Risk Measures Overview

Risk Measures Overview
A Cross-Form Comparison Guide
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Risk Measures Overview – A Cross-Form Comparison Guide
Published March 2016.
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Table of Contents
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OVERVIEW
Regulatory reporting forms seek to measure risk by specifying:
The name of the metric used to calculate risk
How risk is defined
The formula used to calculate risk
Required shock values that must be applied
Advise compared five forms – Solvency II, AIFMD, Form PF, CPO-PQR, and Open Protocol – to evaluate how risk
measures are applied across asset classes. Our analysis included the following risk measures and asset classes:
Interest Rates, Spread, Property, Implied Volatility, FX Delta, Commodities, Default Risk, and Value at Risk (VaR).
Our analysis found that:
Risk measures are defined differently by each form across asset classes.
The formula used to calculate risk is identical across the following asset classes (where applicable):
Equities, Interest Rate, Spreads, Property, and Implied Volatility.
Shock values are different across asset classes.
For VaR: definitions, holding period, confidence level, data set period, and calculation methods vary by
form.
NOTE: In this document, Solvency II risk metrics are based on the “standard formula” as defined in Directive
2009/138/EC and Regulation 2015/35/EU.
NOTE: A complete list of source materials appears in the References section.
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EQUITY
Form Metric Definition Shock Type Shock Values
Solvency II SCR Equity (Type 1/2) Sensitivity of the values of assets, liabilities, and financial
instruments to changes in the level or in the volatility of
market prices of equities (equity risk).
Current value * X% - 22% or - 39%
or - 49%
AIFMD Net Equity Delta The portfolio’s sensitivity to movements in equity prices. Current value * X% - 20%
PF Change in Equity Prices The portfolio’s sensitivity to movements in equity prices
where shocks are applied to LONGS & SHORTS separately.
CPO-PQR Change in Equity Prices The portfolio’s sensitivity to movements in equity prices
where shocks are applied to LONGS & SHORTS separately
(for LARGE pools only).
Current value * X%
Current value * X%
+/- 5% and
+/- 20%
+/- 5% and
+/- 20%
Open Protocol Change in Equity Prices The portfolio’s sensitivity to movements in equity prices
calculated for Large/Small Cap. The change is relative to the
current equities level.
Current value * X% +/- 10%
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INTEREST RATES
Form Metric Definition Shock Type Shock Values
Solvency II SCR Interest Sensitivity of the values of assets, liabilities, and financial
instruments to changes in the term structure of interest
rates, or in the volatility of interest rates (interest rate
risk). NOTE: Inflation risk is not explicitly modelled in SCR
and it is assumed its effect is already included into the
prescribed shock.
Current rate + X%
Up shock: MIN
[1%, r+70% / r+20%]
Down shock: MAX
[0%, r-75% / r - 20%]
AIFMD Net DV01 Basis Point Value – the portfolio’s sensitivity to a change
in the yield curve. Assume an increase of 1bp in the yield
curves that the fund is exposed to (assume a parallel
shift). Report the effect on the total net asset value of the
AIF as a monetary value in base currency for each
maturity bucket as specified (short/intermediate/long).
Current rate + X% 0.01%
PF
Parallel Shift of Yield
Curve
The portfolio’s sensitivity to parallel shifts of yield curve
(risk-free rates) where shocks are applied to LONGS &
SHORTS separately.
Current rate + X%
+/- 0.25% and
+/- 0.75%
CPO-PQR
Parallel Shift of Yield
Curve
The portfolio’s sensitivity to parallel shifts of yield curve
(risk-free rates) where shocks are applied to LONGS &
SHORTS separately (for LARGE pools only).
Current rate + X%
+/- 0.25% and
+/- 0.75%
Open Protocol
Change in Sovereign
Rates (RFR)
The portfolio’s sensitivity calculated to change in Shortterm
(1Y) interest rates separately.
Change is relative to the current interest rate curve.
Current rate + X%
+/- 5% and
+/- 10%
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SPREAD
Form Metric Definition Shock Type Shock Values
Solvency II SCR Spread Sensitivity of the values of assets, liabilities, and financial
instruments to changes in the level or in the volatility of
credit spreads over the risk-free interest rate term
structure (spread risk).
Current spread * X%
Complex
calculations
between
0.9% - 100%
AIFMD Net CS01 The portfolio’s sensitivity to a change in credit spreads.
Assume a general increase in all credit spreads of 1bp.
Report the effect on the total net asset value of the AIF as
a monetary value in base currency for maturity bucket as
specified (short/intermediate/long).
