EIOPA · 2400
Risk Free Rate (RFR)
- Regulation
- Risk-Free Interest Rate - VA calculations
- Article
- 9.E.
- Topic
- Risk Free Rate (RFR)
- Submitted
- 2022-03-07
- Answered
- 2022-06-07
Question
Referring to the 3/11/2021 Technical Documentation Section 9.E. Paragraph 216, we have a question regarding the calculation of the EUR currency area level duration for Government Bonds in the VA calculation using the 31/3/2021-30/3/2022 VA portfolio. Our understanding of the TD is to take a weighted average of durations provided in VA_C_Govts_Dur using the weights provided in VA_C_Govts_Comp exlcuding non-EUR denominated bonds (PL). This gives us an average weighted duration of 9.556 which rounds to 9.6. In the same VA Portfolio document, there is a VA_Currency_Govts_EUR_Duration tab, which provides a value of 9.7. Would you help us understand how this value is determined, and ultimately if there is a discrepancy between what VA_C_Govts_Comp/Dur which is the "correct" one?
Background
The difference between our calculated 9.6Y duration and the published 9.7Y duration was enough to change the rounding of the currency VA for 2 months. While our implementation tries to calculate this value dynamically from the weights/durations, we are considering changing our implementation to use the published value instead.
Answer
The published EUR-duration is being calculated at a lower level in our process to update the representative portfolios. It takes into account the unrounded relative exposures and unrounded durations of all EUR-denoted government bonds to the extent that the available unrounded durations are strictly positive. It will therefore ignore EUR-denoted exposures with zero/missing durations.
The EUR-denoted relative exposures which we publish for the currency government bond portfolios do however take into account zero/missing durations as well, and next to that, are rounded to 1-decimal percentage values. This may lead in general to small deviations from the EUR-denoted relative exposures used for calculating the EUR-duration. Finally the durations within the published currency government bond portfolio are rounded to 1-decimal as well, which could lead to additional deviations when trying to replicate the EUR-durations based on the published information only.
As it is in general not possible to replicate the EUR-duration based on the information provided by EIOPA, the EUR-duration used to calculate the VA is explicitly published by EIOPA.
This Q&A is published by European Insurance and Occupational Pensions Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.
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