Question ID: 304
Regulation Reference: Risk-Free Interest Rate - VA calculations
Article: 49
Status: Final
Date of submission: 23 Jul 2015
Question
I have attempted to replicate the VA calculation based on the UK representative portfolio for end December 2014, January 2015 and February 2015.
I am unsure on how the market yields for corporate bonds are derived from iBoxx for the UK VA calculation.
In paragraph 277, it mentions 'the relevant yield curve is calculated by linear interpolation for those maturities provided by the source.'
Please can you verify how this is to be calculated, as the iBoxx data is split by buckets of maturity 5-7, 7-10, 10-15 etc.? For example how would this be calculated for a bond of duration 8.5 or 8.8? Does this mean that interpolation should be performed between maturity 5 and 10, or between the mid-point of bucket 7-10 and 10-15 (i.e. 8.5 and 12.5)?
In addition, paragraph 278a mentions an adjustment for CQS0 based on 0.85 of CQS1 yields. Can I confirm that this applies for the corporate bond spreads for the UK VA calculation?
EIOPA answer
The market yields provided by the Markit – iBoxx indices for each buckets are also provided with a duration (‘portfolio duration’). To derive a yield curve, EIOPA uses the information available, i.e. the yields corresponding to the portfolio duration. A linear interpolation is performed using the available portfolio durations to derive the missing yields.
In your example, to calculate a yield for a bond of duration 8.8, a linear interpolation is performed using the closest data available. For instance, on the one hand the market yield of the bucket 7-10 and its duration and, on the other hand, the market yield of the bucket 10-15 and its duration.
We confirm that for GBP, the market yields for corporate bonds of CQS0 exposures are 85% of CQS1 yields."