priips last challenges...2016/10/17 · ‣ category 3: bootstrapping methodology (10,000...
TRANSCRIPT
PRIIPS Last Challenges
MULTI OPTION PRODUCTS (MOPs)
REGULATORY BACKGROUND
“In the section entitled ‘What are the risks and what could I get in return’… specify the following:
a) Range of risk classes of all options… using a summary risk indicator having a numerical
scale from 1 to 7;
b) … that the risk and return… varies on the basis of the underlying investment options;
c) … how the performance… as whole depends on the underlying investment options…”
“In the section entitled ‘What are the costs’… specify the following:
a) Range of costs… in the ‘Costs over time’ and Composition of costs’ tables;
b) … that the costs… vary on the basis of the underlying investment options…”
CHAPTER
II Art. 12
Art. 13
“In the section entitled ‘What is the product’… specify the following:
a) Description of the types of options… including market segments or instrument types
b) … that the type of investors to whom the PRIIP is intended… varies on the basis of the
underlying investment option
c) … where the specific information on each underlying investment option is to be found”
Art. 11
“Where a PRIIP offers different underlying investment options… PRIIP manufacturers shall
produce one of the following:
a) A key information document for each underlying investment option within the PRIIP,
including information about the PRIIP overall…;
b) A generic key information document describing the overall PRIIP… unless otherwise
specified in Articles 11 to 14.
Art. 10
“… manufacturers shall include for each underlying investment option – all the following:
a) A comprehension alert, where relevant
b) The investment objectives, means for achieving them and the intended target market…
c) A summary risk indicator and narrative, and performance scenarios…
d) A presentation of the costs...”
Art. 14
CONTENT
OF THE
GENERIC
KID
INFO ON
INV.
OPTIONS
TWO
APPROACHES
HYBRID KID BOOKLET
Produce a KID for each investment option offered, combining
details of the options with information on the product as a whole
(«1 KID per option»)
SEPARATED BOOKLET
Produce a single Generic KID for the insurance product as a whole,
outlining generic information on the options, with details of the
investment options provided separately.
2 APPROACHES FOR THE PRIIPS MANUFACTURER
SRI + narratives
Perf. Scenario
Costs
Investment Option 1
manufacturer
Investment Option ..
manufacturer
Investment Option n
manufacturer
PRIIPs KID
Option 1
PRIIPs KID
Option 2
PRIIPs KID
Option ...
PRIIPs KID
Option n
SRI + narratives
Perf. Scenario
Costs
SRI + narratives
Perf. Scenario
Costs
SRI + narratives
Perf. Scenario
Costs
Combine features of the insurance contract with the features of
the investment options in one document for each investment
option including:
‣ Investment Objective
‣ Targeted retail investor
‣ Risk indicator/narrative
‣ Performance scenario
‣ Costs
Product information
Investmt. objectives
Perf. Scenario
SRI, Costs
Investment Option ..
manufacturer
Investment Option n
manufacturer
PRIIPs KID
LIGHT
Option 1
PRIIPs KID
LIGHT
Option 2
PRIIPs KID
LIGHT
Option ...
PRIIPs KID
LIGHT
Option n
Product information
Investmt. objectives
Perf. Scenario
SRI, Costs
Product information
Investmt. objectives
Perf. Scenario
SRI, Costs
Product information
Investmt. objectives
Perf. Scenario
SRI, Costs
Specific content to be included in the generic KID, specifically on:
‣ «What is this product?» section
‣ Risk indicator/narrative
‣ Performance scenario
‣ Costs
GENERIC
PRIIPs KID
+
Investment Option 2
manufacturer
Investment Option 1
manufacturer
Investment Option 2
manufacturer
PROFILE APPROACH on DISCRETIONARY MANDATES
PROFILE-LEVEL KIDsProduce a KID for each mandate or investment profile,
(«1 KID per option»)
PRIIPs manufacturer (Insurance company)
SRI + narratives
Perf. Scenario
Costs
Asset Manager 1 Asset Manager 2 Asset Manager n
PRIIPs KID
Investment
profile 1
PRIIPs KID
Investment
profile 2
PRIIPs KID
Investment
profile ...
