Rating firms may be asked to get licences
The Securities and Futures Commission may require credit rating agencies in Hong Kong to apply for licences, according to people close to the regulator.
Credit rating agencies using the city as a base and carrying out rating analyses for Hong Kong companies or rating Hong Kong investment products may have to apply to the SFC for a licence, in line with international practice.
Rating agencies have come under fire during the financial crisis for assigning excessively high ratings to structured securities and reacting too slowly when defaults began. Some critics are concerned about possible conflicts of interest, given that the agencies are paid to issue ratings.
The Basel-based Financial Stability Board, supported by leaders of the Group of 20, has issued a series of rulings since the financial turmoil began, advocating better regulation of hedge funds and wanting credit derivatives and credit rating agencies to be supervised more closely.
The International Organisation of Securities Commissions (Iosco), a global regulatory body, has also proposed changes to the code of conduct governing credit rating agencies.
The SFC will launch a code of conduct if the licensing for rating agencies is put in place, according to one of the people, who declined to be named.
'The purpose is to ensure they are complying with similar codes of conduct globally,' he said, adding that it would be on the SFC's agenda next year but with details still to be ironed out.
A spokesman for Standard & Poor's said the global credit agency believed that sound, internationally consistent regulation could benefit the market.
Because of the global nature of ratings and capital markets, it was important for any regulatory framework to be globally consistent and built on a set of standards commonly accepted by the market and regulators internationally, such as the Iosco code, she said.
'We are committed to working with policymakers and market participants in Hong Kong and around the world,' she said.
She said sound regulation should include policies and procedures that addressed the integrity and transparency of the analytical process while preserving the analytical independence of rating agencies.
Billy Mak Siu-choi, an associate professor at Hong Kong Baptist University, said it was not easy to regulate rating agencies effectively through licensing as they could bypass the regulations by moving their offices to another jurisdiction.
'They may look for regulation arbitrage unless every country has such requirements,' he said.
Some people might end up putting too much trust in ratings if the agencies were supervised by regulators, he said.
Separately, the SFC is looking at the unusual price movements of Asian Citrus Holdings and China XLX Fertiliser after the share prices of both companies fluctuated on their trading debuts in Hong Kong, people close to the regulator say.
Asian Citrus, which is also listed on the Alternative Investment Market in London, made its debut in Hong Kong late last month, while XLX Fertiliser, a Singapore-listed producer of coal-based urea and compound fertilisers, began trading in the city early this month.
Both companies made their debuts in Hong Kong by way of introduction, meaning they did not need to offer new shares to investors before listing.
One of the people said it was natural for regulators to look at any unusual price movements, but it was hard to say if there had been any manipulation involved, as the price movements might have been due to illiquidity in the shares.
He expects the Hong Kong stock exchange to review the way such listings are carried out to see if the process needs to be improved.
A spokesman for the stock exchange declined to comment.