11 February 2015
Key Information Documents for PRIIPS
Joint Committee’s Discussion Paper
BNP PARIBAS
Choices made for the RTS must allow industrialisation and agility in the production of the KID
The PRIIPS Regulation will have major operational consequences on manufacturers because of the volume
of products concerned. Given the wide array of products in scope, ranging from OTC and listed derivatives to
structured products to convertibles, many manufacturers will have more than several hundreds of thousands
new products in scope every year, with hundred thousands of outstanding products. To assess the
importance of the work at hand, these numbers can be compared to the KII requirement for funds, which
concerned about a hundred new funds a year for a major asset manager.
Additionally, PRIIPS being based on the MiFID client category of non-professional clients, the products
concerned can relate to very different client situations, such as private placements, OTC derivatives to
corporations classified as non-professional clients, products destined to professional investors but
incidentally sold to retail investors at their request [convertibles], products sold to a single client and large
commercial campaigns via public offering.
Such sheer volume and diversity of client situations call for RTS that allow industrialisation of production of
the KID as much as possible and timely production including in very tight timeframes (sometimes, in the case
of private placements or OTC derivatives, the product is developed in a matter of hours).
It is therefore critical that RTS strive for ease of implementation, which can be done without prejudice to
accuracy. RTS should balance the need for exhaustiveness and detail with the need for simplicity both for
the sake of clients’ usage of the KID and manufacturers’ ability to produce it in large volumes and timely.
This comment applies more particularly to requirements related to the risk indicator, performance scenarios
and costs disclosure, which need to be scalable and to requirements related to the review and update of the
KID, which need to be proportionate considering the stock of products concerned.
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A transitional period is necessary for robust implementation
Another major concern linked to the volume of products concerned is the timing of application of the
Regulation. The draft RTS related to the content of the KID (Article 8 of the Regulation) should be submitted
to the Commission by February 2016 who can take up to three months (May 2016) to adopt them (including
with amendments). This will be followed by another delay for the Parliament and the Council to raise any
objection, which can take up to three months (2 months and a 1-month extension). This means that
manufacturers will likely know the definitive rules around September 2016 or, at best, around April 2016
assuming the Commission adopts the draft RTS quickly with no change and the Parliament and the Council
publish before the two months delay their intention not to object (which seems unlikely considering the
technicality of the matter).
Manufacturers would therefore have between three and, optimistically, eight months for IT developments.
BNP Paribas (“BNPP”) is very concerned that this timing is too short considering (1) the amount of
information in the KID that will require prior data processing and modeling, (2) the number of KIDs which will
have to be produced and (3) the absence of any comparable document used for these products so far, which
could be leveraged (as was the case for the UCITS KII that could build on the simplified prospectus).
More time is needed to ensure robustness of the KID and true consistency between manufacturers. BNPP
therefore considers that a transitional period of one year after publication of the RTS should be set up to
allow practical implementation.
Finally, a related issue concerns existing products, which will be considered as PRIIPS from 31 of December
2016. It should be made clear that these products, to the extent that they are not advised or sold anymore
(Article 13 of the Regulation) are not subject to the KID. As regards products traded on secondary markets, a
transitional period of two years should also be allowed to allow accommodating for the volume of products
concerned.
Questions
Q1: Do you have any views on how draft RTS for the KID might be integrated in practice with
disclosures pursuant to other provisions?
Consistency between PRIIPS and MiFID II is critical to ensure the KID actually reaches its objective of
disclosing in a single document all the information necessary on the product for clients to make an informed
decision. If additional information on the product needs communicating to clients, it would be confusing both
for clients and manufacturers. For the latter, this would also create legal uncertainty, as this piling up of
regulations would mean that they would not be able to fully rely on their compliance with the PRIIPS
regulation as regards information to clients on products.
In other words, MiFID II should not result in an obligation to provide additional product information to retail
clients other than those set forth in the KID, as regards products in scope of the PRIIPS Regulation.
More specifically, BNPP has the following comments on the various aspects overlapping in the two
regulations.
-
Costs and charges
The scope of the costs and charges disclosures in PRIIPS and MiFID II are not identical:
- The costs disclosed under PRIIPS are the ones associated with the product itself and not the ones
which are distributor or client specific and therefore not known by the manufacturer.
- MiFID cost disclosure is not only about the product, it is also about the service provided to the client
by the intermediary.
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The cost disclosure in MIFID is due by the entity providing the investment service to the client; hence it
includes the cost of the financial instrument and the cost of the investment service.
The cost disclosure in PRIIPS is the one due by the manufacturer of the product who may have no relation
with the end investor.
It is therefore not correct to state that the costs disclosed in the PRIIPS KID should at least include the costs
required by MiFID II as per Annex 2.14.1 of the MiFID CP. Investment firms and distributors should however
be able to rely on the PRIIPS KID cost disclosure to comply with their obligation as regards the costs of the
financial instrument. To comply with their overall obligation under MiFID II, they would then have to add any
other costs they are charging with respect to the investment service(s) they provide to the client.
-
Risks
The DP mentions that “under certain circumstances” the investment firm could rely on the PRIIPS KID to
provide the MiFID II risk information. BNPP does not understand what these “certain circumstances” refer to.
In its view, there should be no restriction to the equivalence of the two regulations on the matter of product
risks, with the caveat that certain risks may be tackled in the KID via a reference to another document
because of the 3-page limit of the KID.
-
Target market and consumer type to whom the PRIIP is intended to be marketed
The requirements in MiFID to define a target market (Art. 24.2) and to indicate if the product is aimed at retail
or professional clients (Art. 24.4 b) should be covered by the requirement in Art. 8.3. (c) (iii) of the PRIIPS
Regulation to describe the type of retail investor to whom the PRIIP is intended to be marketed, in particular
in terms of ability to bear investment loss and the investment horizon.
-
General MIFID requirement to provide information on financial instruments in
comprehensible form
a
The requirement in Article 24.5 of MiFID to provide the information on financial instruments in a
comprehensible form should be considered complied with when Articles 6, 7 and 8 of the PRIIPS Regulation
are complied with.
Q2: Do you agree with the description of the consumer´s perspective on risk expressed in the Key
Questions?
BNPP generally agrees.
As regards the question “Is risk and return balanced?” BNPP agrees that the section “What are the risks and
returns?” will answer this question.
It should be noted that the comparison between products on these aspects (as illustrated by the follow-up
question “Am I able to get this information of other products and I am able to compare this product with other
products?”) will be enabled by the use of the risk indicator and cost indicator (common to all products) and
more generally by the use of the KID whose purpose is precisely to allow comparison. This comparison need
should therefore not result in additional wording in the KID referencing some other comparable products.
In addition, the questions should not be driven by a “no risk” position, as riskier products generally have
better returns and may play an important role in the economy if it aims to finance directly or indirectly the
creation or development of small companies such as start-ups.
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Q3: Do you agree that market, credit and liquidity risks are the main risks for PRIIPs? Do you agree
with the definitions the ESAs propose for these?
Market risk
BNPP agrees with the market risk definition as being the risk of changes in the value of the PRIIP due to
movements in the value of the underlying assets or reference values. For structured products, this definition
is a good illustration of the delta (and other risk sensitivities of the product).
Credit risk
BNPP agrees with the credit risk definition as “the risk of loss on investment arising from the obligor´s failure
to meet some/all his contractual obligations”.
Yet, it does not agree that the analysis of the credit risk of the product should comprise the likelihood of each
counterparty defaulting and the recovery rate upon default, as the credit risk of the underlying assets would
already be included in the market risk of the product. For example, when the PRIIP’s return comes from the
credit risk of the underlying assets (as in a Credit linked note), this is reflected in the PRIIP´s market risk (a
change in the credit risk of the underlying will affect the market risk of the PRIIP).
The credit risk of the PRIIP itself hinges on the risk of failure of the issuer, or the guarantor if any, to the
holder and is not dependent on the credit risk of the underlying assets, which is accounted for in the market
risk.
Liquidity risk
BNPP does not fully agree with the definition of liquidity risk as “(i) the absence of a sufficiently active market
on which the PRIIP can be traded or (ii) the absence of equivalent arrangements”. The nature of PRIIPs is
such that many of them are hold-to-maturity products and that their underlying may not themselves be liquid.
The existence of an active market is therefore not the natural option for ensuring liquidity on PRIIPS. BNPP
does not agree that the liquidity of these products should be assessed based on concepts pertaining to
tradable securities, such as the existence of an active market, market makers or a listing on exchange.
The actual liquidity of a PRIIP is dependent on (i) the liquidity of its underlying and (ii) the existence of a
contractual commitment to provide liquidity under certain conditions (for e.g. commitment to a maximum
bid/ask spread under normal market conditions). This means that liquidity cannot be assessed without
considering the liquidity of the underlying assets (for example, if the underlying of a PRIIP is a UCITs fund
which provides weekly NAVs, the PRIIP would also offer a weekly liquidity). BNPP considers that if any
restriction to liquidity results from the liquidity of the underlying assets, this should be made clear in the KID.
BNPP suggests that liquidity should be assumed if (i) a liquidity provider exists (such as the manufacturer or
third-party brokers) regardless of whether the product can be traded and (ii) this provision of liquidity is
ensured under normal conditions. The commitment of the liquidity provider to provide liquidity should be
objective (contractually agreed for example) or derive from regulatory obligations of the manufacturer (such
as insurance companies for insurance-based investment products).
