As of September 30 2010, most major credit rating agencies (CRAs) in Japan and local entities of foreign-affiliated CRA groups were registered with the Financial Services Agency of Japan (FSAJ) under the new registration system under the Financial Instruments and Exchange Act (FIEA) implemented on April 1 2010.
Fundamentally based on the International Organization of Securities Commissions (Iosco) model rules and complementing the US and EU systems, this new system requires registered CRAs to manage conflicts of interest, ensure quality and fairness in their rating process and promote information disclosure regarding their business and their credit ratings.
Compared to other registration systems managed by the FSAJ, this system is unique in that registration is not mandatory, which means that each CRA may elect whether or not to register with the FSAJ.
In the event a CRA elects not to register, financial instruments business operators as defined in the FIEA ("operators"), which provide investors with information on credit ratings issued by unregistered CRAs on and after October 1 2010 (eg broker dealers), are, in principle, required to disclose several matters to the investors including (i) an outline of the policies and methods used in determining the credit ratings, and (ii) the assumptions, significance and limitations of the credit ratings.
Investors are expected to make investment decisions in light of this disclosure by operators, since unlike registered CRAs, unregistered CRAs have no obligation under the FIEA to disclose these matters.
As a result of the registration of most major CRAs in Japan and local entities of foreign-affiliated CRA groups earlier this year, operators are currently able to provide information on credit ratings issued by them without providing the mandated disclosure.
Operators are not free from this disclosure obligation when providing information on credit ratings issued by foreign entities of foreign-affiliated CRA groups, however, even when a local entity in Japan belonging to such group is registered with the FSAJ. This issue has arisen because registration under this system is granted to individual entities, not to corporate groups.
In August, in recognition of this issue and in response to foreign-affiliated CRA groups' inclination to register only local entities in Japan, the FSAJ announced a plan to introduce a group designation system.
Under this system, if the FSAJ designates unregistered group companies of a registered entity, the mandatory disclosure obligation for operators are mitigated such that they are allowed to provide a more general explanation (eg the method to obtain an outline of the policies and methods used in determining the credit ratings from the registered entities in the group) than the detailed disclosure otherwise required in respect of an unregistered CRA.
The FSAJ also announced that it will assign this designation based on whether a common rating method applicable to the group is established and made available to investors, and whether unregistered group companies operate their business and disclose information to the same extent as the registered entities in the group. The group designation system will be implemented on January 1 2011.
In the meantime (from October 1 through to December 31 2010) operators may rely on a temporary exemption by which the mandatory disclosure obligations are automatically (without designation) mitigated with regard to credit ratings issued by unregistered CRAs.
After the implementation of the group designation system, it will remain the goal of the FSAJ that the investors are assured of access to sufficient information to make investment decisions. Furthermore, it is expected that rules regarding disclosure on credit ratings will be reviewed and modified from time to time following implementation of the designation system in light of the actual practice of CRAs and operators.