Current spread + X% 0.01%
PF Credit Spreads The portfolio’s sensitivity to change in credit spreads
where shocks are applied to LONGS & SHORTS
separately.
CPO-PQR Credit Spreads The portfolio’s sensitivity to change in credit spreads
where shocks are applied to LONGS & SHORTS
separately (for LARGE pools only).
Open Protocol Credit Spreads The portfolio’s sensitivity calculated to change credit
spreads split between Investment Grade and Non-
Investment Grade bonds reported separately. Change is
relative to the current interest rate curve.
Current spread * X%
Current spread * X%
Current spread * X%
+/- 0.5% and
+/- 2.5%
+/- 0.5% and
+/- 2.5%
+/- 5% and
+/- 10%
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PROPERTY
Form Metric Definition Shock Type Shock Values
Solvency II SCR Property Sensitivity of the values of assets, liabilities, and financial
instruments to changes in the level or in the volatility of
market prices of real estate (property risk).
Current value * X% - 25%
AIFMD
PF
CPO-PQR
Open Protocol
N/A
N/A
N/A
N/A
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IMPLIED VOLATILITY
Form Metric Definition Shock Type Shock Values
Solvency II N/A Volatility is not implicitly tested in SII SCR for asset
managers. However, an insurance company can tweak
volatility at high-level by recalculating its liabilities and
making adjustments to volatility input.
AIFMD Vega Exposure Current vega factor (multiplier) of the portfolio defined
as the sensitivity of the total net asset value to an
increase of 1 percentage point of implied volatilities.
Current volatility * X% +/- 10%
PF Implied Volatility The portfolio’s sensitivity to change in implied volatilities
for options where shocks are applied to LONGS &
SHORTS separately.
CPO-PQR Implied Volatility The portfolio’s sensitivity to change in implied volatilities
for options where shocks are applied to LONGS &
SHORTS separately (for LARGE pools only).
Current volatility * X%
Current volatility * X%
+/- 4% and
+/- 10%
+/- 4% and
+/- 10%
Open Protocol Implied Volatility The portfolio’s sensitivity to change in implied volatilities
for options. Change is relative to the current implied
volatility level.
Current volatility * X% +/- 10%
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FX………………………………………….
Form Metric Definition Shock Type Shock Values
Solvency II SCR FX Sensitivity of the values of assets, liabilities, and financial
instruments to changes in the level or in the volatility of
currency exchange rates (currency risk).
AIFMD Net FX Delta Assume all currencies appreciate by 20% relative to the
fund’s base currency. Report the effect on the total net
asset value of the AIF as a monetary value in base
currency.
Current FX rate * Shock +/- 25%
Current FX rate * Shock + 20%
PF Currency Rates The portfolio’s sensitivity to change in currency rates
relative to the fund's base currency where shocks are
applied to LONGS & SHORTS separately.
CPO-PQR Currency Rates The portfolio’s sensitivity to change in currency rates
relative to the fund's base currency where shocks are
applied to LONGS & SHORTS separately (for LARGE
pools only).
Current FX rate * Shock
Current FX rate * Shock
+/- 5% and
+/- 20%
+/- 5% and
+/- 20%
Open Protocol Currency Rates The portfolio’s sensitivity to change in exchange rate of
USD relative to the portfolio local currencies.
Current FX rate * Shock +/- 10%
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COMMODITIES
Form Metric Definition Shock Type Shock Values
Solvency II SCR Equity 2 Sensitivity of the values of assets, liabilities, and financial
instruments to changes in the level or in the volatility of
market prices of equities (equity risk). Commodities are
treated as Equity type 2.
AIFMD Net CMD Delta Assume the prices of all physical commodities increase by
40%. Report the effect on the total net asset value of the
AIF as a monetary value in base currency.
Current value * X% - 49%
Current value * X% + 40%
PF Commodity Prices The portfolio’s sensitivity to movements in commodity
prices where shocks are applied to LONGS & SHORTS
separately.
CPO-PQR Commodity Prices The portfolio’s sensitivity to movements in commodity
prices where shocks are applied to LONGS & SHORTS
separately (for LARGE pools only).
Current value * X%
Current value * X%
+/- 10% and
+/- 40%
+/- 10% and
+/- 40%
Open Protocol Commodity Prices The portfolio’s sensitivity to movements in commodity
prices with additional breakdowns for shocks in Metal
and Energy prices.
Current value * X% +/- 10%
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DEFAULT RISK
Form Metric Definition Shock Type Shock Values
Solvency II SCR Default Risk Consists of default risk to counterparty exposure types 1
and 2 with an interaction (covariance) coefficient of 1.5
and given by the formula in Art. 189 of the Regulation.
