PRIIP-KIDs: An Update in 30 Seconds

After the EU Parliament’s rejection of the original RTS (PRIIP-KIDs Level 2) we are awaiting the EU Commissions decision ….

We at DerivativesTech believe, that the PRIIP-KIDs will be delayed to 1 July 2017. Everything else doesn’t make sense in our view.

January 2017 is too early while January 2018 clashes with MiFiD 2.

The Two Biggest Problems with the Current RTS (PRIIP-KIDs Level 2):

(1) The VAR (Value at Risk) doesn’t work for derivatives where the payoffs are highly skewed.

Here’s an example of a Multi Barrier Reverse Convertible: CHF, 12 months maturity, Coupon 8.50%, Barrier 66% on Roche, Credit Suisse and UBS: with the current RTS, the risk is ALWAYS THE SAME.

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This is of course nonsense. Once the barrier is activated, the risk of losing a lot of money is very real. That’s why the VAR concept has to be replaced by something similar to “Average Shortfall.”

(2) How do you display the costs? There are objective fees to 3rd parties (incidental costs), but what about the bank’s trading fees (one off costs)? Should we use something similar to the Issuer Estimated Value (IEV) like in Germany? While the IEV approach is prone to manipulation, asking banks to disclose their (estimated) trading fees is a total overkill.

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The solution? Display 3rd party fees and nothing else. That’s not a perfect solution, but the market is so competitive that banks margin are “fair.”

Management

alex
Aleksandar Puskas, Managing Partner
Born in Serbia. He has over 20 years’ experience in software development and is credited for creating the world’s first mobile app ad scraper for social media.
franco
Franco Arda, Managing Partner
Born in Switzerland. After taking his MBA, he ran structured product sales teams for Deutsche Bank in London, Zurich and Hong Kong. Afterwards, he co-founded a software company in Silicon Valley.

 

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