History and Regulatory Requirements
Introduction
The history and regulatory requirements of PRIIPs provide context for the development and implementation of KIDs. This blog will cover the key historical milestones and regulatory guidelines that shape PRIIPs calculations.
Summary
The obligation to issue KIDs for PRIIPs came into force on January 1, 2018. Key regulatory requirements include:
Risk Indicators
The regulation provides guidance on the methodologies used to calculate the risk categories (Market Risk Measure and Summary Risk Indicator) and ensure these calculations reflect the true risk characteristics of the product under various market conditions. The Market Risk Measure (MRM) is derived from the VaR-Equivalent Volatility (VEV) and used to determine the MRM class. The Summary Risk Indicator (SRI) combines the MRM and Credit Risk Measure (CRM) to provide a comprehensive risk assessment.
Performance Scenarios
The regulation updates methodologies for the presentation of performance scenarios to provide more accurate future performance predictions. These methodologies incorporate concepts of sub-interval frequency and linear transformation to create comparable performance intervals. The performance scenarios include unfavourable, moderate, and favourable scenarios, as well as stress scenarios that show how the product might perform under extreme market conditions.
Cost Disclosure
The regulation enhances requirements for cost disclosures to improve transparency and comparability. The cost disclosure includes a detailed cost summary, total costs, and methodologies for calculating absolute and monetary costs, total costs, and reduction in yield costs. The regulation also provides guidance on the calculation of transaction costs using the slippage methodology.
European Securities and Markets Authority (ESMA) Guidance
ESMA issued a Q&A document to provide clarity on specific implementation aspects of the PRIIPs regulation. The Q&A addressed issues regarding the scope of products regulated, detailed methodologies for cost and risk calculations, and guidance related to the review and update of KIDs. This guidance helps ensure that the PRIIPs calculations are accurate, fair, clear, and not misleading.
By following these methodologies, FE fundinfo ensures that the risk calculations for PRIIPs are accurate and compliant with regulatory standards, providing investors with a clear understanding of the potential risks associated with their investments. Accurate risk calculations are essential for helping investors make informed decisions and manage their investment risks effectively.
