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Risk Measures Overview

A Cross-Form Comparison Guide – Version 2

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Risk Measures Overview – A Cross-Form Comparison Guide

Published May 2017.

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©2017 – Advise Technologies | CONFIDENTIAL Pag e i

©2017 – Advise Technologies | CONFIDENTIAL Pag e ii

Table of Contents

©2017 – Advise Technologies | CONFIDENTIAL Pag e 1

OVERVIEW

Regulatory reporting forms seek to measure risk by specifying:

The name of the metric used to calculate risk

How risk is defined

The formula used to calculate risk

Required shock values that must be applied

Advise compared six forms – Solvency II, AIFMD, Form PF, CPO-PQR, Open Protocol, and Form N-PORT – to

evaluate how risk measures are applied across asset classes. Our analysis included the following risk measures

and asset classes: Interest Rates, Spread, Property, Implied Volatility, FX Delta, Commodities, Default Risk, and

Value at Risk (VaR).

Our analysis found that:

Risk measures are defined differently by each form across asset classes.

The formula used to calculate risk is identical across the following asset classes (where applicable):

Equities, Interest Rate, Spreads, Property, and Implied Volatility.

Shock values are different across asset classes.

For VaR: definitions, holding period, confidence level, data set period, and calculation methods vary by

form.

NOTE: In this document, Solvency II risk metrics are based on the “standard formula” as defined in Directive

2009/138/EC and Regulation 2015/35/EU.

NOTE: A complete list of source materials appears in the References section.

NOTE: For Form CPO-PQR, the risk measures described in this document are only applicable to large pools

(Question C2 4).

NOTE: For AIFMD, the risk measures described in this document are defined in an ESMA opinion and vary by

jurisdiction; individual jurisdictions may change their requirements in the future.

NOTE: For AIFMD, stress tests (Question F 279-280) were not included as part of this analysis.

http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32009L0138&from=EN


http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2015:012:FULL&from=EN

https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-869.pdf#page=28


EQUITY

Form Metric Definition Shock Type Shock Values

Solvency II SCR Equity (Type 1/2) Sensitivity of the values of assets, liabilities, and financial

instruments to changes in the level or in the volatility of

market prices of equities (equity risk).

Current value * X% - 22% or - 39%

or - 49%

AIFMD Net Equity Delta The portfolio’s sensitivity to movements in equity prices. Current value * X% - 20%

Form PF Change in Equity Prices The portfolio’s sensitivity to movements in equity prices

where shocks are applied to LONGS & SHORTS separately.

Current value * X% +/- 5% and

+/- 20%

CPO-PQR Change in Equity Prices The portfolio’s sensitivity to movements in equity prices

where shocks are applied to LONGS & SHORTS separately

(for LARGE pools only).

Current value * X% +/- 5% and

+/- 20%

Open Protocol Change in Equity Prices The portfolio’s sensitivity to movements in equity prices

calculated for Large/Small Cap. The change is relative to the

current equities level.

Current value * X% +/- 10%

Form N-PORT N/A


INTEREST RATES


Solvency II

SCR Interest Sensitivity of the values of assets, liabilities, and financial instruments to changes in the term structure of interest rates, or in the volatility of interest rates (interest rate risk). NOTE: Inflation risk is not explicitly modelled in SCR and it is assumed its effect is already included into the prescribed shock.

Current rate + X% Up shock: MIN [1%, r+70% / r+20%]

Down shock: MAX [0%, r-75% / r - 20%]

AIFMD Net DV01 Basis Point Value – the portfolio’s sensitivity to a change in the yield curve. Assume an increase of 1bp in the yield curves that the fund is exposed to (assume a parallel shift). Report the effect on the total net asset value of the AIF as a monetary value in base currency for each maturity bucket as specified (short/intermediate/long).

