Yes, undertakings need to produce de-risked cash flows for their Sovereign exposures. To do this, undertakings will need to convert the long-term average spread in basis points into an appropriate set of de-risking probabilities. For the time being EIOPA does not perform this conversion on behalf of undertakings.

The LTAS for sovereigns is derived by comparing the historical yield on sovereign bonds with a retrospective construction of the Solvency II basic risk-free interest rate. Under current market conditions this can lead to a negative LTAS for certain maturities and currencies. A negative fundamental spread is counterintuitive, because it would suggest making a ‘negative’ correction for risk (i.e. the ‘de-risked’ cash flows would be greater than the nominal cash flows). As such, undertakings are expected to zeroise any negative fundamental spreads when applying them for the purposes of the matching adjustment calculation.

"EIOPA to publishes the components of the fundamental spread separately for transparency reasons and in order to allow insurers using the matching adjustment to apply it according to Article 77c of the Solvency II Directive and Article 53 of the Delegated Regulation on Solvency II.

For corporates, the PD component is always required in order to de-risk asset cash flows for the purpose of assessing cash flow matching within the matching adjustment portfolio. Once the undertaking has computed the difference of the two annual effective rates of Article 77c(1)(a) of the Directive, any residual part of the fundamental spread must be deducted. This residual part could be either the CoD component where PD+CoD is higher than 35% of the LTAS or [35% of the LTAS – PD] where 35% of the LTAS is higher than PD+CoD.

There is no single prescribed method by which the residual fundamental spread should be deducted, and the specification of such a method is not within the scope of the technical information produced by EIOPA. For example, the residual part of the fundamental spread for each of the individual assets in the matching portfolio can be aggregated into a single amount, expressed in basis points. One method of doing this would be to calculate a weighted average across the assets in the portfolio. The weights would need to be chosen to as to ensure each asset made an appropriate contribution towards the total fundamental spread for the portfolio. The weights used could be the products of the market values and the [modified] durations. Assets from the same sector, credit quality and maturity could potentially be grouped together for this purpose in order to reduce the number of calculations required, providing this could be shown not to distort the result.    

In any case, undertakings must set out the calculation process used to derive the matching adjustment as part of their applications for supervisory approval, in accordance with the requirements of the Implementing Technical Standard on the approval process of a matching adjustment.