Question ID: 3330
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: 182 and 187
Status: Rejected
Date of submission: 23 Apr 2025
Question
Background and Request for Clarification – Market Concentration Risk under Solvency II
We are assessing the application of the Market Concentration Risk module under Solvency II for two insurance undertakings, A and B, both with total assets exposed to the Market Concentration Risk module amounting to EUR 100 million.
Company A has an investment of EUR 30 million in a covered bond via a single custodian as well as a regular bond with the same issuer:
Asset ID Custodian SII Value Issuer Group CIC CQS
XV0123456789 Bank 1 EUR 30m Issuer 1 XV27 0
YZ9876543210 Bank 1 EUR 3m Issuer 1 XV21 2
Company B holds the same security (same ISIN) but has split the investment equally across two custodians. It also holds the regular bond with the same issuer as well:
Asset ID Custodian SII Value Issuer Group CIC CQS
XV0123456789 Bank 1 EUR 15m Issuer 1 XV27 0
XV0123456789 Bank 2 EUR 15m Issuer 1 XV27 0
YZ9876543210 Bank 1 EUR 3m Issuer 1 XV21 2
The concentration risk threshold is 15% of the total assets for the covered bonds and 3% for the regular bond with CQS=2.
Questions for Clarification:
1) Does the use of multiple custodians affect the calculation of concentration risk under the Market Concentration Module?
Specifically, can an undertaking reduce or avoid a concentration risk charge by splitting an investment across multiple custodians, even if the exposure relates to the same security and issuer group?
2) Assuming both companies should be treated equally from a risk perspective, is it correct and in line with Solvency II guidance that exposures should be aggregated at the issuer group level for the covered bonds when assessing concentration risk?
Aggregating by asset ID (e.g., ISIN) for company B appears less appropriate, as a single security may be referenced using different identifiers (e.g., Bloomberg tickers, CUSIP, Reuters RIC etc.) across systems, and multiple securities like covered bonds from the same issuer group would still represent a concentration risk.
We would appreciate clarification to ensure a consistent interpretation and implementation across National Competent Authorities.
Background of the question
The phrase from Delegated Regulation art. 187: "Exposures in the form of covered bonds shall be considered as single name exposures, regardless of other exposures to the same counterparty as the issuer of the covered bonds, which constitute a distinct single name exposure." could be ambiguous. We suppose that the intention of the text is to clarify that covered bonds should be treated separately despite the fact that other exposures (e.g. regular bonds and loans) could be found for the same issuer group. We do not suppose that the market concentration risk could simply be avoided by splitting up the exposures of covered bonds e.g. between various custodians or on various custody accounts within the same bank.
EIOPA answer
The first question has been rejected because the issue it deals with is already explained or addressed in the Delegated Regulation (EU) 2015/35.
The second question has been rejected because the matter it refers to has been answered in Q&As 1693 and 1454.
Single name exposures (see Article 182 of Delegated Regulation (EU) 2015/35) are not based on custodians, hence an undertaking cannot reduce or avoid a concentration risk charge by splitting an investment across multiple custodians.
Concerning covered bonds, pursuant Article 187 of Delegated Regulation (EU) 2015/35 and as further clarified in Q&As 1693 and 1454, “N” covered bonds with CQS lower or equal than 1 would be considered as “N” distinct single name exposures for the purpose of calculating the market concentration risk capital requirement. For regular bonds, the market concentration risk exposure should be instead aggregated per issuer group (See Article 182(1) of Delegated Regulation (EU) 2015/35).