SEOJK Regarding Recognized Rating Agencies and Ratings by the Financial Services Authority

To:

1. The Board of Directors of Conventional Commercial Banks; and
2. The Board of Directors of Sharia Commercial Banks,
   At their respective locations.

COPY

CIRCULAR OF THE FINANCIAL SERVICES AUTHORITY
NUMBER 37 /SEOJK.03/2016

REGARDING
RECOGNIZED RATING AGENCIES AND RATINGS BY THE FINANCIAL SERVICES AUTHORITY

In connection with regulations related to the use of ratings of exposures held by Banks, it is necessary to regulate implementation provisions regarding rating agencies and ratings recognized by the Financial Services Authority in the Financial Services Authority Circular as follows:

I. GENERAL PROVISIONS

1. Regulations regarding rating agencies and ratings recognized by the Financial Services Authority are carried out, among others, by refining the scope of assessment, including parameters in assessment criteria, used by the Financial Services Authority in assessing rating agencies.

2. Rating agencies are an important element that plays a role in supporting the operation of a financial system, including to help create financial market transparency and encourage efficient investment that can support accelerated economic growth.

3. In banking business activities, the determination of ratings by rating agencies against exposures held by Banks is one of the tools to assist Banks in risk management.

4. Rating agencies that can be recognized by the Financial Services Authority are rating agencies that meet the assessment as regulated in this Financial Services Authority Circular.

5. Ratings recognized by the Financial Services Authority are ratings issued by rating agencies recognized by the Financial Services Authority.

6. The Financial Services Authority updates the list of rating agencies and ratings recognized by the Financial Services Authority based on the results of assessment and monitoring of the aforementioned rating agencies based on applicable international standards.

II. ASSESSMENT OF RATING AGENCIES

A. General Principles

General principles in conducting assessments of rating agencies include:

1. assessments conducted do not hinder the development of the rating industry, can stimulate healthy competition, and encourage the creation of market discipline;

2. assessments are aimed at encouraging rating agencies to produce reliable ratings; and

3. assessments are conducted with reference to healthy international standards and practices to support consistency among other regulators, particularly in conducting assessment and recognition of regional and international scale rating agencies.

B. Scope of Assessment

Assessment of rating agencies is conducted based on the fulfillment of assessment criteria, publication media, and disclosure scope, as follows:

1. Criteria used as a reference in conducting assessment of rating agencies are:

a. Independence

This criterion is used to assess the level of independence or freedom of the rating agency from all forms of interests, such as economic, social, and/or political interests, either directly or indirectly, against the rating results issued.

Parameters used to measure the independence criterion are:

1. independence of position and condition of the rating agency, in which the rating agency is not under economic, social, and/or political pressure that can influence the rating process and results;

2. independence of business activities, in which the rating agency operates as an independent business entity separate from other business activities not related to the provision of rating services;

3. independence of rating procedures, in which the rating agency has rating procedures that can maintain independence from conflicts of interest with the rated party, which can arise, among others, because the rated party is charged rating fees;

4. independence of rating contract agreements, in which the rating agency maintains independence in every rating contract agreement. Independence must be paid attention to especially when the rating agency conducts other business activities related to the provision of rating services to the rated party; and

5. independence of operational activities, in which the rating agency has operational policies, safeguards, and code of conduct that can guarantee the independence of the rating agency's operational activities.

b. Objectivity

This criterion is used to assess the level of objectivity and effectiveness of the procedures and methodologies used and developed, the fairness and consistency of rating criteria, and the objectivity of the rating determination process.

Parameters used to measure the objectivity criterion are:

1. objectivity of rating procedures, in which the rating agency has systematic rating procedures that refer to international standards and are designed to produce reliable ratings;

2. objectivity of rating methodology, in which the rating agency has rating methodology for each market segment that is reliable, systematic, takes into account all risk exposures of the rated party, and through testing (backtesting) and validation stages based on historical experience for at least 1 (one) year in the last period, but preferably covering the last 3 (three) years;

3. objectivity of the rating determination process, in which the rating agency has a rating committee to ensure the achievement of objectivity, fairness, and comprehensive analysis in the rating determination process;

4. objectivity of rating results, among others assessed from factors:
   (a) the rating agency discloses all factors influencing the rating results and has the courage to issue a rating that is unpopular or not in line with general expectations; (b) the rating agency pays attention to the established system boundary. For example, for corporate rating, the rating agency must, among others, pay attention to all business sectors of the company related to the rated party; and (c) the rating agency pays attention to specific issues and regulations in a country related to the implementation of rating;

5. objectivity of rating standards, among others assessed from factors:
   (a) the rating agency uses internationally recognized minimum standards in conducting rating, including rating in new fields; and (b) has a policy regarding rating conducted on the initiative of the rating agency (unsolicited rating); and

6. periodic review by the rating agency of practices, procedures, criteria, and rating methodology at least 1 (one) time in 1 (one) year to ensure the quality, consistency, and objectivity of rating results. The review is conducted by a unit or official with competence and not involved in the rating process.

c. Public Disclosure

This criterion is used to assess the disclosure of all matters regarding the rating agency so that the public or competent authorities can assess the independence, objectivity, capability, and operation of the rating agency and compliance with applicable regulations.

