Association
(BCPA)
the largest
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world
Basel Committee on Banking Supervision, The Joint Forum
Stocktaking on the use of credit ratings - June 2009
B.
Asset Identification
1. Banking and securities sector
The field of LRSPs cited by the second highest number of
respondents was, broadly speaking, asset
identification/categorisation.
This includes, for example, the designation
of permissible investments and/or required investments for mutual
funds as well as the establishment of, and exceptions to,
investment concentration limits for particular types of assets.
In most cases, member jurisdictions reported that credit ratings
were used in both the banking and securities sectors. In addition,
the United Kingdom Financial Services Authority (UK FSA) noted
that credit ratings are not used in any of its three financial
sectors for asset identification.
In the EU, the Undertakings for
Collective Investment in Transferable
Securities Directives (UCITS Directives) on collective
investment schemes does not contain provisions which make
reference to credit ratings.
However, Commission Directive 2007/16/EC,22 which clarifies
certain definitions used in the UCITS Directives, contains two
specific references to credit ratings relating to money market
instruments.
In Japan, a securities dealer is
generally not allowed to be a lead manager for a security issued
by its parent or subsidiary company.
However, it is exempt from this regulation if the security is
rated by a DRA that is subject to the Cabinet Office Ordinance of
Act on Financial Instruments Business Operators Art153(iv) under
the Financial Instruments and Exchange Act.
As in the case of US capital
requirement LRSPs, the extensive banking and securities LRSPs
using credit ratings in the US generally restrict such use to
credit ratings issued by credit rating agencies designated as
NRSROs through the US SEC�s registration process.
Finally, in Canada, both the OSFI and
the Ontario Securities Commission (OSC) use credit ratings in
their LRSPs for asset identification/categorisation purposes, for
example, in OSFI LRSPs determining eligible collateral for
securities lending loans and OSC LRSPs establishing money market
fund investment guidelines.
2.
Insurance sector
In the United States, many state
insurance laws describe permissible investments and/or
concentration limits in terms of ratings and/or NAIC designations
for insurance companies.
For example, New York State insurance law delineates permissible
investments for the portion of assets corresponding to insurance
liabilities.
In describing permissible investments in the obligations of
American institutions (other than an insurance company), the law
indicates that such investments are permitted as long as they meet
one of several criteria.
The list of criteria makes at least two references to rating
agency ratings.
First, investment in the obligations
of American institutions are permitted if they are rated �A� or
higher (or the equivalent thereto) by a securities rating agency
recognised by the Superintendent of Insurance.
Second, such investments are
permitted if such obligations are insured and, after considering
such insurance, are rated �Aaa� (or the equivalent thereto) by a
securities rating agency recognised by the Superintendent of
Insurance.
In addition, some state insurance laws provide limitations on the
types of obligations that financial guarantee insurance companies
can insure.
For example, New York State insurance law
provides that an insurer may insure municipal obligation
bonds that are not investment grade so long as at least 95 percent
of the insurer�s aggregate net liability is investment grade.
In Japan, insurance regulations
restrict the concentration of non-DRA rated assets to specific
ratios calculated under the Insurance Business Law and the
Ordinance for Enforcement of Insurance Business Law.
Ratings are also used in the German insurance sector for asset
identification as one possible criterion to determine the safety
of the asset.
C.
Securitisations and covered bond offerings
1. Banking and securities sectors
A significant number of respondents indicated that their LRSPs
addressing securitisations and/or covered bond offerings used
credit ratings, generally by requiring that securitisations
offered to investors be rated by one or more credit rating
agencies.
The breadth of the use of credit ratings in member authorities�
LRSPs addressing securitisations varied, with some covering all
securitisations and other covering only certain identified types
of securitisations (eg, in Italy, only where securities are sold
to non-professional investors).
The UK FSA noted that ECAI ratings are used to determine the
credit quality of a firm�s securitisations positions.
