PRIIPs RTS: methodology for the presentation of risks and performance scenario LUCA GIORDANO CONSOB

Transcription

1 PRIIPs RTS: methodology for the presentation of risks and performance scenario LUCA GIORDANO CONSOB ASSOCTU I Nuovi Regolamenti PRIIPs. Gli standard tecnici in vigore dal 1 Gennaio 2018 Roma, 24 novembre 2017

2 REGULATION (EU) No 1286/2014 Roma, 24 novembre

3 Subject Matter, Scope and Definitions Article 2: «This Regulation shall apply to PRIIP manufacturers and persons advising on, or selling, PRIIPs» Article 4: «packaged retail investment product or PRIP means an investment [ ] regardless of the legal form of the investment, the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the retail investor» Recital 6: For all those products, investments are not of the direct kind that is achieved when buying or holding assets themselves. Instead these products intercede between the retail investor and the markets through a process of packaging or wrapping together assets so as to create different exposures, provide different product features, or achieve different cost structures as compared with a direct holding Roma, 24 Novembre

4 Commission Delegated Regulation (EU) 2017/653 of 8 March 2017 Determination of the market risk measure (MRM): Market risk is measured by the annualised volatility corresponding to the value-at-risk (VaR) at a confidence level of 97,5% over the recommended holding period, unless stated otherwise. The VaR is the percentage of the amount invested, that is returned to the retail investor (Paragraph 1, Annex II) Roma, 24 novembre

5 Market risk assessment (MRM) Category 2 covers PRIIPs which, either directly or on a synthetic basis, offer non-leveraged exposure to the prices of underlying investments, or a leveraged exposure on underlying investments that pays a constant multiple of the prices of those underlying investments Category 3 covers PRIIPs whose values reflect the prices of underlying investments, but not as a constant multiple of the prices of those underlying investments When 5 years of historical prices of the PRIIP are available manufacturer should use the full dataset Roma, 24 novembre

6 Market risk assessment (MRM) Category 2 PRIIPS (linear cash-flow) VaR shall be calculated from the moments of the observed distribution of returns of the PRIIPS during the past 5 years Category 3 PRIIPs (not linear cash flow) VaR shall be calculated (1) from a distribution fo PRIIPS values at the end of the recommended holding period and (2) shall be discounted to the present date using the expected risk-free factor Roma, 24 novembre

7 Market risk assessment (MRM) Category 2 PRIIPS Category 3 PRIIPs is a stochastic process wich follows a normal distribution with Roma, 24 novembre

8 MRM vs PERFORMANCE SCENARIOS MRM framework (AnnexII) is based on the risk-neutral assumption which implies the drift removal PS framework (Annex IV) is based on the real-world assumption which implies the use of historical drift Roma, 24 novembre

9 MARKET RISK MEASURE (MRM) Category 2 PRIIPS Roma, 24 novembre

10 MARKET RISK MEASURE (MRM) Category 3 PRIIPS (b) discount at the same rate (paragraph 16) Roma, 24 novembre

11 MARKET RISK MEASURE (MRM) Category 3 PRIIPs Step 1: simulating the price or prices which determine the value of the PRIIPs at the end of the RHP (N periods) Step 2: correct the returns to ensure that the expected return measured from the simulated distribution of returns is the risk-neutral expectation of the return over the RHP Step 3: the VaR shall be discounted to the present date using the expected riskfree discount factor from the present date to the end of the RHP Roma, 24 novembre

12 MARKET RISK MEASURE (MRM) Category 3 PRIIPs Roma, 24 novembre

13 MARKET RISK MEASURE (MRM) - Example Category 2 PRIIPS MRM class VaR-equivalent volatility (VEV) 1 <0,5% 2 0,5%-5,0% 3 5,0%-12% 4 12%-20% 5 20%-30% 6 30%-80% 7 >80% Roma, 24 novembre

14 MARKET RISK MEASURE (MRM) - Example Category 2 PRIIPS VaR CF = μ + σ z α + z α μ 1 + z α 3 3z α 24 μ 2 μ 1 2 Second Moment σ Volatility (daily) 0, σ Third Moment Skew -0, μ σ Fourth Moment Excess Kurtosis 4, μ σ Cornish-Fisher expantion: z 0, z z -0, z z -0, Roma, 24 novembre