Parameters used to measure the public disclosure criterion are:

1. ease of access for the public, in which the rating agency provides ease of access for the public to create a better understanding of the rating agency, the rating process, and all matters related to the rating agency;

2. disclosure of information related to the process, criteria, rating methodology, rating time frame, definition of each rating, and transition of rating results, including adjustments made, and current default rate data for each rating category including definition, referring to international standards and best practices, both qualitative and quantitative, allowing the public to make comparisons;

3. disclosure of conflicts of interest, in which the rating agency discloses policies, procedures, and activities related to conflicts of interest;

4. disclosure of internal changes, in which the rating agency discloses significant internal changes that can affect the rating agency's ability to issue reliable ratings;

5. disclosure of information regarding code of ethics and compensation with the rated party; and

6. disclosure procedures, in which the rating agency has systematic procedures regarding disclosure as in numbers 2) to 5).

d. Rating Transparency

This criterion is used to assess the rating agency's openness to the public regarding all information related to rating results, including assumptions and background of the issuance of rating results.

Parameters used to measure the transparency criterion are:

1. transparency of rating results, in which the rating agency publishes all rating results after obtaining approval from the rated party so that they can be accessed unlimitedly and free of charge by any party, both ratings conducted on the initiative of the rated party (solicited rating) and on the initiative of the rating agency (unsolicited rating). The rating agency is not allowed to give earlier access rights to rating result information to parties who can access the rating results;

2. transparency of rating monitoring results, in which the rating agency publishes the results of monitoring and rating adjustments (if any) through the establishment of a watch list, and the inclusion of the period of the last comprehensive review;

3. transparency of factors influencing rating, in which the rating agency publishes the background thinking including critical factors in analysis and decision-making for each rating result, monitoring results, and rating adjustments as in numbers 1) and 2), while still adhering to the principle of information confidentiality;

4. transparency of the process, rating criteria, rating methodology related to rating results, rating time frame, definition of each rating, and transition of rating results, including adjustments made, and current default rate data for each rating category including definition, in which the rating agency publishes the aforementioned matters used in generating a rating. Publication also covers structural matters such as methodology used to evaluate material risks contained in various financial instruments and specific industries, as well as assumptions, expectations, and arguments underlying the analysis of rating results; and

5. transparency of analysis methods in the rating process, in which the rating agency discloses the analysis methods used in the rating process, among others:
   (a) statistical analysis of published information; (b) statistical analysis of published information confirmed through discussion between the rating agency and the rated party; and/or (c) analysis of published information and unpublished information, obtained from the results of discussion between the rating agency and the rated party.

e. Resources

This criterion is used to assess the rating agency's ability to provide rating services, both from the aspect of human resources, financial resources, and shareholder support, which enable the rating agency to operate independently and professionally.

Parameters used to measure the resources criterion are:

1. human resources, among others assessed from factors as follows:
   (a) has adequate policies and procedures regarding the recruitment, management, and development of human resources; (b) discloses current information regarding the qualifications and experience of rating analysts, as well as the sectors or parties rated by the analysts; and (c) conducts routine coordination and communication with officials at the senior level and employees at the technical or operational level of the rated party;

2. financial resources, among others assessed from the ability and good financial performance;

3. shareholder support, in which there is a written commitment from shareholders stating that the rating agency will operate in Indonesia in the long term and willingness to help overcome problems if the rating agency experiences financial difficulties; and

4. rating approach, in which the rating agency conducts the rating process using a methodology that combines qualitative and quantitative approaches.

f. Credibility

This criterion is used to assess the recognition and acceptability by the market towards the existence of the rating agency as a provider of reliable rating services.

