Question ID: 2236
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: 179(2)
Status: Final
Date of submission: 13 Jan 2021
Question
We need a clarification on the SII Standard Formula treatment of credit derivatives used for credit spread macro hedge purpose. Our interpretation of paragraph 2, Article 179 of DA 2015/35 is that credit derivatives used for macro hedge purpose can not provide risk relief of SII Standard Formula credit spread SCR, i.e. when the company does not hold all the underlying instruments and/or the basis risk is material. In particular, in view of the definition of Standard Formula spread risk according to Article 175 DA 2015/35, such derivatives receive SCR of credit derivatives as in Article 179, contributing hence to positive risk capital, despite the real economic risk mitigation effect. Is this understanding correct?
Background of the question
If our understanding is correct, SII seems to discourage credit spread macro hedge for Standard Formula users, despite the real economic credit spread relief from such hedging strategy.
EIOPA answer
The understanding is correct. This is specified in Art. 179 par. 3 of Commission Delegated Regulation (EU) 2015/35.