It also noted that with regard to the �covered bond� regime, it
may consider whether the counterparty has an appropriate credit
rating in considering whether an asset pool is of sufficient
quality.
In the United States and Canada, a number of banking and
securities LRSPs governing asset-backed instruments reference
external ratings.
2.
Insurance sector
No respondent stated that credit ratings are used in the insurance
sector regulation specifically with regard to securitisations.
In practice, supervision of insurance companies necessarily takes
into consideration credit ratings if insurance companies invest in
or guarantee securitisation products.
D.
Disclosure requirements
1. Banking and securities sectors
A significant number of respondents indicated that credit
ratings were used in their LRSPs regulating disclosure.
Such usage fell into two broad categories:
requirements and exemptions.
A number of respondents indicated that their LRSPs required rated
entities to disclose their ratings as well as to disclose when
such ratings were changed (or when they believed changes were
imminent).
Others noted that their disclosure LRSPs contained exceptions for
credit rating agencies, eg, explicitly exempting credit ratings
from requirements to disclose certain documents such as pre-sale
reports.
Several jurisdictions identified unique disclosure requirements.
For example, in Japan, the JFSA requires ECAIs to disclose certain
information regarding the securitisation exposures for credit
ratings to be eligible under the Basel II framework (eg, rating
criteria, rating transition matrix, and transaction-specific
information).
2.
Insurance sector
In Japan, DRA ratings are used to
determine which disclosures must be made with regard to certain
re-insurance contracts.
E.
Prospectus eligibility
Several respondents indicated that credit
ratings play a role in their LRSPs governing prospectuses for
securities offerings.
For example, certain types of prospectuses, such as �short form�
prospectuses, include an investment grade rating as one of the
criteria for eligibility to use the form.
Among EU jurisdications, the UK FSA
noted that in the United Kingdom, there are no references to
credit ratings with regard to prospectuses for equities.
For debt instruments, however, the prospectus must disclose the
credit ratings assigned to an issuer or its debt securities at the
request or with the cooperation of the issuer in the rating
process.
Italian legislation allows, in
certain instances, the sale of investment grade public bonds
issued by OECD States and originally placed with qualified
investors without the use of a prospectus.
In the US and Canada, the US SEC and
OSC each have a number of LRSPs referring to credit ratings in the
context of prospectus requirements, for example, their regulations
governing the use of short-form prospectuses in securities
offerings.
In Japan, issuers can use the
�reference system� of the securities registration statement and
the shelf registration system for the public offering of corporate
bonds if they meet certain requirements, including that they are
rated by DRAs.
F.
Other
A handful of respondents identified LRSPs allowing the use of
external credit ratings as an input for an entity�s own internal
ratings.
An equal amount cited LRSPs that use credit ratings for the
purpose of stress tests to gauge credit risk.
Other uses of credit ratings in LRSPs included: the
segregation/custody of customer funds; permissible activities of
banks; soundness assessments for banks; as proxies for non-credit
forms of risk, such as liquidity; and the designation of eligible
collateral.
The German BaFin noted a specific
provision of law that references credit ratings with regard to an
appraisal of creditworthiness in the securities sector.
In particular, a prime broker is permitted
to have custody of hedge fund assets if, among other things, it
has an appropriate level of �creditworthiness.�
The BaFin requires, inter alia,
credit ratings in order to determine if such broker is
sufficiently creditworthy.
Go to
Stocktaking on the use of credit ratings - June 2009 Part 3
Basel Committee on Banking Supervision, The Joint Forum
Stocktaking on the use of credit ratings - June 2009 Part 1
Stocktaking on the use of credit ratings - June 2009 Part 2
Stocktaking on the use of credit ratings - June 2009 Part 3
Stocktaking on the use of credit ratings - June 2009 Part 4
Stocktaking on the use of credit ratings - June 2009 Part 5
Stocktaking on the use of credit ratings - June 2009 Part 6
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