ESA Joint Committee · priips-51 Final

Regarding the correction for risk neutrality in Annex II, 22(c) of the Delegated Regulation - each of the 10,000 simulated returns needs a correction to ensure that the simulated average return is equ

Regulation
PRIIPs
Answered
2017-11-20
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Regarding the correction for risk neutrality in Annex II, 22(c) of the Delegated Regulation - each of the 10,000 simulated returns needs a correction to ensure that the simulated average return is equal to an expected risk-neutral return and to avoid that the simulations follow the implicit drift of the historic row. When applying a correction for risk neutrality, the resulting simulations at the end are only usable for final returns (that appear risk-neutral) but not for the intermediate returns, which means that they are not usable for products where the pay-off is a function of the underlying asset even during the holding period.

Answer

To determine the performance at intermediate holding periods, the correction has to be performed for each interval of time (e.g. from the start of the investment to the start of the intermediate holding period and then from the start of the intermediate holding period to the end of the recommended holding period). As the correction only depends on the length of each period in time, it can be applied as required.
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This Q&A is published by ESA Joint Committee (EBA, ESMA, EIOPA) and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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