PRIIPS Last Challenges...2016/10/17 · ‣ Category 3: Bootstrapping methodology (10,000...

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


Perf. Scenario

SRI, Costs

Product information


Perf. Scenario

SRI, Costs

Product information


Perf. Scenario

SRI, Costs

Specific content to be included in the generic KID, specifically on:

‣ «What is this product?» section



‣ 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



‣ 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 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

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

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


• Base EPT

equivalent

narratives for

languages else than

base languages


• 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.

PRIIPS Last Challenges...2016/10/17 · ‣ Category 3: Bootstrapping methodology (10,000...

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Transcript of PRIIPS Last Challenges...2016/10/17 · ‣ Category 3: Bootstrapping methodology (10,000...