Chapter 3: Credit Rating Services Act

Question 1

Define a credit rating.

Answer 1

A credit rating is an opinion regarding the creditworthiness of an entity, a security or financial instrument or an issuer of a security or financial instrument using an established and defined ranking system of rating categories.

Question 2

Describe the requirements for directors of credit rating agencies.

Answer 2

Directors must comply with fit and proper requirements including
 personal character qualities of honesty and integrity;
 competence;
 operational ability; and
 financial soundness.

Question 3

List three duties of a credit rating agency.

Answer 3

Three duties of a credit rating agency include to
 be organised in such a way as to ensure that business interests do not impair the independence and integrity of its credit ratings;
 have sound administrative and accounting procedures, internal control mechanisms, effective procedures for risk assessment and control and safeguarding of informationprocessing systems;
 have effective organizational and administrative arrangements to prevent, identify, eliminate, manage or disclose conflicts of interest of the CRA, its analysts and employees and to protect confidential information.

Question 4

Discuss the requirements in the Credit Rating Services Act with regard to the methodologies, models and key rating assumptions utilised by a registered credit rating agency.

Answer 4

A credit rating agency must comply with the following requirements with regard to the methodologies, models and key rating assumptions:
 have adequate measures in place to ensure that credit ratings are based on a thorough analysis of all available information relevant according to its rating methodologies;
 use rigorous, systematic and continuous rating methodologies subject to historical validation, including back-testing;
 regularly review its methodologies, models and key rating assumptions such as mathematical or rating assumptions, any changes thereto as well as the appropriateness thereof if they are to be used for the assessment of new financial instruments; and
 establish internal arrangements to monitor the impact of changes in the macroeconomic or financial market conditions on credit ratings.

Question 5

What requirements must be adhered to by a credit rating agency when publishing a credit rating?

Answer 5

When publishing a credit rating, a credit rating agency must
 state clearly and prominently the attributes and limitations; and
 provide an explanation of the key elements underlying the credit rating to enable an investor or member of the public to understand how a rating was arrived at.

Question 6

List the disclosures that a credit rating agency is obliged to make to subscribers and the public.

Answer 6

A credit rating agency is obliged to make the following disclosures to subscribers and the public:
 the practices, procedures , processes, methodologies, models and key rating assumptions used in credit rating services and material changes thereto;
 the code of conduct;
 compensation arrangements;
 the policy on publishing credit ratings and related communication;
 every 12 months, details about historical default rate of rating categories.

Question 7

Duties of a credit rating agency include:

Answer 7

 comply with the Act;
 provide the Registrar with information
 advise the Registrar of changes to the information contained in its application for registration;
 be organised in such a way as to ensure that business interests do not impair the independence and integrity of its credit ratings;
 have sound administrative and accounting procedures, internal control mechanisms, effective procedures for risk assessment and control and safeguarding of information-processing systems ;
 have effective organizational and administrative arrangements to prevent, identify, eliminate, manage or disclose conflicts of interest of the CRA, its analysts and employeesand to protect confidential information;
 employ appropriate systems, resources and procedures to ensure continuity and regularity in the performance of rating services;
 monitor and evaluate the adequacy and effectiveness of systems, internal control mechanisms and arrangements and address deficiencies;
 ensure that it has the necessary knowledge and experience;
 establish a communication unit to communicate with investors, potential investors and the public.

Question 8

A CRA must make the following disclosures (including providing prominent links on its website) to subscribers and the public:

Answer 8

 the practices, procedures , processes, methodologies, models and key rating assumptions used in credit rating services and material changes thereto;
 the code of conduct;
 compensation arrangements;
 the policy on publishing credit ratings and related communication;
 every 12 months, details about historical default rate of rating categories.

Question 9

The Registrar may make rules with regard to the following:

Answer 9

 organizational requirements;
 independence of a CRA and the avoidance of conflicts of interest;
 presentation of credit ratings;
 additional obligations regarding credit ratings of structured finance instruments;
 additional disclosures;
 record keeping;
 fraudulent and misleading advertising, canvassing and marketing;
 suitable guarantees, professional indemnity or fidelity insurance cover;
 control or prohibition of incentives given or accepted;
 responsibilities of CRAs to investors and the public;
 any other matter that the Registrar may or should prescribe.