Question ID: 19
Regulation Reference: Guidelines on submission of information to NCAs (Preparatory phase)
Article: 35
Template: S.26.01
Status: Final
Date of submission: 02 Dec 2014
Question
Let me ask you question relating to QRT for market risk, particularly for interest rate risk. I personally believe that calculation of SCR for interest rate risk is now complete and will not change in the future (with new implementing technical standards). Our understanding of calculation is as follows:
SCR = max {∑cSCR(shock up);∑cSCR(shock down)}, sum goes over currencies (c = currency) and where SCR for particular currency after shock up or down has to be greater or equal to zero. First problem (and I know this does not directly relate to preparatory guidelines but we need to know how to deal with this problem to be able to fill cells for interest rate risk in QRT, and we are almost convinced that interpretation of calculation of SCR for interest rate risk will not change in the future) is calculation of gross SCR where net SCR exists. In my opinion SCR for every currency has to be calculated after shock up and down and also with inclusion of possibility of FDB change. So four figures are calculated for every currency: net SCR(up) , net SCR(down), gross SCR(up) and gross SCR(down). Then final net SCR is determined in line with formula presented above and final gross SCR is determined according to final net SCR (if net SCR is “up”, then gross SCR is also “up” even if its value is lower than “down” gross SCR). Will you be so kind and confirm or disprove our understanding?
Second problem directly relate to cells in SCR-B3A-S.26.01 sheet of QRT. Their interpretation is not absolutely clear for us. Initial values of assets and liabilities (cells A1, A2, A1A, A2A) are easy to understand (we also believe that usually A1=A2 and A1A=A2A). Now we are struggling with B1, B2, B1B, B2B, B1A and B2A cells (after shock values). What exactly put in these cells? Let me just remind that Log for these cells significantly changed in preparatory guidelines version of QRT (QRT from 2011 have very different description of these cells) – this is not mentioned in the description of changes made to Logs in your documents.
If the aftershock values will be just values of assets/liabilities after shock up on all risk-free curves (curves for all currencies all together), then it is possible that D1 and D2 will have no connection to cell D0, because in the D1 and D2 cells diversification between currencies (one time, larger is SCR for up shock and another time for different currency it is shock down which is larger) is included.
Could you please clarify what to input in the cells or if our understanding is correct?
EIOPA answer
The interest rate risk sub-module is calculated taking the larger of the following:
(a) the sum, for each currency, of the capital requirements for the risk of an increase in the term structure of interest rates as set out in Article 146 IRR2;
(b) the sum, for each currency, of the capital requirements for the risk of a decrease in the term structure of interest rates as set out in Article 147 IRR3.
The template reflects this calculation. Therefore please consider the following:
- A1 is in fact equal to A2 and A1A is equal to A2A;
- Cells B1 and B1A represent the sum for all currencies of the value of assets and liabilities after the up-shock and B2 and B2A represent the sum for all currencies of the value of assets and liabilities after the down-shock;
- Only the initial values and the values after the shock are calculated per currency, not the SCR as indicated in the question;
- Cells C1 and C2 are the difference between the initial values and the values after shock, for each scenario;
- Cell C0 represent the net SCR and should be the max(C1;C2);
- Cells D1 and D2 are the difference between the initial values and the values after shock, for each scenario but excluding the loss-absorbing capacity of technical provisions;
- D0 represent the gross SCR and should be D1 if C1>C2 or D2 if C2>C1, meaning that as the question indicates it is not related directly to D1 and D2.