Question ID: 2351
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: Article 84(1) and 84(2) of the Commission Delegated Regulations 2015/35
Status: Final
Date of submission: 28 Oct 2021
Question
Could you please provide guidance on the treatment of Special Purpose Acquisition Company (SPAC) investments? Should these be modelled for SII purposes as equities? Alternatively, is it permissible to apply an additional look through for these investments whereby the fully collateralized portion would be modelled in line with the collateral (i.e. US Treasuries) and the amount in excess of this would be treated as an equity. An example for alternative approach would be as follows Par value of shares = $10 This $10 is collateralized by US treasury bills. Current market price of SPAC = $12 The proposed treatment would be to treat the charge applied for these positions based on US Treasury risk up to the value of the collateral ($10) and then equity risk on the excess of the market value of the instrument over the value of the collateral ($2).
EIOPA answer
Equity investments in Special Purpose Acquisition Companies (SPACs) should be treated as equity investments in the Standard Formula. This is similar to the treatment of equity investments in real estate administration companies, as per Guideline 3 of the Guidelines on the Look-Through Approach.
Article 84(1) and 84(2) of the Delegated Regulation states the criteria for investments to be treated on a look-through basis. They would need to either meet the criteria of being an investment packaged as a fund, or meet the criteria of only being exposed to indirect risks.
A SPAC lists on an equity market in order to seek investment in order to make an acquisition. At the point in time in which it makes the acquisition, it ceases to be a SPAC and becomes a direct listing. As such, a SPAC does not appear to be an investment packaged as a fund, as the principle investment is not made until the end of the life of the SPAC.
As demonstrated in the example given in the question, as well as the indirect exposure to the assets held by the SPAC, there is additional exposure to the market perception as to the value of the SPAC. Therefore, it would be inappropriate to solely apply a look-through basis to the investment, and the Standard Formula does not allow for splitting of the risks in the way envisaged by the question.
Legal references: Article 84(1) and 84(2) of the Commission Delegated Regulations:
Article 84(1): The Solvency Capital Requirement shall be calculated on the basis of each of the underlying assets of collective investment undertakings and other investments packaged as funds (look-through approach).
Article 84(2): The look-through approach referred to in paragraph 1 shall also apply to the following:
1. indirect exposures to market risk other than collective investment undertakings and investments packaged as funds;
2. indirect exposures to underwriting risk;
3. Indirect exposures to counterparty risk.