PRIIPs KID
Investment
profile n
SRI + narratives
Perf. Scenario
Costs
SRI + narratives
Perf. Scenario
Costs
SRI + narratives
Perf. Scenario
Costs
Combine features of the insurance contract with the
features of the mandate (or investment profile) in one
document including:
‣ Investment Objective
‣ Intended target market
‣ Risk indicator/narrative
‣ Performance scenario
‣ Costs
Discretionary Portfolio Managers should consider an
investment option as being an “investment profile”.
Therefore these managers have to provide
information related to the mandates using the
following “profile approach”:
- The information to be provided by Asset
Managers (DPM) to insurance companies must
be at the level of the mandate itself, not at the
level of the underlying assets of the mandate
- Calculations of Risk and Performance scenarios
to be done using the investment profile (model
portfolio, or model asset allocation, or
benchmark). Example:
- Aggressive Investment profile with model asset allocation =
80% equities / 20% bonds calculations of MRM using
appropriate benchmarks modelling this particular asset
allocation.
Absence of data or poor-quality data from
Discretionary Asset Managers will lead to the
following:
- Insurance companies will apply their own Investment
profiles implemented based on the monitoring of investment
limits currently applicable.
- These profiles defined by the insurance companies will
therefore have to be respected by the Asset Managers.
Investment mandate 1.1
Investment mandate 1.2
Investment mandate 2.1
Investment mandate n.1
!
! ! !
EXAMPLE OF GENERIC KID
Range of SRI
No need to show all performance scenarios.
Only the “insured event” scenario is needed
Range of costs to be shown
RISK
CATEGORY
PRIIPS CATEGORY IDENTIFICATION FOR MRM
IF
A natural
benchmark/proxy
exists with same
frequency if historical
data not available.
IF
2
3
4 IF
OR
PRIIP has non-
leveraged
exposure to
underlying
assets’ prices
OR
PRIIPs whose
value depends in
part on factors not
observed in the
market.
Leveraged exposure
on underlying asset(s)
that pays a constant
multiple of underlying
assets’ prices
• >= 2 YRS of historical daily prices for the PRIIP
OR
• >= 4 YRS of historical weekly prices for the PRIIP
OR
• >= 5 YRS of historical monthly prices for the PRIIP
AND
IF1PRIIP is a
derivative as
per MIFID II
definition
Potential loss >
Amount investedOR
PRIIP or its underlying assets:
- have prices with frequency less than monthly
- do not have appropriate benchmark/proxy
- Have appropriate benchmark/proxy with prices less frequent than monthly
OR
GENERIC PRINCIPLES
A natural
benchmark/proxy
exists with same
frequency if historical
data not available
ORExposure on underlying asset(s) that pays a
NON-constant multiple of underlying assets’
prices
• >= 2 YRS of historical daily prices for the underlyings
OR
• >= 4 YRS of historical weekly prices for the underlyings
OR
• >= 5 YRS of historical monthly prices for the underlyings
AND
MARKET RISK MEASURE (MRM)
Qualitative classification of products into one category (1 to 4).
Example categorization could be:
‣ Category 1: Funds with valuation on a less-than-monthly basis (RE/PE) ; derivatives
‣ Category 2: Non-structured funds ; pure unit-linked insurance products with no profit sharing, UCITS,AIF
‣ Category 3: Certificates ; Structured products; Structured funds
‣ Category 4: With-profits insurance products
Application of a calculation methodology according to categorization:
‣ Category 1: Direct assignment of MRM – Derivatives MRM = 7 ; Other products MRM = 6
‣ Category 2: Cornish Fisher expansion based on VaR
‣ Category 3: Bootstrapping methodology (10,000 simulations to be performed)
‣ Category 4: Mix between bootstrapping and market standard model
Scale of MRM vs. VaR-equivalent- volatility significantly changed
compared to last version of the RTS
‣ Resulting MRM and SRI for PRIIPS will be lower than the current SRRI in 90% of the cases
5 years history of prices (or benchmark if history not available) to be used as basis for
calculation
CREDIT RISK MEASURE
‣ If the PRIIP is a fund fully compliant with UCITS V or AIFMD and fully collateralized
CRM = 1 no look through
‣ If the PRIIP is an insurance product and is held and identified on accounts in
compliance with national laws and with Solvency II CRM = 2 no look through
‣ No need to assess CRM for a product with MRM = 7, as the SRI will be 7 anyway
‣ If the PRIIP is exposed to other underlyings the CRM shall be assessed for both the
PRIIP itself (except UCITS & AIF) and the underlyings on a look-through basis and
cascade assessment
‣ If the PRIIP is exposed to multiple underlyings, CRM must be assessed separately
only for each underlying representing an exposure of at least 10% of the total
assets/value of the PRIIP.