15 MARKET RISK MEASURE (MRM) - Example Category 2 PRIIPS Date Last Price Euro Stoxx 50 Bloomber code SX5E Return 01/10/ ,81 02/10/ ,59-0, /10/ ,48-0, /10/ ,75-0, /10/ ,21 0, /09/ ,81-0, /09/ ,38-0, /09/ ,17 0, /09/ ,64 0, /09/ ,85 0, Roma, 24 novembre

16 MARKET RISK MEASURE (MRM) - Example Category 2 PRIIPS Trading days per year (number of days) 104 (number of weekend days) 5 (public holidays) = 256 days M0 (under paragraph 10 of Annex II - RTS) 1281 Actual number of historical observations M1 0, Mean of all the observed returns in the sample (daily) M2 0, Second Moment σ Volatility (daily) 0, σ M3-7,7291E-07 Third Moment Skew -0, μ σ M4 1,29989E-07 Fourth Moment Excess Kurtosis 4, μ σ Confidence level (paragraph 1, Part 1, Annex II) 2,50% Tabulated value under standard normale distribution -1, z α Cornish-Fisher expantion: Polynomial Divisor z 0, z 6 z z -0, z z 24 V V V V z VaR z z VaR z z z -0, z z 36 RHP (Recommended Holding Period expressed in years) Number of Days VaR (Return Space) VEV Return Space MRM class VaR-equivalent volatility (VEV) ,3842 0, <0,5% ,6851 0, ,5%-5,0% ,9031 0, ,0%-12% ,3265 0, %-20% ,9759 0, %-30% ,4396 0, %-80% 7 >80% Roma, 24 novembre

17 MARKET RISK MEASURE (MRM) - Example Category 2 PRIIPS Recommended Holding Period (expressed in years) Number of Days VaR (Return Space) VEV Return Space MRM class VaR-equivalent volatility (VEV) , , <0,5% , , ,5%-5,0% , , ,0%-12% , , %-20% , , %-30% , , %-80% 7 >80% Roma, 24 novembre

18 MARKET RISK MEASURE (MRM) - Example Category 3 PRIIPS INPUT DATA - 5 YEARS OF DAILY PRICES (1281 OBSERVATIONS) DATE PRICE RETURN T 01/10/ ,81 02/10/ ,59-0, /10/ ,48-0, /10/ ,75-0, /10/ ,21 0, /10/ ,09-0, /09/ ,38 0, /09/ ,17 0, /09/ ,64 0, /09/ ,85 0, Roma, 24 novembre

19 MARKET RISK MEASURE (MRM) - Example Category 3 PRIIPS EACH SIMULATED PERIOD IN THE RHP (RHP=12 DAYS) EXAMPLE SIMULATION: SIMULATION 1 RANDOMLY SELECT ONE OBSERVED PERIOD OVER 1281 HYSTORICAL PERIODS RETURN FOR ALL UNDERLYING CONTRACTS DISTRIBUTION OF SIMULATIONS SIMULATIONS RANK VALUE , , , , , , , , , , , , , , , , , , , , , , , , , R R R σ σσ , , R R R a , , RISK-FREE RETURN OVER THE RHP 0, , SUM OF SIMULATED RETURNS 0, , E[RETURN risk-neutral] 0, Corrections required to get , E [RETURN MEASURED] 0, risk-neutral distribution 0,5 σ2 N 0, ADJUSTED SIMULATED RETURN: 0, EXP of SIMULATED RETURN 1, RHP LENGTH: 12 DAYS Roma, 24 novembre

20 MARKET RISK MEASURE (MRM) - Example Category 3 PRIIPS DAY SUM OF RETURNS SIMULATED RETURN (in accordance with 22 - point c - Annex II) RANK PRICE OF UNDERLYING CONTRACT (in accordance with 22 - point d - page 9 - Annex II) Simulation 1 0, , , , , ,8E-05 0, , , Simulation 2 0, , , , , , , , , Simulation 3 0,0012 0, , , , , , , , Simulation 4-0, , , , , ,005-0, , , Simulation 997-0, , , , , , , , , Simulation 998-0, , , , , , , , , Simulation 999-0, , , , , , , , , Simulation , , , , , , , , , MRM PERCENTILE: 2,5% TRADING DAYS PER YEAR: 256 INV NORMAL: -1,96 USED RANK MRM: 975 Recommended holding period expressed in years (T) YEARS 1 VeV is 16,81% than MRM class 4 is assigned VaR (price space): 0, VEV: 0, Roma, 24 novembre

