Question ID: 2162
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: Articles 83(4); 179 (1)(3); 209-215 of Delegated Regulation
Status: Final
Date of submission: 01 Jul 2020
Question
Where credit derivatives are used to hedge a risk (risk mitigation technique) on a particular investment and there is no material basis risk between the initial exposure and the hedge, the credit derivative is not subject to Spread Risk (Article 179(3)). On this specific point the article does not explicitly state that the Spread Risk for the instrument which is hedged can be removed. However, it would seem natural to do so.
Background of the question
Where credit derivatives are used to hedge a risk (risk mitigation technique) on a particular investment and there is no material basis risk between the initial exposure and the hedge, the credit derivative is not subject to Spread Risk (Article 179(3)).
EIOPA answer
As per article 83(4) of the Commission Delegated Regulation (EU) 2015/35, where a risk-mitigation instrument complies with Articles 209 to 215 then the change in value of that instrument should be included within the relevant module or sub-module.
This means that if a credit derivative hedges a risk on a particular investment and complies with Articles 209 to 215, then the changes in values of the investment and of the credit derivative resulting from the spread shock should be included when determining the capital requirement for spread risk on bonds and loans respectively on securitisation positions.
As the capital requirements for spread risk differ between underlying investments and credit derivatives, Article 179(3) clarifies that – in the case of a risk-mitigating credit derivative where no material basis risk exists – the derivative is not included in the calculation of the capital requirement for spread risk on credit derivatives.
The following table illustrates the possible cases (*). The references are to Articles in the Commission Delegated Regulation (EU) 2015/35.