Finally, for transparency purpose and for the sake of simplicity, the same approach as the one adopted for
the UCITS should be taken to describe liquidity risk, i.e. use of narratives in the two sections of the KID
dedicated to liquidity “What happens if the manufacturer is unable to pay out?” and “How long should I hold it
can I take money out early?” rather than an inclusion in the risk indicator.
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Q4: Do you have a view on the most appropriate measure(s) or combinations of these to be used to
evaluate each type of risk? Do you consider some risk measures not appropriate in the PRIIPs
context? Why? Please take into account access to data.
Market risk
GENERAL COMMENTS
BNPP considers that, first and foremost, the objectives of the measures should be defined. To us, the most
appropriate measure of market and credit risks should meet the following objectives:
a) Lead to economically reasonable classifications of products based on their risk/reward profiles, while
ensuring an appropriate distribution of products across the various risk classes;
b) Be unbiased toward any type of product;
c) Be transparent, accessible and reproducible to allow external calculation by third parties, including
competent authorities – no proprietary methodology;
d) Be applicable to all types of PRIIPs (i.e. funds, insurance products within the scope of PRIIPS,
derivatives, convertibles and structured products);
e) Enable an easy and cost-effective implementation by manufacturers and third party calculation firms.
Ease of replication and cost-effective implementation is critical given the number of products in scope;
f) Lead to an easily understandable classification system for the average retail investor;
g) Be objective not to lend itself to manipulation ;
h) Be consistent with the UCITS methodology used for calculating the synthetic risk and reward indicator as
set by CESR in its guidelines 10/673. This is to leverage work already done to implement the UCITS
Regulation and to ensure that PRIIPs and UCITs are on an equal playing foot.
i) Achieve an adequate degree of stability in the risk classification process with respect to normal trends
and fluctuations of financial markets.
BNPP shares the view expressed by CESR in its Guidelines 10/673 on UCITS that “volatility is a well-known
and well-established concept in finance, a measure conceptually easy to grasp”. The KII has been a
successful achievement driven by ESMA in the UCITS space. As a result, our view is that the same
approach should be followed, with some amendments to cater for the diversity of products concerned. This
will ensure PRIIPs and UCITs are on an equal playing field, retail investors can compare the different
investments available to them with similar risk indicators and the transition for UCITS is easier if it were
decided that they should comply with the same requirements in three years time.
BNPP is therefore very much in favor of a volatility based measure of market risk (see in Appendix I BNPP’s
proposed methodology).
QUANTITATIVE MEASURES
Amongst the quantitative measures proposed in the DP for market risk, although Value at risk or Expected
shortfall can be used, they have in our view several drawbacks:
-
They are not retail friendly, in that grasping probabilities is more difficult for a retail investor than
understanding volatility;
They provide results that lack stability over time compared to an approach based on volatility;
They are not as commonly used as volatility and would lead to different metrics for PRIIPs that are
not UCITs, therefore preventing retail investors from easily comparing UCITS risk with the one of
PRIIPs (at least during the transitional period during which UCITS are out of scope of this
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requirement);They use forecasted data which are not easily available, hence lending themselves to a
degree of opacity in the choice of data and raising potential cost and computational issues for
smaller manufacturers;
They are model dependent, hence making comparison between different manufacturers’ products
difficult.
As regards more specifically Expected Shortfall VaR (“ES_VaR”), although it is a better measure then VaR in
that it represents an average loss for the investor under a given a scenario and not just a single point in the
expected distribution of the returns, it measures the ability of an investor to bear losses but disregards the
upside of the product. Due to instability of 99% ES_VaR, several ES_VaR would have to be considered. For
example, if the ES_VaR 99% over the full tenor of the product is 92%, meaning that in the worst 1% of cases
the investor loses on average 92% of its investment, this does not give the investor much information and will
lead to a binary classification of PRIIPs
BNPP has conducted a study over an array of products, which shows that the 99% ES_VaR is a “digital”
indicator meaning it is either close to 0% for capital protected products or close to 100% for products without
a capital protection. To obtain better granularity, in case the 99% ES_VaR is greater than 15% (meaning that
in the 1% worst cases the average loss is more than 15%), it makes more sense to use the 75% ES_VaR,
representative of the average loss in the worst 25% cases: this is representative of more losses scenarios
than just the 1% worst case.
QUALITATIVE MEASURES
The qualitative measures of market risk are subjective by nature hence lacking a solid basis to ensure true
comparability between PRIIPS, as manufacturers may have different approaches to assessing them. Most of
all, all the criteria considered will be covered in some shape or form in the various sections of the KID (mainly
the description of risks or performance).
More specifically, BNPP has the following comments on some of the measures proposed:
-
Type of underlying
Useful for information purposes but the volatility of the
underlying is more relevant than its type (some emerging
markets’ underlying may be less volatile at a given time than
developed markets’ ones)
-
Risk diversification and
leverage
These measures cannot be qualitative; in our view risk
diversification and leverage can only be measured
quantitatively.
-
Other product design features
Relevant features will need to be commonly defined and
interpreted by manufacturers. This is more useful as a potential
risk warning rather than as a measure of risk.
-
Exposure to foreign exchange
rates
This is also more useful as a potential risk warning rather than
as an accurate measure of risk.
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Credit risk
BNPP does not agree with the general statement in § 3.4.2 of the DP that one should consider the product
characteristics and not only the general solvency of the manufacturer or the entity responsible for the
payment obligations if different.
On the contrary, it agrees with § 3.3.3 of the DP defining credit risk as “the risk of loss on investment arising
from the obligor´s failure to meet some/all his contractual obligations” (see BNPP’s answer to Q3).
QUANTITATIVE MEASURES
BNPP is not in favor of relying on CDS levels or funding spreads for the following reasons:
- Some product manufacturers may not have a CDS traded in the market but only a credit rating (e.g.
Investec Bank in the UK market), funding spreads are usually not publicly available and these may
not be available in EURO.
- CDS or funding spreads are often subject to changes (sometimes volatile changes) (when rating
agencies classification offers greater stability).
As regards credit VaR, it should be noted that it is model dependant and, as such, not easy to audit by
regulators. As a result, it does not offer the best comparability between manufacturers and is not of a
common usage, making it difficult to comprehend for retail investors.
QUALITATIVE MEASURES
Prudential supervision is a good measure, but not sufficient in itself to distinguish between various
creditworthiness. In our view, it would be a prerequisite that the guarantor be a supervised entity anyway (as
is currently required by the French AMF as regards structured products – see AMF Position n° 2013-12).
Another limit is that it is country specific.
Risk spreading is a concept from the UCITS world, but it is not transposable to the vast majority of PRIIPs
because a PRIIP does not generally “invest” in a diversified basket of assets with different credit ratings while
a UCITs fund can do. This measure should therefore be removed because it does not apply to the entire
universe of PRIIPS.
The level of seniority and the secured or unsecured nature of the PRIIP would be insufficient and certainly a
little obscure for a retail investor. This information could be provided if need be for information only.
Deposit insurance schemes are not applicable to PRIIPs except for structured deposits. As it can not apply to
the entire universe of PRIIPS, this measure should be removed.
CONCLUSION
In BNPP’s view the best approach to credit risk would be based on one or more of the main rating agencies
classification, looking both at short term and long term ratings, because it is objective, can be easily
controlled by regulators, provides better stability than a CDS spread, and is usually available to all
manufacturers/obligors. The list of eligible rating agencies registered with ESMA1 is sufficiently broad for this
purpose in BNPP’s view
The approach BNPP suggests with regard to the credit risk indicator is described in Appendix I, section 3..
1
The list of ratings agencies registered with ESMA is available on the following link
http://www.esma.europa.eu/page/List-registered-and-certified-CRAs
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Liquidity risk
QUANTITATIVE MEASURES
BNPP agrees that the bid-offer spread is a measure of liquidity, as can be (but not necessarily) the average
volume traded.
The number of market makers is definitely not a good measure of liquidity for PRIIPS because most often,
the manufacturer is the sole market marker and provides liquidity via tight spreads (for exchange traded
products for instance, a maximum bid/ask spread is set by exchanges)..
QUALITATIVE MEASURES
As regards the characteristics of the exit arrangements, the listing mentioned in point (i) is not a good
qualitative criterion in itself because a listing does not necessarily ensure actual liquidity.
We agree with points (ii) to (iv) that exit arrangements can be assessed based on the existence of liquidity
arrangements, the conditions of the exit price (legal conditions like liquidity letters for instance) and the
existence of a bid-offer spread in normal market conditions.
In respect of insurance products, the liquidity risk becomes a credit risk to the extent that the insurance
company has to provide liquidity in any circumstances (e.g., funds corresponding to a redemption request
should be made available within 2 months and in case of death of the insured person, the value of the
contract in case of death shall be paid to the beneficiaries within one month following receipt of all
documents necessary to proceed to such payment).
CONCLUSION
In our view, the only reliable quantitative measure of liquidity risk is the bid/ask spread of executed trades, as
opposed to the indicative bid/ask spread, but this criterion alone is not sufficient to assess liquidity. Other
factors need to be considered, which are the existence of a liquidity provider committed to providing liquidity
and the liquidity of the underlying assets. These factors are currently often described in narratives. As a
result, describing the liquidity risk through narratives seems to us a lot more accurate than through a
quantitative liquidity indicator, which cannot incorporate these qualitative factors.
Q5: How do you think market, credit and liquidity risk could be integrated? If you believe they cannot
be integrated, what should be shown on each in the KID?
