Business Daily from THE HINDU group of publications
Saturday, Mar 29, 2008
ePaper | Mobile/PDA Version
Business Daily from THE HINDU group of publications Saturday, Mar 29, 2008 ePaper | Mobile/PDA Version |
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Markets
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Financial Markets Marketing - New Products & Services Web Extras - Credit Rating
Our Bureau Mumbai, March 28 In a developing country, where financial markets and instruments are not very well and widely understood, products should be as simple as possible, said the Finance Minister, Mr P. Chidambaram, speaking at the launch of rating agency CRISIL’s ‘Complexity Levels’. He also said that, “the financial products must be understood in the background of the country and the financial situation of the country the products are in”. This service from CRISIL, a credit rating agency, classifies financial instruments and products into three categories: simple, complex, and highly complex. The new initiative is aimed at improving transparency for investors in financial markets. The service is free and is being offered on a voluntary and pro-bono basis. “In many cases, the products are not understood adequately, leading to accusations of mis-selling,” said the Minister. In his Budget speech this year, the Finance Minister had announced that the Government will encourage development of a market-based system for classifying financial instruments based on their complexity and implicit risks. “There are increasingly complex instruments and products sold in Indian market, some even to retail investors, and lack of widespread understanding of these products adds potential for large unforeseen losses,” said Ms Roopa Kudva, Managing Director and Chief Executive Officer, CRISIL. “Complexity levels help the investor in determining the degree of sophistication and due diligence required to understand the risk factors involved in such instruments,” she added. The complexity rating will be given in the rationale of any rating given by CRISIL in future. CRISIL Complexity Levels initial coverage includes 77 instrument types, 21 of them classified as simple, 27 as complex and 29 as highly complex.
(For example, National Savings Certificate is ‘simple’, ULIP complex and Real Estate Investment Trusts highly complex). CRISIL will consider four parameters for determining the complexity levels of financial instruments and they are the ease of calculation of payout and returns, clarity on timing of cash flows, number of counter parties involved in the transaction, and familiarity of market participants with the instrument. The Complexity Levels will be updated every six months and the agency might also add new classes of instruments. Referring to the current global financial turmoil, Mr Chidamabaram said one of the reasons behind it were the ratings assigned by credit rating agencies. He urged credit rating agencies to “get their act together” and “redeem their reputation.” More Stories on : Financial Markets | New Products & Services | Credit Rating
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