Question ID: 1138
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Topic: Solvency Capital Requirement (SCR)
Article: 132
Status: Final
Date of submission: 20 Mar 2018
Question
In calculating the capital requirement for spread risk (SCRcd) for a Credit Linked Note, which is the correct approach please?
1) sum of (i) SCRbond for the issuer of the Credit Linked Note and (ii) SCRcd for the embedded Credit Default Swap
2) the higher of (i) SCRbond for the issuer of the Credit Linked Note and (ii) SCRcd for the embedded Credit Default Swap.
EIOPA answer
As credit linked notes can have widely different features the treatment no general answer is possible and the treatment has to be determined on a case by case basis.
The question whether an (implicit) short position in a credit derivative would be in line with the requirements of Article 132 Solvency II (in particular with paragraph 4) is not discussed in the following.
In case
1. Article 84(2) DA was applicable; and
2. the Credit Linked Note could be represented as a simple combination of a long position in a corporate bond and a short position in a Credit Default Swap (this would for example not be the case if there was no bankruptcy remoteness from the issuer)
the corporate bond would have to be included in the calculation of the capital requirement for spread risk in accordance with Article 176 DA and the short position in the Credit Default Swap in accordance with Article 179 DA.
The treatment foreseen in the suggested Alternative 2 is not foreseen in the DA.