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German pension fund association criticises EU rating agency proposals

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The aba, Germany’s pension fund association, has criticised the EU’s plans to oblige pension funds to establish their own credit-research mechanisms.

In August, German regulator BaFin issued a decree implementing EU-level changes to regulations concerning rating agencies.

According to the European Commission’s proposals, pension funds are to be required to conduct their own credit-risk assessments in order to reduce their dependence on the larger rating agencies.

But the aba, after assessing the proposals in detail, has now issued a position paper in which it criticises parts of these changes. 

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In its paper, it says: “The aba supports the objective to regulate credit ratings to a greater degree and reduce reliance of investors on credit-rating agencies caused by regulatory requirements.”

However, it “opposes the call for IORPs to develop their own internal credit-analysis processes”.

The aba argues this would “overburden” many investors – particularly IORPs – which tend to have “only limited business operations”.

Meanwhile, the BaFin itself has amended its decree to tone down this requirement, stating that credit-risk analysis can “initially” also take the form of checking the plausibility of external ratings – through the rating reports of external agencies, for example.

For direct bond holdings, the aba recommends the provision of “minimum standards” for internal credit-analysis processes for IORPs, similar to the BaFin’s recommendations. 

For indirect investments, the association sees the investment management company or asset manager as being “solely responsible” for credit ratings.

Meanwhile, the European supervisory body ESMA has issued its first report on rating agencies.

Under the amendments to the law regulating those institutions, ESMA has to report annually on the existing rating agencies and their market share, as issuers are to be required to get assessments from two rating agencies – one being a small provider, with a market share of less than 10%.

According to the first ESMA report, the three large rating agencies have a combined market share of 85%.

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