Current rate + X% 0.01%

Form PF Parallel Shift of Yield Curve

The portfolio’s sensitivity to parallel shifts of yield curve (risk-free rates) where shocks are applied to LONGS & SHORTS separately.

Current rate + X% +/- 0.25% and +/- 0.75%

CPO-PQR Parallel Shift of Yield Curve

The portfolio’s sensitivity to parallel shifts of yield curve (risk-free rates) where shocks are applied to LONGS & SHORTS separately (for LARGE pools only).

Current rate + X% +/- 0.25% and +/- 0.75%

Open Protocol Change in Sovereign Rates (RFR)

The portfolio’s sensitivity calculated to change in Short-term (<1Y) and Long-term (>1Y) interest rates separately. Change is relative to the current interest rate curve.

Current rate + X% +/- 5% and +/- 10%



Form N-PORT DV01 and DV100 The portfolio’s sensitivity to changes in interest rates for each currency that is ≥ 1% of the fund’s NAV. Must be calculated over the following maturities: 3-months, 1-year, 5-years, 10-years, and 30-years. (NOTE: If maturities fall between those durations, then linear interpolation must be applied.) Firms may use their own methodologies for this calculation.

Current rate + X% +/- 0.01% and +/- 1%


SPREAD


Solvency II SCR Spread Sensitivity of the values of assets, liabilities, and financial instruments to changes in the level or in the volatility of credit spreads over the risk-free interest rate term structure (spread risk).

Current spread * X% Complex calculations

between 0.9% - 100%

AIFMD Net CS01 The portfolio’s sensitivity to a change in credit spreads. Assume a general increase in all credit spreads of 1bp. Report the effect on the total net asset value of the AIF as a monetary value in base currency for maturity bucket as specified (short/intermediate/long).

Current spread + X% 0.01%

Form PF Credit Spreads The portfolio’s sensitivity to change in credit spreads where shocks are applied to LONGS & SHORTS separately.

Current spread * X% +/- 0.5% and +/- 2.5%

CPO-PQR Credit Spreads The portfolio’s sensitivity to change in credit spreads where shocks are applied to LONGS & SHORTS separately (for LARGE pools only).

Current spread * X% +/- 0.5% and +/- 2.5%

Open Protocol Credit Spreads The portfolio’s sensitivity calculated to change in credit spreads split between Investment Grade and Non-Investment Grade bonds reported separately. Change is relative to the current interest rate curve.

Current spread * X% +/- 5% and +/- 10%

Form N-PORT SDV01/CR01/CS01 The portfolio’s sensitivity to change in credit spreads. Shift is applied to the option-adjusted spread aggregated by investment/non-investment grade. (NOTE: Credit spread may also relate to CDS spread.)

Current spread * X% +/- 0.01%


PROPERTY


Solvency II SCR Property Sensitivity of the values of assets, liabilities, and financial instruments to changes in the level or in the volatility of market prices of real estate (property risk).

Current value * X% - 25%

AIFMD N/A

Form PF N/A

CPO-PQR N/A

Open Protocol N/A

Form N-PORT N/A


IMPLIED VOLATILITY


Solvency II N/A Volatility is not implicitly tested in SII SCR for asset managers. However, an insurance company can tweak volatility at high-level by recalculating its liabilities and making adjustments to volatility input.

AIFMD Vega Exposure Current vega factor (multiplier) of the portfolio defined as the sensitivity of the total net asset value to an increase of 1 percentage point of implied volatilities.

Current volatility * X% +/- 10%

Form PF Implied Volatility The portfolio’s sensitivity to change in implied volatilities for options where shocks are applied to LONGS & SHORTS separately.

Current volatility * X% +/- 4% and +/- 10%

CPO-PQR Implied Volatility The portfolio’s sensitivity to change in implied volatilities for options where shocks are applied to LONGS & SHORTS separately (for LARGE pools only).

Current volatility * X% +/- 4% and +/- 10%

Open Protocol Implied Volatility The portfolio’s sensitivity to change in implied volatilities for options. Change is relative to the current implied volatility level.