Currently, this is not in the scope of the Consensus RMS
Solvency II module and is calculated by an insurance
company based on input from the asset manager.
Complex formula
based on loss-given
default (LGD) and
variance of loss
AIFMD
N/A
PF Default Rates The portfolio’s sensitivity to change in default rates of the
fund where shocks are applied separately to LONGS &
SHORTS, ABS, and Corporate Bonds/CDS.
CPO-PQR Default Rates The portfolio’s sensitivity to change in default rates of the
fund where shocks are applied separately to LONGS &
SHORTS, ABS, and Corporate Bonds/CDS. Applies only to
LARGE pools.
Current value + X%
Current value + X%
+/- 1% and
+/- 5%
+/- 1% and
+/- 5%
Open Protocol
N/A
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VAR…………………………………
VaR
Definition
Holding
Period
Confidence
Level
Data Set
Period
Calculation
Solvency II
AIFMD
PF
CPO-PQR
In SII, SCRs are calibrated by insurance
companies (high level) and not asset managers.
There is no requirement for an asset manager to
calculate VaR for SII.
Reporting risk measures as outlined in ESMA
opinion ESMA/2013/1340.
Form PF Q40: During the reporting period, did
you regularly calculate the VaR of the reporting
fund? If YES, then fill in VaR values.
QC2-4 (Large pools only): Did large CPO
regularly calculate the VaR of Large Pool during
reporting period?
N/A N/A N/A N/A
20 Days 99% 250 Days Historical Simulation
Parametric
Monte-Carlo Simulation
Variable Value ‡ Variable Value ‡ Variable Value ‡ Historical Simulation
Parametric
Monte-Carlo Simulation
Other
Variable Value ‡ Variable Value ‡ Variable Value ‡ Historical Simulation
Parametric
Monte-Carlo Simulation
Other
Open Protocol Section 8 (VaR/CVaR) 1 day 95% Variable Value ‡ Historical Simulation
Parametric
Monte-Carlo Simulation
Other
‡ Managers can determine the values used for these fields. All values must be disclosed on the form itself.
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GREEKS AND RELATED DATA POINTS
The table below shows how different risk metrics apply across forms.
Open Protocol Solvency II PF AIFMD CPO-PQR
Beta
Delta
Gamma
Vega
Theta
CS01
DV01
Z-Spread
Yield to Maturity
Yield to the Next Call
Cash on Cash Yield
Continued on next page…
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Open Protocol Solvency II PF AIFMD CPO-PQR
Yield to Worst
Current Yield
Yield to Best
CDS Spread
Net Equity Delta
Default Spread Beta
Semideviation
Sharpe Ratio
Skewness
Sortino Ratio
Stress VaR/Stress Test
Standard Deviation
Profit-at-Risk
Residual Risk
Continued on next page…
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Open Protocol Solvency II PF AIFMD CPO-PQR
Earnings-at-Risk
Expected Shortfall/CVaR
Inflation Beta
Information Ratio
Kurtosis
Liquidity Adjusted Value at Risk
Marginal Expected Shortfall
Maximum Drawdown
Omega Ratio
Risk-Based Leverage
Scenario Analysis
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REFERENCES
12.1 Solvency II
Directive 2009/138/EC: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32009L0138&from=EN
Regulation 2015/35/EU: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2015:012:FULL&from=EN
12.2 AIFMD
Directive 2011/61/24: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:174:0001:0073:EN:PDF
Regulation 231-2013: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:083:0001:0095:en:PDF
ESMA Opinion Guidelines:
https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-869.pdf
https://www.esma.europa.eu/sites/default/files/library/2015/11/2013-esma-
1340_opinion_on_collection_of_information_under_aifmd_for_publication.pdf
12.3 PF
Form PF Paper Form: https://www.sec.gov/about/forms/formpf.pdf
Dodd-Frank Legislation: http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf
Form PF Frequently Asked Questions: https://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml
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12.4 CPO-PQR
Pool Quarterly Report For Commodity Pool Operators: https://www.nfa.futures.org/EasyFilePlus/EFPTemplate.aspx?template=PQR
12.5 Open Protocol
Template and Manual: http://www.theopenprotocol.org/top/thetemplateandmanual
Frequently Asked Questions: http://www.theopenprotocol.org/top/faq
CONTACT
For more information, please contact:
Timur Sakayev
Head of Calculations and Financial Data
Advise Technologies
+1 (212) 576 1170
tim.sakayev@adviserms.com
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