‣ Exposure to ETDs, cleared OTC derivatives and fully and appropriately collateralised
exposures shall be assumed to carry no Credit Risk.
‣ CRM to be adjusted based on the life time of the product
PERFORMANCE SCENARIOS
PERFORMANCE SCENARIOS
‣ Computation of performance scenarios linked to the categories used to calculate MRM
‣ Use of probabilistic methodology for selection of favorable, moderate and unfavorable scenario (90th, 50th,
10th percentile of calculated returns)
‣ Historical prices used as basis to compute future performance scenarios – identical to the ones used for
Market Risk
‣ Potential possibility that RHP does not need to be aligned in case of MOP ( referring to the Non Paper of the
EC)
‣ Performance scenarios to be presented net of costs
‣ Payoff graph to be shown for Exchange-Traded Derivatives instead of tables
‣ Number of interim periods dependent on the Recommended Holding Period (the RHP if less than 1Y ;
two if RHP between 1Y and 3Y ; three if RHP more than 3Y)
‣ For insurance products, discretionary profit participation can only be used in the favorable scenario
‣ Must be presented both in monetary units and in percentages as average annual return
‣ Death scenario to be presented as a 4th scenario only in monetary figures for regular-premium insurance
products ( biometric risk)
PERFORMANCE SCENARIO SELECTION
Echange-
Traded
Derivative ?
Yes
One scenario
Pay-off graph
NoInsurance
product ?
Yes
3 periods and
3 «survival» scenarios
+ 1 «death» scenario
12 scenarios
No
Single
premium
product ?
3 periods and
3 scenarios
9 scenarios
RHP typically
longer than 3
years
RHP more
than a year
?
Yes
1 period and
3 scenarios
3 scenarios
No
RHP more
than 3 year
?
2 periods and
3 scenarios
6 scenarios
No
COSTS
LIST OF COST IN SCOPE FOR PRIIPs
Asset Managers Banks Insurance companies
- Distribution fees (maximum allowed)
- Constitution costs
- Marketing costs
- Subscription fees including taxes
One-off
costs
Entry costs
Exit costs
- Sales commissions
- Structuring costs
- Hedging costs
- Legal fees
- Capital guarantee costs
- Implicit premium paid to issuer
- Proportional fees
- bid-mid spread (for early exit)
- Management fees
- Depositary fees
- Directors fees
- Advisory fees
- Administration fees (FA, TA, prime broker)
- Securities lending fees
- Regulatory, registration, listing fees
- Audit fees
- Legal, professional fees
- Marketing and distribution fees (maximum allowed)
- Financing costs
- Implicit costs for structured funds
- Other costs
- Performance-related fees
- Costs related to the underlying
- Coupon payments costs
- Structuring costs
- Acquisition, distribution costs
- Processing costs
- Cost of holding required capital
- Cost part of the biometric risk premium
- Portfolio transactions costs
Ongoing
costs
Portfolio
transaction costs
p.a.
Other ongoing
costs p.a.
Incidental
costs
Performance fees - N/A - N/A
Insurance costs
- Structuring, marketing costs
- Acquisition, distribution costs
- Processing costs
- Administrative costs
- Cost of holding required capital
- Depositary fees
- Portfolio transaction costs
- N/A - Cost part of the biometric risk premium or
full biometric risk premium
- N/A
- Portfolio transaction costs
- Carried interestsCarried interests - Carried interests - Carried interests
Costs categories in
the KID
COSTS
‣ Entry costs now include subscription fees including taxes
‣ if country specific taxes included, this could mean to having a different number per country
‣ Maximum distribution fees allowed if not known by management companies
‣ Methodology for computation of actual transaction costs difference between “arrival price” and net realized price
‣ “Arrival price” corresponds to the mid-market price at the time the order is transmitted where and how to retrieve the
mid-market prices? What if the result is negative?