Parameters used to measure the credibility criterion of the rating agency are:

1. has a license from the Financial Services Authority or other competent authority;

2. has conducted operational activities for at least 1 (one) year;

3. has published at least 2 (two) rating results;

4. has internal policies and procedures to prevent the misuse and/or dissemination of non-public information to employees or unauthorized parties and external parties, who can benefit from such information; and

5. has a track record in issuing reliable rating results. The approach in assessing the track record is conducted, among others, through evaluation of default occurrence studies (default study). For newly established rating agencies, the assessment of track record is conducted by considering the number and experience of rating analysts owned.

2. Publication media and disclosure scope, in which the rating agency must have a website that is easy for the public to access containing all information that must be disclosed or published as in number 1. In the event that the rating agency's website is part of the parent company's website, the rating agency must have its own website or region site.

III. PUBLICATION OF RATING AGENCIES AND RATINGS RECOGNIZED BY THE FINANCIAL SERVICES AUTHORITY

1. Based on the assessment of the fulfillment of criteria as stated in number II, the Financial Services Authority establishes rating agencies and ratings recognized by the Financial Services Authority in a list used in the implementation of Financial Services Authority regulations related to the use of ratings of an exposure.

2. The list of rating agencies and ratings recognized by the Financial Services Authority as in number 1 is published through the Financial Services Authority website at www.ojk.go.id.

IV. UPDATING THE LIST OF RECOGNIZED RATING AGENCIES AND RATINGS

1. The Financial Services Authority updates the list of rating agencies and ratings recognized by the Financial Services Authority when necessary, based on the results of assessment and monitoring of the fulfillment of assessment criteria as well as publication media and disclosure scope as in item II.B.

2. For the purpose of updating as in number 1, the Financial Services Authority is authorized to request the rating agency to submit audited annual financial performance reports. In addition, the Financial Services Authority is authorized to request written information regarding every significant change, among others regarding organizational structure or management, formation of rating analysts, rating procedures and methodology, and/or other information that can affect the rating agency's ability to produce reliable ratings.

3. A rating agency can be removed from the list of rating agencies recognized by the Financial Services Authority based on:
   a. the results of the Financial Services Authority's assessment; and/or b. the request of the rating agency.

4. A rating agency is removed from the list of rating agencies and ratings recognized by the Financial Services Authority based on the results of the Financial Services Authority's assessment as in item 3.a in the event:
   a. the rating agency is known to provide misleading information; b. the rating agency is subject to sanctions by competent authorities that can disrupt the continuity of the rating agency's business;
   c. the rating agency violates relevant legislation, among others creating a fake market or insider trading and/or manipulating to produce higher ratings than should be; and/or
   d. the rating agency does not meet the assessment criteria as well as publication and disclosure as in item II.B.

5. Before removing a rating agency from the list of recognized rating agencies, the Financial Services Authority clarifies the problems causing the rating agency to be removed from the list of recognized rating agencies by the Financial Services Authority. The rating agency is given the opportunity to provide responses to the clarification request within a period determined by the Financial Services Authority.

6. A rating agency submitting a request to be removed from the list of rating agencies and ratings recognized by the Financial Services Authority as in item 3.b must meet the requirements:
   a. ensuring that the validity period of the issued ratings has expired or ensuring there is a replacement rating agency to issue new ratings in the event the rated exposure has not yet matured; b. has settled all obligations to the rated party before operational activities are halted;
   c. submits written notification to the Financial Services Authority at the latest 12 (twelve) months before the planned cessation of operational activities; and
   d. announces to the public regarding the plan to cease operational activities at the latest 3 (three) months before the cessation of operational activities.

7. Foreign rating agencies that decide to cease their operational activities in Indonesia must meet the requirements as in number 6.

V. OTHER PROVISIONS

1. Banks must still conduct assessment of exposures rated by rating agencies.

2. Banks are fully responsible for the use of ratings issued by rating agencies recognized by the Financial Services Authority.

3. Requests from rating agencies to be included in the list of rating agencies and ratings recognized by the Financial Services Authority are submitted to the Financial Services Authority through the Department of Research and Banking Regulation.

4. The assessment and updating process of rating agencies and ratings recognized by the Financial Services Authority is conducted not only based on this Financial Services Authority Circular but also takes into account other related regulations regarding rating agencies.

VI. CLOSING PROVISIONS

With the implementation of this Financial Services Authority Circular, Bank Indonesia Circular Number 13/31/DPNP dated December 22, 2011 regarding Rating Agencies and Ratings Recognized by Bank Indonesia, is revoked and declared invalid.

The provisions in this Financial Services Authority Circular take effect on the date of determination.

Determined in Jakarta on September 8, 2016

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY, signed

NELSON TAMPUBOLON

Copy in accordance with the original
Legal Director 1
Legal Department signed

Yuliana