BNPP does not think that these three risks should be aggregated because each of them is independent from
the other and the sum has no meaning as such. Such aggregation, with no explanation of the different
contributions of each type of risk, although it can be considered as simple and easy to grasp by a retail
investor is however misleading, as concepts which are fundamentally different like credit risk and market risk
would be mixed together.
Our view is that a single indicator could be used with a multidimensional approach so that investors will be
provided with the most accurate information, without too much complexity. This indicator would have two
dimensions illustrating the market risk and the credit risk. As explained in its answer to Q4, BNPP considers
that the liquidity risk should be described as a narrative, possibly in the same section as the risk indicator if
needed (although the section entitled “How long should I hold it and can I take money out early?” is better fit
for this purpose).
Such risk indicator could be displayed as follows:
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Risk indicator : 6 C
Market risk
Credit risk
Low risk
1
2
3
4
5
6
High risk
Low risk
7
A
High risk
B
C
D
E
F
Q6: Do you think that performance scenarios should include or be based on probabilistic modelling,
or instead show possible outcomes relevant for the payouts feasible under the PRIIP but without any
implications as to their likelihood?
The main purpose of the performance scenarios should be first and foremost to explain how the product
works in a pedagogic way. BNPP believes that education of the investor together with a realistic choice of
performance scenarios should be a guide here at the risk otherwise of confusing the investor and making the
production of the KID more difficult than necessary considering the sheer volume of the financial instruments
in scope.
BNPP does not think that basing performance scenarios on probabilistic modeling is the way forward, as
such approach has several drawbacks, whose six main ones are the following:
-
-
-
-
Experience shows that retail consumers often have difficulties in understanding probabilities or
percentiles, which makes it quite hard for them to interpret a scenario based on probability.
It may not necessarily provide investors with a full view of the outcomes of the product. For example,
for a product whose payoff distribution is very concentrated so that the 10% and 90% scenarios lead
to a similar outcome, the investor may not be presented an unlikely scenario even though that
scenario is important to understand the loss profile of the product.
It opens the door to discussions about the assumptions that should be used to compute these
scenarios. For instance, using a risk neutral distribution for an equity linked product would not reflect
the perspective of investors in equities who rationally invest in this asset class because they believe
that equity carry a risk premium. Such equity risk premium would thus have to be incorporated in the
model but based on which commonly agreed assumptions?
The use of Monte Carlo model is not appropriate for asset classes such as credit and fixed income in
that it does not provide meaningful results (assumptions on the distribution of the risk of a
counterparty defaulting are highly debatable) and may even be not feasible technically because of
the absence of data (fixed income products).
Scenarios which are model dependent are not easily auditable by regulators.
Assuming that manufacturers would agree on a model to compute performance scenarios, model
calibration could still differ because of differing business models between manufacturers and
different modeling capacities, leading to different outcomes.
The duration should be the duration of the product (assuming the customer retains the investment until its
final redemption) or, with respect to insurance products, a 8 year duration, as currently required under
French insurance law for the purpose of preparing the redemption values tables.
BNPP considers that hypothetical performance scenarios have the major advantages of being easy to
understand and providing investors with an exhaustive illustration of the different mechanisms of the product.
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Such approach does not deteriorate the comparability of products, as the risk indicator will already
incorporate the likelihood of the various outcomes and will be computed using a common methodology for all
PRIIPs.
To avoid arbitrary choices of hypothetical scenarios by manufacturers and ensure they represent realistic
outcomes, level 3 guidelines could be drawn up for each type of PRIIPs. The AMF has published such
guidelines in France for structured products (Position AMF n° 2013-13: Guide pour la rédaction des
documents commerciaux dans le cadre de la commercialisation des titres de créance structurés) to ensure,
amongst other things, that communications about the performance mechanisms used to compute their return
are accurate. These guidelines require:
- that the manufacturer disclose the assumptions used to compute each performance scenario and
that these assumptions be realistic;
- that the internal rate of return (IRR) of the product be displayed for each scenario;
- that any cap on the IRR be disclosed.
A similar approach could be taken at European level to ensure consistency amongst manufacturers and
products and avoid any misleading communication.
Q7: How would you ensure a consistent approach across both firms and products were a modelling
approach to be adopted?
Should a modeling approach be adopted for performance scenarios, the need for consistency will require a
common set of assumptions, upon which it is unlikely that the various parties concerned will agree. This
approach is therefore likely to raise more issues than it will add value to investors.
The two main issues BNPP can anticipate are the following:
-
An equity risk premium would need to be included in the model for relevant products because a
rationale equity investor would invest in equity linked PRIIPs only if they believe that the expected
performance outcome is above the risk free rate. Choosing the right equity risk premium will require
a consensus among all parties (ESAs, manufacturers, retail investor representatives, distributors).
-
Performance distributions are derived from market data and a model. The choice of market data may
lead to inaccurate or different estimates. The choice of the model which the manufacturer uses for
hedging purposes is at its discretion and tailored to its own situation. It is unrealistic to expect that all
manufacturers could agree on the same model for a given type of PRIIPS.
Q8: What time frames do you think would be appropriate for the performance scenarios?
For products with a fixed tenor, it is fundamental that the whole tenor of the product be used to build
performance scenarios. Any performance scenario based on a shorter tenor (e.g. 10 days for a 5 years
product) would be an incorrect description of the potential outcome of the product.
This approach would also be detrimental to comparability, as comparability could be ensured anyhow by
annualizing numbers (e.g. internal rate of return, annualized volatility or cVaR corresponding to the average
“annual loss”).
BNPP is therefore in favour of a flexible approach whereby a standardised holding period assumption would
be required only for open ended products.
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Q9: Do you think that performance scenarios should include absolute figures, monetary amounts or
percentages or a combination of these?
To the extent that some retail investors may not be fully comfortable with percentages, monetary amounts
should be provided in the narratives accompanying the graphs or tables illustrating the scenarios
(themselves using percentages). The need in the insurance area to express the unit-linked contracts in
number of units also calls for the use of numbers rather than percentages.
These monetary amounts could be hypothetical as to the amount invested (for example 1000 Euros).
Q10: Are you aware of any practical issues that might arise with performance scenarios presented
net of costs?
BNPP considers that performance scenarios should be presented net of implicit costs to avoid any
misunderstanding by the investor, implicit costs being defined as the sum of costs upon which the
manufacturer has control, i.e. the manufacturing costs and the distribution costs (including inducements)
when known to the manufacturer.
For instance, a structured product offers 100% capital protection plus 100% of the rise in an equity index and
has implicit costs of 2% (e.g. 0.5% issuer manufacturing costs for the manufacturer and 1.5% distribution
costs for the distributor, covering issuance and administration costs). The same product would offer 110% of
the rise in an equity index (instead of 100%) if all costs were set to 0%, meaning 10% extra gearing in the
call option costs 2% to the client. However, displaying performance scenarios showing a payoff of 110%
would be misleading because it is hypothetical. Instead performance scenarios should display a payoff of
100% principal protection and 100% of the rise in the index, because these are the actual economic
performance that the investor will receive. To ensure full transparency, the 2% implicit costs would be
disclosed in the costs section.
The below table illustrates what BNPP means by “performance scenario net of implicit costs”
Implicit costs
(i.e. costs affecting the economic
pay-out of the product )
Payout for a purchase price of
100%
Is this the actual economic payoff
that the investor will receive?
2% (0.5% issuer manufacturing
cost + 1.5% distributor cost )
0% (hypothetical)
100% + 100% of index rise
100% + 110% of index rise
Yes
No
Suitable to display in
performance scenarios
Not suitable to display in
performance scenarios
because it is misleading
Implicit costs should therefore be displayed in the cost section of the KID and should also be taken into
account in the performance scenarios shown. The only costs that could affect additionally the performance
scenarios would be performance fees if any, which would then have to de disclosed as coming in deduction
of the performance shown.
Other costs that do not affect the economic pay-out of the product (typically those direct costs paid directly
by the retail client to third parties such as costs of the wrapper, custody costs, brokerage commissions,
stamp duties, transaction taxes, advice fees, distribution fees from third parties...) are not under the control of
the manufacturer and should therefore not be part of the performance scenarios. These costs are not
dependent on the product itself but on external factors and parties, such that they do not pertain to the KID.
For example, the product may be distributed by different distributors with different fee structures or through
different wrappers (as a security or as a unit of life-insurance contracts, including contracts with different fees
applicable), meaning that for a given product, different costs could apply depending on the way it is sold,
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which makes it impossible to disclose in the KID. Assuming that the information could be obtained by the
manufacturer, which we do not believe possible on a consistent, exhaustive and per product basis, an
approach requiring inclusion of all external costs in the KID would result in a different KID for each different
distribution/advising/custody situation, i.e. potentially for each client (see also our answer to Q1- point 1) on
the same matter).
In principle, it should be noted that this approach is not feasible. Such cost disclosure is already dealt with
by the level 2 measures of MiFID II.
Hence, these other costs should be disclosed by distributors / custodians, as required by MiFID. An
additional requirement in PRIIPS could be to disclose the existence of such additional costs in the cost
section of the KID with a mention that other costs may be incurred, details of which can be obtained by
contacting the advisor.
With respect to investment-based insurance products, given the number of investment methods (general
fund, euro-growth fund, unit-linked assets selected by the customer or an asset manager appointed by the
customer) and the various financial options (stop loss service, protection of profits, …), and taking into
account the limited length of the KID, we suggest that only direct costs are disclosed as currently required
under the French Insurance Code (for the “encadré”).
Q11: Do you have any preferences in terms of the number or range of scenarios presented? Please
explain.
