Question ID: 429
Regulation Reference: Risk-Free Interest Rate - Matching adjustment
Article: 54
Status: Final
Date of submission: 25 Aug 2015
Question
After applying the published PDs to de-risk the cash-flows of corporate bonds, shall we use the published CoD figures to calculate the matching adjustment?
EIOPA answer
This approach may not arrive at the correct result because the fundamental spread (FS) is not always the sum of PD and CoD. Where the floor relating to the long-term average spread (LTAS) applies, the fundamental spread is larger than that sum. In general, the matching adjustment should be calculated on the basis of the amount FS – PD. As the fundamental spread is calculated as FS = max(PD+CoD, 35%*LTAS), (see paragraph 243 of the Technical Documentation) that amount is equal to max(CoD, 35%*LTAS – PD).