Current volatility * X% +/- 10%

Form N-PORT N/A


FX………………………………………….


Solvency II SCR FX Sensitivity of the values of assets, liabilities, and financial instruments to changes in the level or in the volatility of currency exchange rates (currency risk).

Current FX rate * Shock +/- 25%

AIFMD Net FX Delta Assume all currencies appreciate by 20% relative to the fund’s base currency. Report the effect on the total net asset value of the AIF as a monetary value in base currency.

Current FX rate * Shock + 20%

Form PF Currency Rates The portfolio’s sensitivity to change in currency rates relative to the fund's base currency where shocks are applied to LONGS & SHORTS separately.

Current FX rate * Shock +/- 5% and +/- 20%

CPO-PQR Currency Rates The portfolio’s sensitivity to change in currency rates relative to the fund's base currency where shocks are applied to LONGS & SHORTS separately (for LARGE pools only).

Current FX rate * Shock +/- 5% and +/- 20%

Open Protocol Currency Rates The portfolio’s sensitivity to change in exchange rate of USD relative to the portfolio local currencies.

Current FX rate * Shock +/- 10%

Form N-PORT N/A


COMMODITIES


Solvency II SCR Equity 2 Sensitivity of the values of assets, liabilities, and financial instruments to changes in the level or in the volatility of market prices of equities (equity risk). Commodities are treated as Equity type 2.

Current value * X% - 49%

AIFMD Net CMD Delta Assume the prices of all physical commodities increase by 40%. Report the effect on the total net asset value of the AIF as a monetary value in base currency.

Current value * X% + 40%

Form PF Commodity Prices The portfolio’s sensitivity to movements in commodity prices where shocks are applied to LONGS & SHORTS separately.

Current value * X% +/- 10% and +/- 40%

CPO-PQR Commodity Prices The portfolio’s sensitivity to movements in commodity prices where shocks are applied to LONGS & SHORTS separately (for LARGE pools only).

Current value * X% +/- 10% and +/- 40%

Open Protocol Commodity Prices The portfolio’s sensitivity to movements in commodity prices with additional breakdowns for shocks in Metal and Energy prices.

Current value * X% +/- 10%

Form N-PORT N/A


DEFAULT RISK


Solvency II SCR Default Risk Consists of default risk to counterparty exposure types 1 and 2 with an interaction (covariance) coefficient of 1.5 and given by the formula in Art. 189 of the Regulation. Currently, this is not in the scope of the Consensus RMS Solvency II module and is calculated by an insurance company based on input from the asset manager.

Complex formula based on loss-given default (LGD) and variance of loss

AIFMD N/A

Form PF Default Rates The portfolio’s sensitivity to change in default rates of the fund where shocks are applied separately to LONGS & SHORTS, ABS, and Corporate Bonds/CDS.

Current value + X% +/- 1% and +/- 5%

CPO-PQR Default Rates The portfolio’s sensitivity to change in default rates of the fund where shocks are applied separately to LONGS & SHORTS, ABS, and Corporate Bonds/CDS. Applies only to LARGE pools.

Current value + X% +/- 1% and +/- 5%

Open Protocol N/A

Form N-PORT N/A


VAR…………………………………

VaR Definition Holding Period

Confidence Level

Data Set Period

Calculation

Solvency II In SII, SCRs are calibrated by insurance companies (high level) and not asset managers. There is no requirement for an asset manager to calculate VaR for SII.

N/A N/A N/A N/A

AIFMD Reporting risk measures as outlined in ESMA opinion ESMA/2013/1340.

20 Days 99% 250 Days Historical Simulation Parametric Monte-Carlo Simulation

Form PF Form PF Q40: During the reporting period, did you regularly calculate the VaR of the reporting fund? If YES, then fill in VaR values.

