The Indian Ministry of Finance in its Union Budget of 2008-2009 highlighted the need to develop a market based system of classifying market instruments based on their complexity levels. Following this announcement, Fitch Ratings has introduced Complexity Indicators for Indian Market Instruments. Fitch believes that the introduction of Complexity Indicators will increase the overall level of risk awareness of market participants, particularly by providing the investor community with an opinion on the relative complexity of a market instrument.
Complexity Indicator Scale
Fitch's complexity indicators are an opinion on the relative complexity of a broad category of instruments expressed on an ordinal scale of 'Low Complexity', 'Moderate Complexity' and 'High Complexity' using the definitions below:
Low Complexity: An instrument where the relationship between the inherent risk factors and intrinsic return characteristics is straightforward.
Moderate Complexity: An instrument where the relationship between the inherent risk factors and intrinsic return characteristics is less straightforward given the presence of certain contingency features.
High Complexity: An instrument where the relationship between the numerous interdependent risk factors and intrinsic return characteristics is highly involved requiring forward looking analysis and projections.
Complexity Indicators for Indian Market Instruments
Fitch's complexity indicators cover a broad category of Indian corporate, bank, financial, insurance, municipal and other public finance instruments as well as structured finance securities. Fitch's complexity indicators will be updated as and when new credit instrument categories are introduced.
Perpetual non cumulative preferred shares (Tier 1)
High
Balance sheet capital classification.
Equity linked notes
High
Contingent variable coupon feature.
STRUCTURED FINANCE
Instrument
Complexity
Rationale
Single Loan Sell Down Pass Through Certificates
Moderate
Repackaging of a corporate loan. Option features can vary.
Partial Guarantee Bonds
High
Nature and scope of guarantee can vary.
Asset Backed Securities
High
Portfolio level collateral and cash flow analysis.
Residential Mortgage Backed Securities
High
Portfolio level collateral and cash flow analysis.
Non Performing Asset Security Receipts
High
Portfolio level collateral and cash flow analysis.
PUBLIC FINANCE, INFRASTRUCTURE & PROJECT FINANCE
Instrument
Complexity
Rationale
Municipal bonds
Low
Straightforward risk-return characteristics.
Project Finance loans
Moderate
SPV structure backed by a single asset.
Credit enhanced state owned corporations or municipal bonds
Moderate
Structured payments with government guarantees.
DERIVATIVES
Instrument
Complexity
Rationale
All derivative instruments
High
Value of the derivative instrument is based on the value of an underlying asset.
Disclaimers
Fitch's Complexity Indicators are based on the information and documents provided to us. Complexity Indicators are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer. Complexity Indicators do not comment on the adequacy of market price, the suitability of any investment, loan or security for a particular investor (including without limitation, any accounting and/or regulatory treatment), or the tax-exempt nature or taxability of payments made in respect of any investment, loan or security. Fitch is not your advisor, nor is Fitch providing to you or any other party any financial advice, or any legal, auditing, accounting, appraisal, valuation or actuarial services. A Complexity Indicator should not be viewed as a replacement for such advice or services.
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