BNPP is of the view that simplicity should prevail here, for the sake of the client but also considering the
limited length of the KID.
For simple PRIIPS, not based on formula or calculation mechanisms, two scenarios could be enough even
though there is a risk of misinterpretation by the investor, as no comparison with a neutral scenario would be
available.
For most PRIIPS, three scenarios are sufficient, providing the best balance between the limited length of the
KID and the necessity to describe sufficient hypothetical outcomes to explain how the product works. A
fourth scenario could be added for PRIIPS with additional features when necessary, i.e. when it brings
educational value to the KID.
Q12: Do you have any views, positive or negative, on the different examples for presentation of a
summary risk indicator? Please outline advantages and disadvantages, and provide any other
examples that you are aware of that you think would be useful.
As explained in Q4 and Q5, BNPP is in favour of a multi-dimensional indicator with two quantitative
components, the market risk and the credit risk and, possibly, a narrative describing the liquidity risk.
This would be the most accurate expression of risks and would enable fact-based investment decisions by
investors. Dissociating credit risk, liquidity risk and market risk has also an educative benefit since an
investor not necessarily aware of these 3 risks could then understand the difference between them.
Although a single visual indicator may be enticing for retail investors because of its apparent simplicity, it is
not informative enough, as by mixing different notions of risk, it does not offer investors the possibility to
discriminate between them, even though they may not value in the same manner the different types of risk.
For example, some investors may be more concerned about credit risk and will make investment decision
firstly based on the credit risk dimension, while others may prioritize market or liquidity risk. Combining all
risks in a single indicator would result in a loss of information, and potentially lead to investment choices not
suitable for investors.
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10 février 2015
Let’s take the example of an investor who is very bullish on equity markets and willing to take a high market
risk, but is concerned about the credit quality of the product manufacturer. This investor may select a PRIIP
based first on a minimum credit risk. Any summary indicator commingling market and credit risks (taking the
mean, the max or any combination of these) will not provide this information.
A risk indicator is a great opportunity to “rate” or “rank” products based on the 3 key risks discussed in the
DP: market risk, credit risk, and liquidity risk. Commingling those risks to produce a single number is over
simplistic and, in our view, not consistent with the ESA’s identification of the key risks and the overall
objective of PRIIPS which is to empower the retail investor in its investment decision. Presenting a single
visual element for risk means that an overall assessment of risk has been made on behalf of the investor,
who is therefore not able to weight the different components of risk according to its perception. Such
approach would in our view increase the potential for misunderstandings of risks by retail investors.
The indicator already used for UCITS should be leveraged, as it is already known by a sizeable portion of
retail investors. It should however be modified to include a second dimension for the credit risk, which could
be rated on a similar scale, differentiated via the use of letters (from A to G) for example. This would be
illustrated as shown in our answer to Q5.
Q13: Do you have any views, positive or negative, on the different examples for presentation of
performance scenarios? Please outline advantages and disadvantages, and provide any other
examples that you are aware of that you think would be useful.
Again, simplicity is key both to ensure good understanding by investors and scalability for manufacturers
considering the number of products in scope and the need to be able to produce a KID in very tight time
frames. For instance in some circumstances such as when a product is built for a particular client (private
placement), there can be less than one hour between the time a trade idea is discussed and trade execution.
Multi-dimensional performance scenarios such as the example showed in the Dutch financial leaflet (one
dimension for investment and another for value) are not easy to understand for retail investors and are
therefore very likely to create confusion.
A single visual element for performance scenarios (option B) has the benefit of being solely focused on the
product and easier to understand.
Should the product require a multi-dimensional performance scenarios (e.g. the product performance
depends on other factors than financial assets, typically the value of regular investments or withdrawals) then
our view is that the manufacturer should be allowed, but not obliged, to add a dimension to the performance
scenarios.
Q14: Do you have any views on possible combinations of a summary risk indicator with performance
scenarios?
It is not clear from the DP what would be the purpose of combining the risk indicator and the performance
scenarios. It should be noted that no such combination is mandated by level 1, both aspects, though under
the same section heading, being tackled separately.
Such approach seems quite intellectual but not very practical as regards the ability of retail investors to
understand this combination and the complexity it introduces for the production of the KID.
Also, the risk indicator and the performance scenarios serve different goals. The purpose of performance
scenarios is to explain how the product works in different market conditions in a pedagogic way, while the
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10 février 2015
risk indicator is a measure of risk. If the risk indicator is well designed, there should be no need to
reintroduce the notion of risk in the performance scenarios.
BNPP therefore recommends not to “visually combine” the presentation of risk indicators with performance
scenarios.
As explained in question 12, BNPP favors a multidimensional risk indicator (option 3 with only two
dimensions – credit and market risk). As regards the presentation of performance scenarios, option B is the
most accessible: a simple visual element illustrating different performance scenarios should provide a good
focal point for investors.
However manufacturers should also be able to choose option (C) which is more relevant for insurance
products. The performance scenario should be based on a deterministic scenario (as opposed to
probabilistic modelling) for any such PRIIP.
Q15: Do you agree with the description of the consumer´s perspective on costs expressed in the Key
Questions?
As regards item 1 of the table “How much will this investment cost”, BNPP agrees that it is a paramount
question. The follow-up question “Are all costs included in the overall costs amount” is also legitimate. In this
respect, it should be made clear to the investor that the KID shows all the costs known by the manufacturer
but that costs external to the manufacturer, on which it has no control, may be incurred depending on the
parties that the investor has chosen to get access to the product (financial advisor, broker, custodian…). As
mentioned in Q10, such costs cannot be disclosed in the KID because they are not product specific and are
not known by the manufacturer.
Based on the experience of BNPP, the follow-up question regarding the overall cost amount, which relates to
a breakdown of costs is unlikely to reflect investors’ concerns: they want to know upfront what will be the
overall costs for them and are not generally concerned by the breakdown (for example, the requirement in
MiFID I to provide clients with details of costs on request has seldom been activated by investors). In
addition, some charging structures may be complex without being detrimental to the investors. For retail
investors, it should be more relevant that the manufacturer clearly discloses implicit costs borne by them
rather than providing a detailed breakdown of the charging structure, all the more that the KID is limited to 3
pages.
However with respect to insurance products, taking into account the number of ways investments may be
made, the existence of various insurance cover embedded in the PRIIP and generally the high degree of
complexity of the product (although one of the preferred savings scheme in France), only direct costs,
internal to the manufacturer, should be disclosed. Otherwise the information on costs may be confusing. The
costs relating to the underlying assets for unit-linked investments should be disclosed in the DICI or the KID
relating to the relevant asset.
As regards item 2 of the table, “How accurate is the current estimation of the overall costs?”, it should not
be a question that investors should ask when reading the KID, as estimates should not be used or at least
should be used in a conservative manner so that costs are never underestimated. It is a fact of many PRIIPS
that all costs are not known accurately up-front (because they depend on market factors that will be set only
on launch date, i.e. after the marketing phase) but at least realistic maximums should be provided so that the
information is not detrimental to the client’s decision. Such possibility could be further restricted so that
maximums are a sensible reflection of the actual costs by setting a maximum difference threshold between
actual costs and maximums.
As regards item 3 of the table “How do the costs develop over time?,” BNPP agrees with all the consumer
perspectives proposed. We believe that a simple table presentation as set in our answer to question 19
addresses the overall cost both on an absolute and annualised basis.
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As regards item 4 of the table, the 3 questions below should be addressed in the section of the KID related
to early exit, “How long can I hold, can I take my money out early?”:
-
Do I have to pay extra costs if I take my money out early?
If so, how much extra will I have to pay?
Will I pay more the earlier I exit from the investment?
BNPP agrees that exit costs, when known, should be disclosed. Yet, it disagrees with the further two
questions.
-
How does the product manufacturer calculate what I must pay?
When I am being charged costs on my investment, how or why are these costs being
generated?
Answers to how the manufacturer computes the costs or why are costs being generated would require a
level of detail that is well beyond cost disclosure and that would not fit within a 3-page KID. Concerning
insurance products, it may be necessary to explain insurance mechanisms (mutualization of costs, benefits
and risks) and this may be too complicate and misleading for retail investors.
Finally, BNPP agrees with the last question of section 4, “If I have to pay costs other than when I make the
investment, what is the frequency or schedule of such payments?”.
As regards item 5 of the table, BNPP is of the view that the questions proposed are very misleading: “How
much of my initial investment remains after cost deduction?” e.g. “How much of my investment is really
invested”?
Taking as an example Option 4 p. 67, which displays a “fair-value/invested capital” of 97% (assuming there
are 3% of aggregated upfront costs), this presentation is misleading for 2 reasons:
- The investor could think that 97% “fair-value” is an indicative exit value for the product, whereas it is not.
- The investor could also incorrectly believe that its return will be computed on the basis of EUR 970 “capital
invested” while EUR 1000 are invested and final redemption is computed on the basis of EUR 1000 (for
example, in the case of a capital protected product, EUR 1000 x (100% + Performance of the underlying
between strike date and valuation date) and not EUR 970 x (100% + Performance of the underlying between
strike date and valuation date). For further details, please refer to our answer to Q17 and Q26, Option 4.
As regards item 6 of the table, “How much am I paying for my capital protection in relation to my overall
investment?” it implies providing the breakdown of the zero coupon bond price and the other components of
the products. BNPP believes this level of details, although arguably interesting from an intellectual point of
view, is irrelevant for the retail investor, as its primary concern is the total amount of fees charged rather than
the detailed breakdown of fees between capital protection and other components.
