EUROPEAN UNION: ESAs Update Q&A on PRIIPs KID

Wednesday November 29 2017

On 20^th November 2017, the Joint Committee of the European Supervisory Authorities updated Q&A’s on the PRIIPs KID.

Please see below updates:

A manufacturer is not required to draw up a KID for a product listed on a regulated market when they have defined the product as meant only for non-retail investors. The Delegated Regulation defines the term “biometric risk premium” in point 54 of Annex VI. The term “insurance premium payment” in the second sub paragraph of Article 2(4) and the term “insurance premium” at the top of Templates A and B of Annex V – Single or Regular premiums paid – are considered to have the same meaning as biometric risk premium.

It can be added that some of the references to “premiums” in the Delegated Regulation, for example in the first sub paragraph of Article 2(4) the terms “overall premium”, “premium” or “annual premium”, refer to the total amount paid or total annual payments made by the retail investor. The term “Investment” at the top of Templates A and B of Annex V – Single or Regular premiums paid – also refers to the total amount paid or total annual payments.

It is not possible to voluntarily include a PRIIP in any Category. The analysis of the appropriate categorisation must be done. For example, leveraged products that could lead retail investors to lose more than their initial investment would be Category 1. Other types of leveraged products, for example those that track a reference value that cannot fall below zero, may be Category 2 or 3.

The Delegated Regulation does not in general address the treatment of specific product types, and for credit-linked notes the contractual arrangements for each product would need to be assessed on a case-by-case basis, to identify the applicable category and the methodology for this category would then be applied.

However, some guidance can be given in relation to how the Delegated Regulation can be applied to instruments that pay a periodic coupon to the investor until either maturity or the default of a reference entity.

First, in accordance with Annex II, Part 1, point 4(c), where there is not sufficient historical data the product shall be considered a Category 1 product, and hence the MRM is 6. For example, if a product depends, on the default of multiple entities, there may not be observable correlations for a joint default.

Where there is market data, for example CDS prices that give a market based estimate of the probability of default for a particular reference entity, these products may be Category 3 and the corresponding methodology for the risk and performance calculations would apply.

Credit events are not considered to be “factors not observed in the market” (see also Q&A no. 12, Section MRM, 1. Product Categories), and therefore Category 4 is not considered to be applicable.

The Delegated Regulation does not specify a conventional number of trading periods which compose one year. Since conventions can vary between Member States or markets, the number of trading periods to use should be the actual number of prices observed in the prescribed interval.

Rolling means that the volatility should be measured with the sub-interval – of length w – increasing by one step each time; for example where there are daily prices and a recommended holding period of 1 year (see Point 10(a) of Annex IV of the Delegated Regulation) the sub-interval would start at 1-21 days and roll to 2-22, 3-23 etc.

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