Variable Value‡ Variable Value‡ Variable Value‡ Historical Simulation Parametric Monte-Carlo Simulation Other

CPO-PQR QC2-4 (Large pools only): Did large CPO regularly calculate the VaR of Large Pool during reporting period?

Variable Value‡ Variable Value‡ Variable Value‡ Historical Simulation Parametric Monte-Carlo Simulation Other

Open Protocol Section 8 (VaR/CVaR) 1 day 95% Variable Value‡ Historical Simulation Parametric Monte-Carlo Simulation Other

Form N-PORT N/A

‡Managers can determine the values used for these fields. All values must be disclosed on the form itself.


GREEKS AND RELATED DATA POINTS

The table below shows how different risk metrics apply across forms.

Open Protocol Solvency II Form PF AIFMD CPO-PQR Form N-PORT

Beta

Delta

Gamma

Vega

Theta

CS01*

DV01†

Z-Spread

Yield to Maturity

Yield to the Next Call

OAS

* May also apply to SDV01 and CR01. † May also apply to DV100.



Cash on Cash Yield

Yield to Worst

Current Yield

Yield to Best

CDS Spread

Net Equity Delta

Default Spread Beta

Semideviation

Sharpe Ratio

Skewness

Sortino Ratio

Stress VaR/Stress Test

Standard Deviation

Profit-at-Risk

Residual Risk



Earnings-at-Risk

Expected Shortfall/CVaR

Inflation Beta

Information Ratio

Kurtosis

Liquidity Adjusted Value at Risk

Marginal Expected Shortfall

Maximum Drawdown

Omega Ratio

Risk-Based Leverage

Scenario Analysis


REFERENCES

12.1 Solvency II

Directive 2009/138/EC: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32009L0138&from=EN

Regulation 2015/35/EU: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2015:012:FULL&from=EN

12.2 AIFMD

Directive 2011/61/24: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:174:0001:0073:EN:PDF

Regulation 231-2013: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:083:0001:0095:en:PDF

ESMA Opinion Guidelines:

https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-869.pdf

https://www.esma.europa.eu/sites/default/files/library/2015/11/2013-esma-

1340_opinion_on_collection_of_information_under_aifmd_for_publication.pdf

12.3 Form PF

Form PF Paper Form: https://www.sec.gov/about/forms/formpf.pdf

Dodd-Frank Legislation: http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf

Form PF Frequently Asked Questions: https://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml


http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2015:012:FULL&from=EN

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:174:0001:0073:EN:PDF

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:083:0001:0095:en:PDF

https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-869.pdf

https://www.esma.europa.eu/sites/default/files/library/2015/11/2013-esma-1340_opinion_on_collection_of_information_under_aifmd_for_publication.pdf

https://www.esma.europa.eu/sites/default/files/library/2015/11/2013-esma-1340_opinion_on_collection_of_information_under_aifmd_for_publication.pdf

https://www.sec.gov/about/forms/formpf.pdf

http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf

https://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml


12.4 CPO-PQR

Pool Quarterly Report For Commodity Pool Operators: https://www.nfa.futures.org/EasyFilePlus/EFPTemplate.aspx?template=PQR

12.5 Open Protocol

Template and Manual: http://www.theopenprotocol.org/top/thetemplateandmanual

Frequently Asked Questions: http://www.theopenprotocol.org/top/faq

12.6 Form N-PORT

Final Rule: Investment Company Reporting Modernization: https://www.sec.gov/rules/final/2016/33-10231.pdf

CONTACT

For more information, please contact:

Data & Analytics Team

Advise Technologies

+1 (212) 576 1170

[email protected]

https://www.nfa.futures.org/EasyFilePlus/EFPTemplate.aspx?template=PQR

http://www.theopenprotocol.org/top/thetemplateandmanual

http://www.theopenprotocol.org/top/faq

https://www.sec.gov/rules/final/2016/33-10231.pdf

mailto:[email protected]

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