As regards item 7 of the table, BNPP agrees that most of the questions are relevant. The conditions for
reviewing the information contained in the KID will be part of the Consultation on Article 10. The fact that
costs may change (running fees) may lead to a notification to investors.
As regards the question “Will I receive updates on my costs?”, it should be noted that it is not relevant for all
types of PRIIPS, as many of them have no running costs, so that the costs disclosed upfront in the KID have
been charged once and for all, with no additional costs incurred afterwards.
As regards item 8 of the table, BNPP believes that its recommended cost presentation set in its answer to
Q19 will enable investor to compare products from several perspectives (manufacturing, distribution, total
costs and total annualised cost), therefore answering the 2 questions below:
-
Is this product more or less expensive than another product?
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-
Do I have to pay the same costs (e.g. entry or exit costs) for other products?
The last question “If I pay more in costs for this product will I receive a better return on my investment?”
cannot be easily answered in a KID, as it will depend on the final outcome of the product which in many
cases can only be known after maturity. Usually the higher the costs are for a given product, the lower the
expected return on investment will be. Yet it is not always true: a product can show total aggregated costs of
20bps p.a. with an annual net return capped to 10% p.a. while another one can have total aggregated costs
of 30 bps p.a. with an annual net return capped at 12% p.a.: the second product may actually provide better
returns than the first one.
Q16: What are the main challenges you see in achieving a level-playing field in cost disclosures, and
how would you address them?
BNPP has identified 2 key challenges to ensure a level-playing field in cost disclosure:
1) Availability, consistency, comparability
The first challenge is to ensure that all manufacturers disclose the same types of costs, using the same
methodology. Direct costs under the remit of the manufacturer (typically manufacturing fees and sometimes
distribution costs) can be disclosed in the KID because the manufacturer has access to this information. It
should therefore be possible for all manufacturers to disclose these costs using the same methodology (this
should be discussed in the discussion paper that will follow in spring). This is not the case of external costs,
which are not necessarily known to the manufacturer and not product specific (see our answer to Q10).
Pursuant to this, it is important that the cost indicator should only include cost information which are:
(i) reliable
(ii) under the control of the manufacturer (since the manufacturer bears the legal responsibility of the
accuracy of the KID)
(iii) available to ALL manufacturers of a given type of PRIIP
Our view is that the inclusion of the below third party indirect costs, at the level of a single PRIIP (in
percentage or absolute terms), if possible at all, would likely be done with different assumptions or inputs
from one manufacturer to another:
- brokerage costs
- stamp duties
- FTTs
- advice fees
- sometimes distribution costs
- portfolio management technique costs
- dividend (a dividend is generally a pricing parameter not a cost, at least as regards
structured products)
- look-through costs
This would lead to major inconsistencies in the way the cost indicator would be calculated between similar
manufacturers or similar products, at the expense of product comparability for investors and a level playing
field between manufacturers and products.
2) Cost uncertainty and use of estimates
There are situations where the costs are not known with certainty at the time the product is manufactured
(which is the time at which the KID is developed), because:
 the final size of the issue may change between the time the product is designed and the end of the
marketing period
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




the market parameters change during the distribution period
the exact distribution fee is set post-hedging
distribution costs are waived or reduced by the distributor once it has reached a certain amount of
subscriptions (reducing the cost per security)
the issue size is not known until the marketing period closes
the distribution cost varies depending on the distributor concerned (when there are several
distributors of a single product)
In these instances, our view is that the manufacturer can either:
 ensure that the costs charged will not amount to more than a specific percentage of the investment,
or
 use estimates (although it should be noted that this option is not possible when several distributors
apply different distribution costs).
The second solution is likely to lead to inconsistencies between manufacturers and to inaccuracies;
estimates can also be revised up closer to the hedging date of the PRIIP. Hence, the indication of a
maximum fee seems to BNPP the fairest solution for the client, even though ESMA has considered this
approach not acceptable in the past.
Indeed, a maximum fee represents the worst-case scenario for the client who is aware of the highest amount
they can be charged. As opposed to using estimated fees, indicating the maximum manufacturing fee in the
KID is a strong commitment from the manufacturer, providing it is realistically set: the final cost will either be
this maximum or a lesser amount, which would anyhow be in the interest of the client (i.e. the exact final cost
is irrelevant somehow or is relevant only to the extent that it would be positive news for the client, not
negative ones). We therefore consider that including a maximum amount is not misleading for the client, on
the opposite, and should be permitted when the exact costs are unknown. To ensure that realistic maximums
are used, this option could be further constrained by a requirement that the difference between actual costs
and this maximum be lower than a certain threshold.
Q17: Do you agree with the outline of the main features of the cost structures for insurance-based
investment products, structured products, CfDs and derivatives? Please describe any other costs or
charges that should be included.
Implicit costs of structured products
We understand that the implicit cost of structured products although not defined formally in the DP, would be:
(i) the distinction between the investment’s price and the margin/fees that have been incorporated in
the price (“Approach 1”); or
(ii) the difference between the amount received by the manufacturer and the ‘fair value’ or ‘intrinsic
value’ of the product (“Approach 2”).
1) As regards (i), BNPP generally agrees with the example provided in the DP that “if a manufacturer sells a
structured Euro Medium Term Note (EMTN) at 1,000€, he should disclose in the KID that 3% (30€) of the
purchase price is a sales commission and 2% (20€) of the acquisition price will be absorbed upfront to
recompense the manufacturer for the costs the manufacturer incurs when structuring the note. The result is
that 95% (950€) of the acquisition price will be invested in the note: there are 5% costs”
However, there are two qualifications that should be made:
-
It is not correct to conclude that because costs amount to 5% of the issue, only 95% of the amount
paid by investors will be invested in the product
In practice the 3% would be the distributor cost rather than a sales commission retained by the
manufacturer. It is generally used to cover the marketing, legal and regulatory costs of the
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distributor. The 2% would be the issuer manufacturing cost, charged by the manufacturer to cover
the costs of manufacturing and issuing the note.
BNPP considers that this approach allows for a common application, which is not the case of the fair-value
approach.
To ensure such common application and a common understanding of the cost section of the KID, the implicit
costs should be defined with no ambiguity. It should therefore be made clear that the implicit costs, i.e. the
costs embedded in the purchase price, refer to the costs charged by the manufacturer to structure the note
and to the distributor’s cost agreed with the manufacturer (if any).
In our view, the cost disclosure should therefore include:
- the issuer manufacturing costs
- the distribution cost
It should be highlighted that implicit costs are not to be deducted because they are already included in the
price, the performance scenarios and the estimated returns. The KID should therefore make clear to
investors that these costs are already deducted and do not have to be deducted again, opposite to other
costs, which are not embedded in the price (this is assuming of course that the option of displaying
performance scenarios net of costs is chosen as discussed in Q10).
2) As regards (ii), BNPP disagrees with the ‘fair-value’ or ‘intrinsic value’ approach for several reasons
explained hereafter.
Reliability issues with IEV/fair-value, detrimental to product comparison
As stated in the DP, the main limitation of the ‘fair-value’ is that it is based on models and assumptions,
which differ among manufacturers. In Germany, the price paid by the retail investor minus the Issuer
estimated value (IEV) gives an indication of an overall cost figure of the product. Yet, the IEV depends on the
issuer’s own internal pricing models, meaning there are some challenges in achieving consistency in pricing
assumptions for comparisons between manufacturers.
This raises the question of the usefulness of disclosing the fair value to investors if that number cannot be
relied upon to compare costs between products. BNPP considers that the inconsistencies in the way the fair
value is calculated by manufacturers are a major drawback of this approach and disqualify it altogether.
The fair-value approach has been developed for short term products
This approach has not been used so far for longer term products, whereas a longer tenure would amplify the
reliability issues mentioned above.
Difficulty of understanding IEV/fair-value for a retail investor
This is an issue that should be considered in conjunction with the difficulty that retail investors may have in
understanding the concept of fair value, which constitute another limitation of this approach. The disclosure
of distributor cost and issuer manufacturing costs is easier to understand and achieves the same purpose.
The EIV/Fair value approach was originally designed by manufacturers for distributors’ use, not for retail
investors and there is no lesson learned or feedback publicly available regarding the use of this approach.
Meaning of IEV/fair-value differences for an investor
One can also question what relevant information the fair-value brings to investors. A lower fair-value for a
product identical to another one is not necessarily explained by higher costs to the investor and therefore a
lower performance, as the fair-value will include factors specific to each manufacturer that have no impact on
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the investor. For example, a product with a fair value of 95%, purchased at 100% can pay at maturity a 4.5%
coupon on the amount invested whereas the same product with a fair value of 99%, purchased at 100%, will
only pay a coupon of 4% on the same invested amount. The difference in fair-value can be a reflection of the
hedging positions of the two manufacturers, or different ways of calculating it. When comparing two products,
a rationale investor would not look at fair value but at the best coupon for a purchase price of 100%.
Additionally, fair-value is not a tradable price, it is a theoretical price which has no practical reality for the
investor.
As a conclusion, the fair value in our view does not bring any relevant information for investor, in absolute
terms but also to compare similar products from different issuers.
EIV’s inputs and limitations as regards running fees
In addition, it cannot be assumed that the difference between the fair-value and the selling price represents
the total costs charged even though this is the intention of EIV, because there are some costs that the EIV
does not capture correctly.
