Question
We are unsure about which of the probability of default and fundamental spread parameters provided by EIOPA to apply to bond cash flows for the purposes of calculating a matching adjustment. For example:
- For bonds issued in Euros by the European Investment Bank, do we take 30% of the Long-Term Average Spread figures provided for EUR?
- For bonds issued in British pounds by the European Investment Bank, do we take 30% of the Long-Term Average Spread figures provided for EUR or GBP?
- For bonds issued in Euros by the French and German governments, do we take 30% of the Long-Term Average Spread figures provided for FR and DE respectively? Or do we use the EUR figures?
- For corporate bonds issued in British pounds by a company based in for example Australia (or France), do we use the probabilities of defaults and fundamental spreads for AUD (or FR), or GBP (or something else)?
EIOPA answer
Bonds issued in euro by the European Investment Bank:
The default probabilities and fundamental spreads for financial corporate bonds issued in euro are applicable to these bonds.
The relevant factor to the LTAS for these bonds is 35%. For the purpose of calculating the matching adjustment, the European Investment Bank is not treated like a central government or a central bank.
Bonds issued in pound sterling by the European Investment Bank:
The default probabilities and fundamental spreads for financial corporate bonds issued in pound sterling are applicable to these bonds.
As above, the relevant factor to the LTAS for these bonds is 35%.
Bonds issued in euro by the French and German governments:
The fundamental spread for these bonds is 30% of the long-term average spread for FR and DE respectively.
Corporate bonds issued in pound sterling by a company based in Australia or France:
The default probabilities and fundamental spreads for GBP are relevant for these bonds, irrespective of the location of the issuer.