PRIIPs Breakfast meeting June 2016 Table of Contents Challenges - - PowerPoint PPT Presentation

PRIIPs – Breakfast meeting

June 2016

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Table of Contents

► Challenges

► Risk Indicators ► Performance scenarios ► Costs ► MOPs

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01

Challenges

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KID – a short and easily understandable factsheet covering the key features of the product

• 3 pages (DIN-A4)
• Standardized format and content
• Accurate, fair, clear and not misleading information
• Written in English and/or the official language of

countries of PRIIP distribution

• On paper, durable medium and on website

Key Information Document

Form Timing

• To be received by the retail investor in good time

before the conclusion of a transaction

• To be produced and updated on a periodic basis

Content

• Stand-alone document, separate from marketing

material

• Focus on information that retail investors need

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KID: content and format

Leveraging on the UCITS KIID

►

A standardized and pre-contractual document written in a clear language and clearly separated from marketing materials.

►

The main format and content of the KID will be as follows:

Title: “Key Information Document” & generic statement

“What is this product?”

► Investment type; ► Objectives and means on how to achieve them; ► Whether the product offers insurance benefits (including detail)

and terms of the products (if applicable); “What are the risks and what could I get in return?”

► Summary risk indicator & narrative explanation of the applicable

risks;

► Possible maximum loss; ► Performance scenarios and underlying assumptions;

“What happens if the PRIIP manufacturer is unable to pay out?”

► Whether the related loss is covered by an investor

compensation or guarantee scheme;

► Name of the guarantor and which risks are covered;

“What are the costs?”

► Disclosure of the costs associated with an investment in the

PRIIP in the form of summary indicators and total aggregate costs expressed in monetary and percentage terms;

► direct and indirect costs to be borne by the retail investor,

including one-off and recurring costs;

► Costs of distribution of the PRIIP to be provided to the investor

in addition “How long should I hold it and can I take money out early?”

► cooling off period or cancellation period for the PRIIP, where

applicable;

► Recommended holding period; ► Ability, conditions and consequences for making disinvestments

before maturity; “How can I complain?”

► How and to whom an investor can complain;

► The KID is a living document and must be up-to-date at all times

“Other relevant information”

► Additional information to be provided to the retail investor at the

pre-contractual and/or post-contractual stages

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KID - definition of methodologies for risk indicators as key challenge

Risk indicator

Credit Market Liquidity

Challenges:

• The Market Risk Measure (MRM) calculation is dependent on the

PRIIPs categorization

• Classification of the investment products according to the

PRIIPS categorization is unclear

• Confidence interval to compute the VaR is not aligned between

UCITS and other PRIIPS subject products creating challenges for multi option products (MOPs)

• …

Four approaches that are being considered as viable :

Qualitatively based indicator which combines credit and market risk, complemented by a quantitative market risk measure. Two-level indicator where the first level roughly separates products based

• n their qualitative

characteristics and the second level specifies the risk based on a quantitative assessment. Indicator based on quantitative market and credit risk measures and is calculated by using forward looking simulation models Indicator which separates market risk and credit risk. Market risk in this indicator is assessed by a quantitative volatility measure and credit risk is assessed by a qualitative external credit rating

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Future scenario approach relying on quantitative modelling

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KID – definition of methodologies for performance scenarios as key challenge

Performance scenarios

Challenges:

• Comparability of future performance scenarios between

all types of PRIIPs

• Models to compute different scenarios not aligned
• Assumptions can largely be different between PRIIPs

manufacturers

• Computation of interim performance scenarios for liquid

products Vs illiquid products

• …

Let the manufacturer of a PRIIP decide which scenarios to present in the KID (the so called what-if: manufacturer choice). Prescribe which scenarios should be included in the KID Take probabilities of outcomes into account in the scenario selection Combination of the previous approaches

Four approaches are highlighted for performance scenarios:

Let the manufacturer of a PRIIP decide which scenarios to present in the KID (the so called what-if: manufacturer choice). Prescribe which scenarios should be included in the KID Take probabilities of outcomes into account in the scenario selection Combination of the previous approaches

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Future scenario approach relying on quantitative modelling

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KID – definition of methodologies for identifying costs as key challenge

Individual costs

• Identifies the different types of costs of the different types of PRIIPs (in particular, funds, structured products and life-insurance

products), and identify the specific issues related to the calculation of some of these costs

• Assesses the different ways of aggregating these different types of costs, including the different possible definitions of the overall

cost ratio (summary cost indicator), and the possible ways of calculating the cumulative effect of costs

Challenges:

• Transactions costs should be calculated on three years

historic data. Accuracy can be questioned.

• Model based on “arrival price” , unsuitable to calculate

transaction costs

• Unavailability of data on market prices to establish mid

market prices for non equity products.

• Comparability between insurance products and asset

management products.

• …

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Future scenario approach relying on quantitative modelling