SRRI and SRI calculation under PRIIPs and UCITS has been saved
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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 |
|
 |
5 years of historical data |
5 years when available, otherwise 2 years for daily, 4 years for weekly, and 5 years for monthly funds |
 |
Weekly prices for daily valued funds |
Follows the actual pricing frequency of the fund |
 |
Standard deviation of returns |
Value-at-Risk-equivalent volatility (VEV) based on Cornish-Fisher expansion of a Gaussian Value-at-Risk |
 |
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
Regulatory changes and migration to new PRIIPs RTS live in Jan 2023
In response to the industry consultation in 2019 and 2020, the European Commission published in 2021 a few amendments to the methodologies for risk, reward and cost compilation.
The overview of all the upcoming changes and how to prepare to the successful migration to the new RTS can be found in the article here.
As far as the upcoming changes pertaining to the risk compilation go, they are fewer and less impactful than changes for other disclosures (e.g. performance scenarios):
- As anticipated, the original formula for VEV had a small mistake in it that has now been corrected; and
- The bucket limits for the MRM determination from VEV are now clearly defined to avoid any ambiguity.
The most notable change is that the PRIIP manufacturer can now opt to increase the SRI if they deem the compiled SRI to inadequately represent of the risk of the PRIIP. When opting for this option, the manufacturers should document the decision-making process.
UCITS KIID and PRIIPs KID
Following a decision by the European Parliament in November 2021, both the end of the PRIIPs exemption for UCITS funds and the go-live date for the regulatory technical standards (RTS) are set for the 1st of January 2023, and publication of UCITS KIIDs will no longer be a requirement in Europe as from 1st of January 2023.
This means that PRIIPs KID and UCITS KIID will not need to be published in parallel for UCITS funds open to retail investors. For non-retail investors, on the other hand, the management companies will be given a choice as to which document to publish.
Feel free to contact us for more information, including the specific KI(I)D requirements for UK or Switzerland.
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Related pages
PRIIPs Reporting Services
Our PRIIPs KID Factory and Reporting services
Quantitative risk reporting for investment funds
Outsourcing of market risk, VaR, leverage, liquidity risk, credit risk, default risk, counterparty risk, back-testing and stress-testing reports
