Nine Dragons spotlights SFC regulation of CRAs
14 June 2011
Now that the SFC (since 1-Jun-2011) regulates credit rating agencies (CRAs), the SFC needs to look at the timing of information release by the CRAs. Unlike external research houses, CRAs have a special relationship with debt issuers, because they are given privileged access to information in order to produce credit ratings which are paid for by the company under contract. The agencies are in effect agents of the company. By comparison, research analysts (in theory) work only with published information, piecing it together to produce their views and analysis.
So when a credit rating is initiated, changed, or withdrawn, or when the relationship breaks down, then that often represents the publication of price-sensitive information, because the rating is based on inside information. Even a withdrawal of ratings can indicate a breakdown in a key relationship, rather like the resignation of an auditor.
Today, we were given an example of this. At 13:55 HKT (according to the time stamp on the S&P press release (login required)) S&P said that it had withdrawn its log-term corporate credit rating on Nine Dragons Paper (Holdings) Ltd (2689) "because we have insufficient access to management".
The stock price immediately began to react and dropped 19.2% from $6.66 at 13:55 to $5.38 at 14:26 before recovering slightly and then being suspended at 14:50. As the graph shows, volume was substantial. Those participants who have Bloomberg or similar terminals and subscribe to the S&P feed on those terminals had immediate access to the release, but everyone else was waiting until the news wires picked it up - for example Dow Jones first reported the reason for the sell-off at 15:04, after the stock was suspended. Even Reuters did not publish the S&P release until 14:08 (02:08 EDT).
In our view, the SFC should prohibit the CRAs it regulates from releasing announcements about listed companies during market hours, for the same reasons that listed companies cannot announce price-sensitive information during market hours unless their stock is suspended. It can lead to unfair and disorderly markets.
CRAs are distinct from equity and debt analysts who are merely publishing their own opinions and analysis based on public information. They should remain free to publish their views, whether orally or in writing, whenever they want.
Update 19-Jun-2011: A reader reminds us of a similar incident on 21-May-2002, when S&P downgraded the credit ratings of several property stocks during market hours, prompting a sell-off. The issue of timing of releases was also covered in an IOSCO Technical Committee report (page 13) in Sep-2003. IOSCO subsequently produced a Code of Conduct Fundamentals for Credit Ratings Agencies, but it does not cover this point.
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