SRRI and SRI calculation under PRIIPs and UCITS

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SRRI and SRI calculation under PRIIPs and UCITS

Similarities & differences between UCITS and PRIIPs risk indicators calculation

PRIIPs regulation assigns each product a single SRI from 1 to 7, thus communicating its risk and reward position to the retail customer. As a step up from the UCITS’ SRRI, SRI calculation methodology introduces the credit risk dimension and assesses market risk using a more complex Cornish Fisher methodology.

What is new in the SRI calculation compared to SRRI?

SRI calculation relies on both a market and a credit risk measure. Compared to SRRI, market risk measure uses an alternative volatility and determines market risk score based on wider buckets.

SRRI Synthetic Risk and Reward Indicator

UCITS
Market Risk only

SRISummary Risk Indicator

PRIIPs
Market Risk (MRM) + Credit Risk (CRM)



Key difference areas between SRRI and MRM



SRRI

MRM

Data history

5 years of historical data

5 years when available, otherwise 2 years for daily, 4 years for weekly, and 5 years for monthly funds

Data history

Weekly prices for daily valued funds

Follows the actual pricing frequency of the fund

Data history

Standard deviation of returns

Value-at-Risk-equivalent volatility (VEV) based on Comish-Fisher expansion of a Gaussian Value-at-Risk

Data history

Risk Class

SRRI

MRM (VEV)

1

0% - 0.5%

0% - 0.5%

2

0.5% - 2%

0.5% - 5%

3

2% - 5%

5% - 12%

4

5% - 10%

12% - 20%

5

10% - 15%

20% - 30%

6

15% - 25%

30% - 80%

7

25%

80%

CRM & its impact on the SRI calculation

SRI calculation combines market risk & credit risk

PRIIPs
Market Risk (MRM) + Credit Risk (CRM)

SRI
Summary Risk Indicator

Credit Risk (CRM)

  • A PRIIP is considered to entail credit risk when the return of the PRIIP or its underlying investments depends on the creditworthiness of a manufacturer or party bound to make relevant payments to the investor
  • For PRIIPs exposed to underlying investments and techniques, the credit risk is assessed on a look-through basis (in proportion to the total assets they respectively represent) and adopting a cascade assessment where necessary
  • Separate assessment of the credit risk entailed by each underlying investment, which when considered together, represent an issuer exposure of 10% (or more) of the TNA
  • The level of credit risk shall be assessed on the credit assessment assigned to the PRIIP/relevant obligor by an external credit assessment institution

A PRIIP with the MRM of 4 and CRM of 5 will have the SRI of 5

 

Market Risk (MRM)

Credit Risk (CRM)

MR1

MR2

MR3

MR4

MR5

MR6

MR7

CR1

1

2

3

4

5

6

7

CR2

1

2

3

4

5

6

7

CR3

3

3

3

4

5

6

7

CR4

5

5

5

5

5

6

7

CR5

5

5

5

5

5

6

7

CR6

6

6

6

6

6

6

7

SRI vs SRRI in action

Different portfolio compositions put credit risk in context

Emerging market bonds fund

Issuer

Σ Dirty MV M€

TNA M€

% TNA

Issuer CQS

Weighted CQS

Country A

160

650

25 %

5

1.2

Country B

150

650

23 %

6

1.4

Country C

130

650

20 %

6

1.2

Σ Weighted CQS =

3.8

CRM

4

Value-at-Risk equivalent volatility (VEV) =

5.4%

MRM

3

SRI

5

Volatility (σ) =

4.6%

SRRI

3

Large cap equity fund

Issuer

E Dirty MV MC

TNA

%TNA

Issuer CQS

Weighted CQS

No credit risk exposure

 

 

0

0

Σ Weighted CQS =

0.0

CRM

1

Value-at-Risk equivalent volatility (VEV) =

11.7%

MRM

3

SRI

3

Volatility (σ) =

10.8%

SRRI

5





The tables above are only displayed to illustrate the SRI and SRRI calculation methodologies and should not be relied on or used for any other purpose

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