Q&A

Question

Since there is an ongoing discussion with respect to the three main parameters in the extrapolation of the risk-free interest rate curve, we would like to raise the question whether the actual determination of these parameters has any impact on the valuation of assets (e.g. unlisted loans with a maturity of more than 20 yrs) which are based on a mark-to-model valuation method (for example DCF-method in accordance with Art. 9 (7) b 2015/35)). That is, is it necessary to make use of

a) the relevant risk-free interest rate curve published by EIOPA plus an adequate credit spread

or

b) the EUR swap curve as published for example by Bloomberg plus an adequate credit spread when using the DCF-method to value to asset mentioned before.

EIOPA answer

Art. 9 of Delegated Regulation (EU) 2015/35 sets out that assets have to be valued in a market-consistent manner, i.e. in accordance with Art. 75 of Directive 2009/138/EC. For that purpose, and to take into account the time value of money, expected cash flows have to be discounted using a corresponding, current interest rate, adjusted for and reflecting the asset's credit risk, embedded options etc. To achieve market consistency, these adjustments have to be based on prices that can be observed in the market for assets with similar features. Therefore, one can expect that a range of dicount rates, including EIOPA's risk-free rate, can be used as a basis for tailored adjustments to reach the relevant discount rate for the asset, as long as the proper adjustments are made to the relevant discount rate for the asset to achieve market-consistent valuation.