‣ To be computed based on a history of the last three years
‣ In the absence of mid-marker price, opening or closing prices may be considered, but what to do in case of high volatility?
‣ For products existing for less than 3 years, a different methodology to compute transaction costs should be used:
‣ estimated PTR to be extrapolated against a benchmark to be selected based on asset classes
‣ Insurance costs to be disclosed as a separate line in the “composition of costs” table (biometric risk)
‣ Could lead to individualized documents based on the age of the policyholders
‣ Computation of the Reduction-in-Yield (RIY) based on the moderate scenario and the respective cost-free scenario. (Cost over
time)
‣ ETDs to take a performance of 3% into account when calculating the RIY
‣ Exit fees not included on cost composition table, however must be present in ‘Cost over time’ and described in ‘How long should
I hold it…’
Comprehension Alert and KID Revision/Monitoring/Publication
Comprehension Alert and KID Revision/Monitoring/Publication
‣ Comprehension Alert most likely to follow UCITS eligibility rules ( following Non Paper of the EC)
‣ KID’s need to be revised yearly based on last publication date
‣ KID’s need to be updated in case of material change. Currently guidance is given for risk ( MRM calculation
depending on the valuation frequency and monitoring based on a 4 months sliding period)
‣ Performance needs to be monitored and updated in case of 5 % deviation
‣ All other changes are left to the appreciation of the manufacturer
‣ Updated KID’s must be available on the website
‣ No need to inform existing investors on updated KID’s ( confirmed during the workshop of the EC in July
2016)
‣ Insurance PRIIP’s KID need to notified to the FSMA ( in principal by the advisor/distributor of the product Art
74 of the Law of 29.06.2016 )
‣ Responsibility of the Distributor to remit the KID within PRIIPS. Distribution oversight and Product governance
responsibilities for the manufacturer and distributor to be looked within MIFID II / IDD
FLEXIBLE FUNDS
FLEXIBLE FUND CATEGORIZATION
‣ A “flexible fund” is a fund with a are managed according to investment policies and/or
strategies that pursue certain reward objectives by participating through flexible investment in
different financial asset classes – according to point 14 of Annex 2 of the RTS.
‣ Such funds are to be classified under Category 2.
‣ Different computations to be done on VaR-equivalent-volatility required, using the maximum of
the:
‣ VeV calculated using the standard CF VaR expansion,
‣ VeV calculated based on the pro-forma asset mix
‣ VeV calculated based on the risk limit (or “volatility budget”) of the fund
EPT / CEPT
European PRIIPs Template (EPT & CEPT)
RHPsNarratives
Prices (or
benchmarks for
DPM)
Minimum
EPT Comfort (CEPT)
• Identification data
• Pre-calculated
figures
• Risk (SRI)
• Performance
Scen.
• Cost (table 1)
• For
• different RHPs
• regular
premium/ lump
sum
• cost structures
• Identification data
• Base EPT
equivalent
narratives for
languages else than
base languages
• Identification data
• Price or benchmark
history / raw data of
the portfolio
(potentially sliced
benchmark data) to
allow risk and
performance
calculation by the
PRIIP manufacture
• General portfolio
data
• Risk assessment
• Performance
scenario returns
• Costs (table 2)
• Narratives in base
language of the
portfolio
Format: CSV or XML ( fundxml ?)
Interval: Monthly?
C o m f o r t i n f o r m a t io n r e q u i r e d u n d e r a r t i c l e 1 4 a n d i t s r e f e r e n c e s o f P R I I Ps f i n a l R T S w i t h t h e f o l l o w i n g l i n k s :
Comfort- EPT(Version as of 2016/08/31 agreed by EWG)
• CEPT Prices: Article 14 c
• CEPT Translated Narratives: Article 14 a-c
• CEPT RHPs: Article 14 c-d
Article 14
Specific information on each underlying investment option
In relation to the specific information referred to in Articles 11, 12 and 13, PRIIP manufacturers shall include for each
underlying investment option – all of the following:
(a) a comprehension alert, where relevant;
(b) the investment objectives, the means for achieving them, and the intended target market in accordance with
paragraphs 2 and 3 of Article 2;
(c) a summary risk indicator and narrative, and performance scenarios in accordance with Article 3;
(d) a presentation of the costs in accordance with Article 5.