Question ID: 2400
Regulation Reference: Risk-Free Interest Rate - VA calculations
Topic: Risk Free Rate (RFR)
Article: 9.E.(216)
Status: Final
Date of submission: 07 Mar 2022
Question
Referring to the 3/11/2021 Technical Documentation Section 9.E. Paragraph 216, we have a question regarding the calculation of the EUR currency area level duration for Government Bonds in the VA calculation using the 31/3/2021-30/3/2022 VA portfolio. Our understanding of the TD is to take a weighted average of durations provided in VA_C_Govts_Dur using the weights provided in VA_C_Govts_Comp exlcuding non-EUR denominated bonds (PL). This gives us an average weighted duration of 9.556 which rounds to 9.6. In the same VA Portfolio document, there is a VA_Currency_Govts_EUR_Duration tab, which provides a value of 9.7. Would you help us understand how this value is determined, and ultimately if there is a discrepancy between what VA_C_Govts_Comp/Dur which is the "correct" one?
Background of the question
The difference between our calculated 9.6Y duration and the published 9.7Y duration was enough to change the rounding of the currency VA for 2 months. While our implementation tries to calculate this value dynamically from the weights/durations, we are considering changing our implementation to use the published value instead.
EIOPA answer
The published EUR-duration is being calculated at a lower level in our process to update the representative portfolios. It takes into account the unrounded relative exposures and unrounded durations of all EUR-denoted government bonds to the extent that the available unrounded durations are strictly positive. It will therefore ignore EUR-denoted exposures with zero/missing durations.
The EUR-denoted relative exposures which we publish for the currency government bond portfolios do however take into account zero/missing durations as well, and next to that, are rounded to 1-decimal percentage values. This may lead in general to small deviations from the EUR-denoted relative exposures used for calculating the EUR-duration. Finally the durations within the published currency government bond portfolio are rounded to 1-decimal as well, which could lead to additional deviations when trying to replicate the EUR-durations based on the published information only.
As it is in general not possible to replicate the EUR-duration based on the information provided by EIOPA, the EUR-duration used to calculate the VA is explicitly published by EIOPA.