Parameters used to value a derivative are adjusted to account for the cost of hedging and the fair value
includes an estimate of these hedging costs but not an actual number. Some manufacturers may actually
receive funding revenue through the issuance of a structured product (representing cheaper funding than it
would be achieved in the vanilla bond market). This raises the question of how to compute the funding
difference, and whether that difference should be included in the fair-value.
Additionally, the fair-value does not incorporate running costs. For instance, a three year delta-one product
offering the total return of a static basket of stocks, issued at 100% with a running fee of 0.2% per annum,
would have a fair value on day 1 corresponding to the value of the basket of stocks, i.e. 100%. Since the
0.2% is taken off on a daily basis from the basket value, the fair-value on day one would not correctly
account for this running fee. This would be the case for all products whose fees are booked on an accrual
basis.
As a conclusion, BNPP does not think that Approach 1 is perfect but Approach 2 is worse because more
complex for investors to understand and opening a lot of room for manufacturers’ discretion in computing
fair-value, including in the calibration of parameters used as inputs. In the interest of simplicity and clarity to
investors, we definitely favour the first option (i.e., Approach 1).
Cost structure of derivatives
The cost structure of a derivative is described as follows in the DP:
- the intrinsic value of the derivative
- a front-end load fee;
- a sales commission; and
- the issuer margin (covering the operational costs incurred by the issuer for structuring the derivative,
market-making, settlement costs and the profit of the issuer)
However, the intrinsic value of a derivative is not necessarily the intrinsic value of the option in financial
terms, but the cost of acquiring such derivative in the market. This represents the product value but not a
“cost” charged by the manufacturer to the client.
We are not sure what a front-end load fee means and are unable to comment on this.
Finally, as the issuer margin covers for operational costs related to the manufacturing and “issuance” of the
derivative, we are not sure what “sales commission” refers to. It seems to relate to a third party’s
remuneration, whereas it is most uncommon as regards OTC derivatives.
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The “issuer margin” should be referred to as “issuer manufacturing costs” for consistency with the cost
structure of structured products.
Cost structure of CfDs
BNPP has not comment on this aspect, as its members are not active on this type of product.
Cost structures of insurance-based investment products
Yes it adequately reflects the costs structure for insurance-based investment products. However it would be
more correct to refer to insurance premium rather than "costs for managing the insurance cover". To the
extent that the entry and management fees include implicit costs, and it may be very difficult for us to
determine all implicit costs for each product given the number of intermediaries that may intervene (for
example, in case of investment in shares of listed companies by an asset manager appointed by the retail
investor to manage its financial assets), we believe that we should give the same information on fees and
costs as those required by French regulations (such as in the “Encadré”) and exclude implicit costs.
Q18: Do you have any views on how implicit costs, for instance costs embedded within the price of a
structured product, might be best estimated or calculated?
First, there is a need to provide a breakdown of implicit costs as “issuer manufacturing cost” and “distribution
cost” instead of aggregating these two concepts under “implicit costs”.
The issuer manufacturing costs should be calculated accurately (using maximums when not known precisely
upfront) in the same manner by all manufacturers.
Estimates can be used when the costs are not known with certainty upfront but only in a conservative
manner to avoid misleading the investor. As explained in our answer to Q16, the disclosure of the maximum
cost charged seems more appropriate and fairer to the investor than the use of estimates.
Q19: Do you agree with the costs and charges to be disclosed to investors as listed in table 12? If
not please state your reasons, including describing any other cost or charges that should be
included and the method of calculation.
BNPP understands that this list is not exhaustive, as it includes only the cost items considered difficult to
assess. It notes thus that the most important costs that should be disclosed are absent from the table. These
are: (i) the manufacturing costs of the issuer (these fees are used to cover operational and regulatory costs
related to issuance) and (ii) the distribution costs, when available to the manufacturer.
Having said that, BNPP strongly disagrees with the breakdown of charges proposed in table 12. In principle,
it believes that retail investors’ primary concern is the total amount of fees they may be charged, and their
impact on performance, rather than the detailed fee structure of the product. The investor needs to know the
total costs charged. The technical details of how the manufacturer comes up with a manufacturing cost (e.g.
market spreads while hedging, regulatory costs of issuance, provisions for model risk…) are irrelevant to the
investor.
This table lists items that are not costs but pricing parameters (dividends) or production costs that are not
charged to clients as such (portfolio management techniques, costs embedded in pricing parameters) and
are embedded in actual costs charged to clients. It also mixes up costs paid by clients and opportunity costs
(see description of dividends). Hence several of the items proposed in the table are in our view not relevant
and would result in providing details difficult to individualise and too complex for use in the KID.
Our comments below address each of the proposed cost categories separately:
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1. Portfolio management techniques
These costs seem to be more relevant to funds than bank and insurance products. When UCITs may come
in scope of PRIIPs 5 years after the regulation comes into force, BNPP agrees that the use of the fund’
securities for stock lending, repo or collateral purposes, when it represents a risk to investors, should be
disclosed in the risk section of the KID/KII. The cost of these techniques to the UCIT itself is however a
production cost not a cost paid by the client and should not be disclosed.
As regards structured products, the ability to use some of the hedging inventory for stock lending or
collaterals is taken into account in the pricing of the product (e.g. by marking a repo curve on the underlying
stocks), and therefore the benefit, if any, is passed on to the client.
2. Implicit costs
To the extent that implicit costs refer to “issuer manufacturing costs” and “distributor cost” (when known to
the manufacturer), the manufacturer should indeed disclose them separately. These should not be
aggregated under a section ‘implicit costs’ which has no meaning for retail investors.
3. Dividends
PRIIPs can be separated into two types when it comes to the impact of dividends:
- Price return products, where the underlying does not re-invest dividends. In this case the
manufacturer marks a dividend curve and this is passed back to the client under the form or a lower
purchase price of the product (compared to a product where dividends are re-invested or passed on
to the investor).
- Total return products, where dividends are either passed on to the investor or re-invested in the
underlying or at the level of the product.
In both cases, dividends are not a cost but a pure pricing parameter of the product (passed on via a price
decrease to the client in the first case, or re-invested in the second case).
4. Performance fees
We agree that it makes sense to disclose performance fees charged by the manufacturer at the product
level, if any. Since a performance fee is by definition variable, the formula used to calculate it should be
disclosed. For the avoidance of doubt, only performance fees within the remit of the manufacturer should be
disclosed. For instance, if a fund used as underlying in a PRIIPs charges a performance fee, this is not under
the control of the manufacturer.
5. Early redemption costs
Potential early redemption costs should be disclosed in the section of the KID entitled “Can I take my money
out early?” because this is where the client would naturally look to find this information. If it is also included in
the cost section, then this information would have to be repeated which is suboptimal considering the limited
space available.
6. Look-through costs
Where a PRIIP invests in another PRIIP, for example a fund-of-funds investing in underlying funds, we think
that the fees charged by the underlying funds should be disclosed only if this information is within the remit of
the manufacturer. One issue here is that the underlying funds may change their fees while the manufacturer
may not be aware or notified. It would be unfair to let the manufacturer bear responsibilities of cost
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disclosures related to the underlying (management fees of funds, fund of funds) which are not within its
remit.
7. Costs embedded in pricing parameters
Disclosing pricing parameters (e.g. dividend, volatility, rates, …) does not bring any relevant information to
the retail investor. These are usually set according to the hedging techniques employed by the manufacturer
of the product, which is not directly relevant to the retail investor. These are production costs which are
covered by the manufacturing fee.
8. Portfolio transaction costs
These costs seem to be relevant for UCITS only. Under this understanding, BNPP does not comment on this
section.
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10 février 2015
Recommended cost presentation
To summarize, BNPP recommends keeping the cost disclosure simple, accurate and easy to understand by
the retail investor, who is primarily concerned with the total fees charged rather than the detailed fee
structure of the product.
We recommend to provide the following breakdown between (i) the issuer manufacturing cost (these fees
are used to cover operational and regulatory costs related to issuance of PRIIPs ) and (ii) the distribution
cost, when available to the manufacturer.
Adding these lead to a single aggregated number representing the total cost over the life of the product, and
a total cost per annum computed as the aggregated number divided by the tenor of the product. This
approach is therefore similar to a Total Expense Ratio Approach.
The template below assumes a product with a 4 year tenure, with 1% issuer manufacturing fee and 1.25%
distribution cost.
The main challenge for insurance product is that the calculation basis may be different for various costs.
Percentage (%)
Absolute (based on
an investment of
EUR 1000 )
Manufacturing Cost
Distribution cost
(when known)
Performance Fee
Total costs over Total costs
the product tenor
per annum
1%
1.25%
0%
2.25%
0.5625%
p.a.
EUR 10
EUR 12.5
EUR 0
EUR 22.5
EUR 5.625
p.a.
These costs are already included in the price, the performance scenarios and the estimated returns
displayed in this KID.
Q20: Do you agree that a RIY or similar calculation method might be used for preparing ‘total
aggregate cost’ figures?
No, BNPP does not agree. RIY is difficult to compute and difficult to understand for investors. It seems to be
suited to products with complex fee structure (fees varying according to investment size, investment term or
performance). This approach, because of its complexity, seems disproportionate for products whose fees are
calculated on a constant basis.
Our view is that an approach displaying the Total cost per annum, in the spirit of the Total expense ratio
(TER) used for funds, is better on several counts:
- It is already used for UCITS, hence known by a portion of investors and allowing comparability
between UCITS and other types of PRIIPS;
- It is simple to compute and understand;
- It is annualised, which is good for comparability;
- It includes running costs, which is not the case of the fair value approach (the “fair-value” does not
provide information on future costs such as running manufacturing fees or unknown performance
fees at maturity, but only information on day 1);
- It is not dependent on a model and assumptions proper to each manufacturer.