21 Performance scenarios: favourable, moderate and unfavourable Category 2 PRIIPS Roma, 24 novembre

22 Performance scenarios: favourable, moderate and unfavourable Category 2 PRIIPS α z z (z z (2z z Unfavorable Scenario - Critical values 10% -1, , , , Moderate Scenario - Critical values 50% 0-0, Favorable Scenario - Critical values 90% 1, , , , Standard Performance Scenarios Paragraph 9 - letters (a), (b), (c) - Annex IV RHP 5 years 1 year 3 years N is the number of trading periods in the recommended holding period T* Annualized volatility σ 0, , , Unfavorable scenario 0, , , Moderate scenario 1, , , Favorable scenario 2, , , Roma, 24 novembre

23 Performance scenarios: favourable, moderate and unfavourable Category 3 PRIIPS do not correct the simulated returns for the risk-neutral factor do not discount using the risk-free discount factor Roma, 24 giugno

24 Performance scenarios: favourable, moderate and unfavourable Category 3 PRIIPS Recommended holding period in years (T) Percentile Rank (over 1000 simulations) Used Rank Unfavourable scenario 10th 900 Used Rank Moderate scenario 50th 500 Used Rank Favourable scenario 90th 100 YEARS 1 3 Unfavorable Scenario 0, ,79433 Moderate Scenario 1, , Favourable Scenario 1, ,7828 The scenarios values under different performance scenarios shall be calculated in a similar manner as the market risk measure (MRM) - Point 4 Annex IV and Point 12 letter a, b Annex IV) Roma, 24 novembre

25 Stressed scenario Category 2 PRIIPS Category 3 PRIIPS Roma, 24 novembre

26 Stressed scenario Category 2 PRIIPS Roma, 20 giugno

27 Stressed scenario Category 2 PRIIPS Date Euro Stoxx 50 Return Return Rank Rolling volatility 01/10/ ,81 02/10/ ,59-0, , /10/ ,48-0, , /10/ ,75-0, , /10/ ,21 0, , /10/ ,09-0, , /10/ ,23-0, , /10/ ,54-0, , /10/ ,08 0, , /10/ ,09-0, , /10/ ,12 0, , /10/ ,9 0, , /10/ ,83 0, , /10/ ,19 0, , /10/ ,24-0, , /10/ ,1-0, , /10/ ,92-0, , /10/ ,58 0, , /10/ ,43-0, , /10/ ,1 0, , /10/ ,84-0, , /10/ ,99 0, , /10/ ,64-0, , /11/ ,87 0, , Roma, 20 giugno σ σ σ

28 Stressed scenario Category 2 PRIIPS Stressed Performance Scenario Paragraph 11 - Annex IV α z z (z z (2z z RHP 1 YEAR - Annex IV, paragraph 11 1% -2, , , , RHP OTHER HOLDING PERIODS - Annex IV, paragraph 11 5% -1, , , , Stressed volatility 1 year - Annex IV, point 10(d) 0, Stressed volatility 3 years - Annex IV, point 10(d) 0, RHP Stressed volatility 5 years - Annex IV, point 10(d) 0, years 1 year 3 years N is the number of trading periods in the recommended holding period , , , STRESSED SCENARIO 0, , , Roma, 24 novembre

29 Stressed scenario Category 3 PRIIPS Roma, 24 novembre

30 Stressed scenario Category 3 PRIIPS Observed returns Rank Rolling volatility Stressed returns r t adj = r t W σ S σ S -0, σ 0, , , σ 0, , , , , σ 0, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Roma, 24 novembre

31 Stressed scenario Category 3 PRIIPS Percentile RHP = 1 (Paragraph 10, letter d, Annex IV) 99 Inferred stressed volatility (RHP = 1 year) Used rank (RHP = 1) W σs 0, Observed Standard Deviation 0, σ S Standard Deviation of the Adjusted Returns 0, σ Mean stressed returns 0, Percentile stressed scenario Rank Stressed Scenario Stressed Scenario Paragraph 14 Annex IV RHP = 1 Y z α , Roma, 24 novembre