Friday, November 16, 2007

ASEAN+3 and Credit Rating

In East Asia, the most active regional initiative in developing the credit rating sector is ASEAN+3. During the ASEAN+3 Finance Ministers’ Meeting (AFMM) on August, 2003, six working groups (WG) regarding the Asian Bond Market Initiative (ABMI) have been established. One of the working groups is WG 5 which focuses on rating systems and information dissemination on Asian bond markets.

Later, based on the achievement that had been made regarding the credit rating, AFMM+3 on 4 May 2005 in Istanbul, Turkey endorsed the reorganization of the ABMI WGs. The new working group for credit rating sector had become WG 4 which only focus on rating system.
From the establishment of six WGs, the officials from ASEAN+3 have conducted regular dialogues, symposium, seminar and discussions. Many participants from other sectors such as other regional institution, academics, think tanks and the private sector also involved in WGs’ events in order to exchange views and discuss related issues.

In regard of WG4, one of important event was ad-hoc forum on the Recent Discussions at BIS/IOSCO on Credit Rating Agencies which held on 3 June 2005 in Manila. Discussions of the forum focused on the efforts being made at the International Organization of Securities Commissions (IOSCO) and the Bank for International Settlements (BIS) with regards to the credit rating agencies.

IOSCO issued the Code of Conduct Fundamentals for Credit Rating Agencies on December 2004, to promote investor protection by safeguarding the integrity of the rating process. Meanwhile, on May 2003, the BIS Basel II framework on capital adequacy regulations had introduced the use of external credit assessments from designated credit rating agencies in calculating capital adequacy ratios.

One of major statement from the meeting is recognition of challenges from credit rating agencies and financial regulators in Asia in the introduction of Basel II. The implementation of Basel II would generate higher volume of credit rating business and it would requires quality control on the accountability, objectivity and rating process to prevent any misleading result and negative consequences. Therefore, it needs better preparation not only from the credit rating agencies but also from financial regulators and standard setter.

I think the most important issue in regard of rating sector is the implementation on Basel II particularly pillar 1 which it would need special attention from local authorities especially in regard of the readiness of local credit rating agencies to produce rating information as expected by all market participants. There is a need to integrate the regional event in order to produce more effective communication on current issues.

The most ideal way to integrate related event is to put ACRAA as a member of WG4 as this working group only focus on specific subject of rating system. I guess there is a paradigm shift in the role of credit rating agency which might cause problem in a local market as each market has different value and culture.

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