BNPP considers that the TER approach can provide an accurate view of aggregate costs.
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10 février 2015
Q21: Are you aware of any other calculation methodologies for costs that should be considered by
the ESAs?
A modified TER approach, as explained in its answer to Q 20 and illustrated by the table in its answer to
Q19, is the methodology BNPP recommends.
Q22: Do you agree that implicit or explicit growth rates should be assumed for the purpose of
estimating ‘total aggregate costs’? How might these be set, and should these assumptions be
adjusted so as to be consistent with information included on the performance scenarios?
By explicit growth rates, BNPP understands that it is only relevant in performance where an assumption on
the path followed by the underlying is required, meaning for products with path-dependent costs.
This issue is therefore not relevant for structured products whose costs are not dependent on growth rates,
whose performance rates are based on formulas and whose implicit costs are embedded in the price of the
product (hence showing an expected performance net of implicit costs). We reiterate our view is that
scenarios net of implicit costs should be used. It is preferable to keep the information related to costs
disclosed clearly once and for all in the relevant cost section of the KID, rather than a second time in the
performance scenario section to make the best use of the 3-page size limit (please refer to our answer to
Q10).
The only situation in which assumptions will be needed for these products is when performance fees or path
dependent fees are charged, which is most unusual for such products.
We do not understand what is meant by implicit growth rate. For BNPP an assumption on the growth rate of
the underlying is by nature explicit and only relevant in the uncommon case of products where the total
aggregate cost is path dependent.
Q23: How do you think implicit portfolio transaction costs should be taken into account, bearing in
mind also possible methods for assessing implicit costs for structured products?
Please refer to our answer to Q19.
Q24: Do you have any views on possible assumptions that should be made, and how these might be
calibrated or set?
As regards the holding period, it is suggested that, as not all PRIIPS have the same holding period, costs
could be shown on certain standardized time horizons such as year 1, year 3, etc. We consider this
approach to be inadequate, as it would not be representative of how a sizeable number of products work. In
BNPP’s view, it is more accurate to use a display of total costs and annualised costs.
As regards rates of return, if performances are shown net of implicit costs (see Q10), there is no need to use
assumptions for rates of return. The investor will have the information on what it will get from its investment
net of costs in the performance scenario section, while having the total amount of costs in the cost section.
These two pieces of information do show the compound impact of costs on the capital investment. An
additional information that could be provided in the performance scenario is the internal rate of return of each
scenario (this is current practice in France – see our answer to Q6) so that comparison with aggregate costs
is made easier.
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10 février 2015
As regards the assumed amount invested, BNPP has no issue with making such an assumption.
As regards rebates, this is an example of costs on which the manufacturer has no control and which cannot
be indicated in the KID, all the more that one KID can be used by several distributors and KIDs are not
distributor’s specific.
Q25: What do you think are the key challenges in standardising the format of cost information across
different PRIIPs, e.g. funds, derivatives, life insurance contracts?
BNPP agrees that a standardized presentation of costs should apply to allow comparability and ensure a
level playing field. This will mean however that some sections of the template will show zeros, as all products
do not have the same costs structure, hence not being friendly to investors in terms of presentation.
A challenge is to clearly differentiate implicit costs, already included in the price of the product and its
performances, from other costs (usually external to the manufacturer).
Another challenge is that the comparison would be a bit artificial for products with very different holding
periods because the products are in fact quite different in nature (a couple of days to 3 years for most of
listed derivatives, usually 8 years for life insurance contracts in France (as required by applicable laws), a
couple of days to several years for a UCITs fund).
With respect to life insurance contracts, the clients may not understand the various layers of costs applicable
with different calculation basis, depending on the type of underlying assets, the way the assets are
managed, the various financial services or insurance cover options, should we have to disclose all implicit
costs. They may therefore not understand the costs structure applicable for such products. In addition more
than 3 A4 pages would be needed.
Q26: Do you have a marked preference or any objection for any of the presentational examples? If
so, why? Please provide any alternative examples which you believe could be useful.
Presentational examples raising objections and reasons for the objections

Option 1 is not suitable. It does not provide the exact amount of costs and the detail of issuer
manufacturing costs and distribution costs.

Option 3 is not suitable for equity linked products. The annual percentage rate is a concept used for
loans only.

Option 6 is not easy to understand. It does not provide any information about the total annualised
cost of the product. Many figures are shown but the purpose of some of the columns may not be
clear for retail investors.

Option 7 is the worst possible option of all the proposed ones. It does not show the fundamental
information of the aggregated amount of costs and the figures in percentage terms. A graph also
assumes a specific performance scenario. We believe all graphs relating to performance should be
part of the dedicated section “What are the risks and what could I get in return?”. It is complex to
understand for retail investors and it would be costly to include in all KIDs.

Options 8 and 9 will definitely confuse retail investors because of the density and amount of
information provided. When one looks at it, it is impossible to quickly spot the most important piece
of information, which is the aggregated amount of costs on a per annum basis. Associating costs
and scenarios is not appropriate in our view because many products have costs that do not vary
according to scenarios. Such presentation also uses about half a page, which is too much in light of
the limited length of the KID.
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10 février 2015

Option 10 shows neither the fundamental information of the aggregated amount of costs per annum
nor cost figures in percentage terms. It does not show any breakdown either. It also assumes a
variation of costs across time, which is not the case of many PRIIPS. This option may be appropriate
for insurance products (because they are long-term products, with, often, no maturity) but not for
other PRIIPS. BNPP is of the opinion that level 2 measures could take a different presentational
approach depending on the type of products considered.
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10 février 2015
Presentational examples that could work

Option 2 has the benefit of being simple to understand and concise. It does not require an estimation
of the amount invested and it also allows comparability between products, because a single number
of total aggregated costs per annum is displayed. A 5 year product with total aggregated costs of 5%
(1% p.a.) may be seen quite expensive, while its annualized cost is in fact lower than the one of a 1
year product with total aggregated costs of 2% (2% p.a.), hence the need to display cost information
on a per annum basis. However it is not appropriate for insurance products as the calculation basis
may be different.

Option 4 could work providing the information on fair value is removed. As explained in Q17, the fair
value brings no informational value, is not a basis on which to estimate costs and offers no true
comparability. It is also misleading as the investor could think that 97% “fair-value” is an indicative
exit value for the product, while it is not, it could also incorrectly believe that the product return will be
computed on the basis of EUR 970 “capital invested” while EUR 1000 are invested.
Under this caveat, the proposed table is accurate and concise. The investor can easily see initial
costs, ongoing costs and exit costs as both percentages and monetary figures. We would
nevertheless recommend adding 3 columns related to (i) performance fees (if any), (ii) total cost in
percentage and monetary terms for the full product tenor, and (iii) annualised cost as a percentage
computed as (ii) divided by the product tenor expressed in years.
It may also be appropriate for insurance products provided that some changes are made (investment
service costs and fair value/invested capital used in such context may not be appropriate for
insurance products).

Option 5 is both accurate and concise. It would also provide information (if needed) regarding some
special features such as performance fees or early redemption fees. It is suitable for insurance
products as well.
As a result, to ensure comparability between the various PRIIPs, option 5 is BNPP’s preferred approach for
all types of PRIIPs.
Q27: In terms of a possible breakdown of costs, are you aware of cost structures for which a split
between entry or exit costs, ongoing costs, and costs only paid in specific situations or under
specific conditions, would not work?
No, we are not aware of products for which this would not work, as when some types of costs is not
applicable it could be left blank.
Q28: How do you think contingent costs should be addressed when showing total aggregated costs?
We are not sure what is meant by contingent costs. This wording is not used elsewhere in the discussion
paper.
Q29: How do you think should cumulative costs be shown?
Cumulative costs should be shown as a percentage of the invested nominal or the initial net asset value of
the unit or share. It is easy to understand and allows comparability between products.
Q30: Do you have any views on the identity information that should be included?
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10 février 2015
BNPP agrees that ISINs should be used when available to designate the product in addition to its marketing
name if any.
The manufacturer’s website could be provided but a specific email address would be better in our view. This
should be in addition to the name of the manufacturer. A postal address could also be provided for clients
with no Internet access as opposed to a telephone number because there is not necessarily a single
telephone number available to answer questions about all types of PRIIPS of the manufacturer.
BNPP considers that the name of the competent authority should be preceded by the mention “regulated by”
in the manufacturer’s section. It does not think that the competent authority website should be added, at the
risk otherwise of confusing the investor as to where the information on the product is available and which
contact to use.
The date of publication or review should also be mentioned.
This identity section would look as follows:
[Product Name ] ISIN : FRXXXXXXXXXX
Date of publication: XXXXXXXXX – Latest review (if any): XXXXXXXXXX
Manufacturer: [insert name of manufacturer], regulated by [insert name of the regulator],
[email protected], postal address.
Q31: Do you consider that the criteria set out in recital 18 are sufficiently clear, or would you see
some merit in ESAs clarifying them further?
It is correct that there are national divergences in the way structured products are regulated in the EU at the
moment, including as regards the potential insertion of an alert in the marketing documents of the products
(example of France : AMF Position 2010-05).
