In the first of its kind globally, Union finance minister P Chidambaram will launch a Crisil service to classify capital market instruments according to their complexity. The financial instrument will be classified into three categories ? simple, complex and highly complex. The initiative is going to be on a voluntary and pro-bono basis and will be made public later this month, Crisil said in a statement.
Chidambaram, in his budget speech on February 29, had stated that the government would encourage development of a market-based system for classifying financial instruments based on their complexity and implicit risks. According to Crisil, the initiative is aimed at strengthening the capital markets through greater transparency for investors. The rating agency is launching this service to indicate the complexity levels of the financial instruments, following an extensive research. The conclusions have been validated by a survey carried out by Crisil among the retail and institutional investors.
In a statement issued on Thursday, Crisil said, ?The feedback reveals that many investors do not fully understand the intricacies of financial instruments in the market. This is more with the newer complex instruments like capital protection-oriented mutual fund schemes and equity-linked debentures.?
Explaining the nature of the services, Roopa Kudva, managing director and chief executive officer, Crisil, said, ?Crisil?s complexity levels will help investors determine the degree of sophistication and the due diligence required to understand the risk factors involved in an instrument. This will assist the investor in making an appropriate decision based on his or her understanding of the complexity of the instrument.?
Crisil will use four parameters to determine the complexity of an instrument. They include ease of calculation of payout and returns, clarity on timing of cash flows, number of counterparties involved in the transaction and familiarity of market participants with the instrument. Complexity levels will be updated every six months to bring in new instruments or change classifications for reasons like increasing market familiarity with a particular type of instrument.
