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Hong Kong loses big by beating Moody's in court

Its reputation as a financial centre is damaged, for there is nothing wrong with share prices falling due to reports highlighting risks.

Published Tue, Apr 12, 2016 · 09:50 PM
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ON March 31, Hong Kong's Securities and Futures Appeals Tribunal largely upheld the findings of the Securities and Futures Commission (SFC) against Moody's Investors Service. Moody's has received a public reprimand and an HK$11 million (S$1.9 million) fine for various failings related to a report issued in July of 2011 that searched for "red flags" on various issues for a number of Chinese companies. We, like many others in financial markets across the region, are perplexed both with the SFC's prosecution of Moody's and the tribunal's decision. While the SFC probably feels that it has scored a victory for the market integrity of Hong Kong, it has instead stunted the development of the offshore debt market for Chinese companies, misallocated its own enforcement resources and, intentionally or not, let itself be seen as responding to negative commentary on companies that issue securities in Hong Kong.

Aside from the public reprimand and pain of the fine, Moody's must be embarrassed by the unflattering light cast upon its internal processes around the issuance of the report in question. In fairness to Moody's, the report was clearly inspired by the collapse of Sino Forest that preceded it, which neither Moody's nor any other major ratings agency had foreseen. As noted in the tribunal's decision, this clearly caused much concern around the health and transparency of many Chinese companies. However, as we highlight below, any embarrassment Moody's feels is likely to be more than offset by the fact that four of the six companies highlighted as negative outliers have subsequently defaulted on their debts and wiped out their shareholders.

The Hong Kong SFC's actions have damaged its own reputation. The severity of the penalty appears misguided (the SFC wanted to fine Moody's HK$23 million), and the overall prosecution perhaps over-zealous. Moody's was clearly sloppy in its preparation of the report. It admitted to making 12 errors in the report, but argued that those were of little or no consequence to the conclusions. It was also perhaps unclear about what its red flags were meant to indicate, as it didn't change any of its official credit ratings on the back of them.

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