It is not appropriate to take the list of assets in Article 50 of the UCITs Directive (“UCITs eligible assets”) as a
proxy for assets in which retail investors commonly invest because many of these assets are not typical
underlying of PRIIPs, such as OTC derivatives, or money market instruments. The underlying assets of
structured products are usually liquid shares or indices, not derivative or money market instruments
(including a deposit). It is also important to note that when investing in a UCITs the investor does not have
access to the full composition of the fund, while when investing in a structured product, the underlying assets
are fully disclosed.
However the second criterion proposed in the DP would actually target all PRIIPS which are derivatives,
convertibles and structured products because all of these products use a number of different mechanisms to
calculate the final return of the investment. For example, a structured product offering 100% capital
protection and the performance (if any) of a basket of shares would have to beat this comprehension alert
(providing mechanisms are numbered as currently done by the AMF in France. The only PRIIPS not
concerned by the alert would be non formula based UCITS. This is not appropriate since active management
can be as complex as formula based products. This would create an unlevel playing field between PRIIPS
which are UCITS and PRIIPS which are structured products or unit-linked insurance. This also is not
consistent with the approach implemented by the various competent authorities in the EEA.
BNPP strongly disagrees with the view that using a number of different mechanisms increases systematically
the risk of misunderstanding on the part of the retail investor. The retail investor has no better understanding
of how a UCITS is managed. What is at stake is the capacity of the investor to understand the risks he/she
takes and the market scenario he/she anticipates. But it is not because a product uses hedging instruments
or sophisticated mechanisms to ascertain delivery of its performance on its due date that it has to be labelled
as not simple and difficult to understand and be reserved to sophisticated investors: one should think in
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10 février 2015
terms of intelligibility rather than in terms of complexity. Retail investors should not be discouraged to invest
in innovative products including embedded instruments hedging various risks, as long as they can perfectly
understand the risks they take.
An approach based on mechanisms could be envisaged but only when a certain number of mechanisms is
reached, as implemented by the AMF. It should be noted however that this is quite onerous in terms of
defining what is or is not a mechanism and counting them for each new product. In any case, it would still
create an unlevel playing field between structured products and UCITs.
If no precise criteria can be found to make this alert works properly, then it should apply to all PRIIPS without
distinction.
Q32: Do you agree that principles on how a PRIIP might be assigned a ‘type’ will be needed, and do
you have views on how these might be set?
Yes BNPP agrees. A generic type could also be indicated such as “retail investment product”, complemented
by the legal form of the product.
Example for a structured product issued as an EMTN:
Type: Retail investment product, in the form of a financial instrument equivalent to a debt instrument
Q33: Are you aware of classifications other than by legal type that you think should be considered?
Considering the large range of PRIIPS, existing classifications are not extensive enough to be applied to all
PRIIPS
Q34: Do you agree that general principles and as necessary prescribed statements might be needed
for completing this section of the KID?
As a principle, BNPP agrees that financial jargon should be avoided.
However, it is afraid that general principles may not be of great help for manufacturers because this section
is one of the most challenging due to its technicality. For structured products, it is hard to see how the pay-off
structure could be “explained in a summary format” because it would likely be incomplete, which can also be
quite risky form a legal point of view for the manufacturer. For example, would that mean that the observation
dates of the product would not have to be disclosed? BNPP considers it is of the utmost importance that
template KIDs be developed for each type of PRIIPS to achieve consistency, comparability and legal
certainty. This should not be tackled as level 3 measures, but within the RTS. Level 3 measures would be
published too late: manufacturers will have already made and financed the necessary developments to
produce KIDs.
Q35: Are you aware of other measures that might be taken to improve the quality of the section from
the perspective of the retail investor?
See our answer to Q34: if a KID template for each type of PRIIPS is developed, it will ensure the quality of
this section.
Q36: Do you have views on the information PRIIPs manufacturers should provide on consumer
types?
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10 février 2015
BNPP is of the view that this section should be concise enough so that investor reads it and precise enough
to add-value.
This section should indicate that the customer type targeted by the product is a retail investor and should
describe the investment objectives and horizons that the product will satisfy, including the main risks that the
investor may face.
As regards the link with the target market, please see our answer to Q1.
As regards the development of the DP related to PRIIPS that target narrow or very specific developments of
certain underlying assets, it is unclear what it refers to and therefore BNPP is unable to comment on it.
BNPP agrees with the development regarding the recommended holding period.
Q37: What is the key information that needs to be given to the retail investor on insurance benefits,
and how should this be presented?
Product offering many investment options that can be redeemed in full or in part at any time (funds being
made available within 60 days, irrespective of whether the underlying assets backing the insurer's
undertakings are liquid assets or not), that can grant the right to be made available a loan advance,
depending of the amount of savings then outstanding under the contract, that may offer insurance cover in
certain circumstances (disability, death...), and the value of which may be transferred to the beneficiaries
appointed by the investor, in case of death of the insured person. As a result, the same agreement may be
adequate for an investor in various steps throughout his/her life (professionnal activity, retirement, disability,
death and transfer to his/her children or other persons that are not his/her heirs or legatees). All main
characteristics should be disclosed in the KID, hence the need to have a KID template per kind of PRIIPs.
Q38: Are you aware of PRIIPs where the term may not be readily described, or where there are other
issues?
Some products are considered perpetual but in actual facts they are not really perpetual because they
always include a call provision which can be exercised upon notice. Even for these products, this section
could therefore be filled in.
Q39: Are you aware of specific challenges arising for specific PRIIPs in completing this section?
The use of the word “scheme” in the DP seems to imply that this section would be dedicated to indicating
whether a national deposit guarantee scheme or securities guarantee scheme would apply to the PRIIP.
Leaving aside the case of structured deposits which are covered by deposit guarantee schemes (such as the
FSCS in the UK), BNPP considers that these two types of schemes are irrelevant in the context of PRIIPS
because:
- PRIIPS are not deposits and therefore are not covered by the deposit guarantee scheme
- The securities guarantee scheme applies in case of bankruptcy of the client’s account holder, which
is unrelated to the product itself, is unknown to the manufacturer, and could point to any EU member
State, so that such information cannot be provided in the KID.
BNPP considers that this section deals with the risk of default of the issuer, so that the role of the guarantor
can be explained to the investor. It could read as follows:
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10 février 2015
“The manufacturer ensures the redemption amount corresponds to the product’s formula. Should the
manufacturer default, the investor has a right of recourse with the guarantor YYY in order to receive the
amount owed to him by application of the repayment formula.”
Q40: Are you aware of specific challenges arising for specific PRIIPs in completing this section?
No.
Q41: Are you aware of specific challenges arising for specific PRIIPs in completing this section?
The discussion is a correct reflection of the challenges linked to the fact that the manufacturer may not know
who the distributor is. Another challenge is that there could be several distributors for one PRIIP, or that the
PRIIP could be designed with one distributor originally and then other distributors could join in.
For these reasons, BNPP agrees that an email address at the manufacturer could be provided and that this
should be complemented with a general statement that the investor can contact the entity who has proposed
the PRIIP to him, such as his advisor or the distributor. BNPP is not in favor of inserting the contact details of
a distributor even if known because there may be other distributors marketing the product or joining later on
which would then have been left out.
Q42: Do you agree that this section should link to a webpage of the manufacturer?
Yes BNPP agrees.
Q43-Q48
We believe that one KID per PRIIP should be sufficient, irrespective of the options that may be selected by
the retail investor, provided that their existence is cleary mentioned in the KID and their costs disclosed in the
appropriate way. The performance scenarios should be generic and clearly state the options (mandates,
protection of profits, stop loss service…) that have not been taken into account for the purpose of building
those scenarios.
Q44 In your market, taking into account the list of criteria in the above section, what products would
be concerned by article 6(2a)? What market share do these represent?
By way of derogation from paragraph 2 where a PRIIP offers the retail investor a range of options for
investments not structured or managed by the manufacturer, such that all information required in Article 8(3)
with regard to each underlying investment option, cannot be provided within a single, concise stand-alone
document, the KID shall provide at least a generic description of the underlying investment options and state
where and how more detailed pre-contractual information documentation relating to the investment products
backing the underlying investment options can be found. With respect to unit-linked life insurance a contract,
BNPP suggests that KID indicates that investment may be made in assets backing units, and that their
separate KID is made available on the manufacturer's website.
A substantial part of insurance-based insurance products may be concerned by article 6(2a) in the French
market.
Q49: Do you agree with the measures outlined for periodic review, revision and republication of the
KID where ‘material’ changes are found?
The areas of attention identified in the discussion section are indeed very important.
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10 février 2015
As a principle, BNPP considers that the purpose of the KID is not to inform existing investors of any changes
occurring after the product has been sold since the KID is a pre-contractual document intended for would-be
investors.
The KID should not substitute itself to the duties of the advisor/distributor towards its clients in terms of ongoing information to be provided to the investors during the tenor of the product. This means that revisions
should happen only in case of significant changes likely to impact significantly existing investors (and not
already showing in the valuation of the product that they receive) or likely to change the basis on which
potential investors would make their investment decisions.
Under these conditions only, the revision of the KID should entail a republication on the manufacturer’s
website. An active approach to client information should not be regulated by PRIIPS because such
requirement would impede on MiFID, which regulates the duties associated with investment services. Such
requirement is indeed highly conditioned to the type of investment service provided to the client by the
distributor/advisor.
In any case, the responsibility for an active approach should sit with the entity that has provided the
investment service to the client, which in certain cases may be the manufacturer, but would generally be the
distributor. The manufacturer, except if it is also the distributor, will indeed not have a relationship with the
end investor and would be unable to make this communication on a personalized basis.
Finally, it should be noted that such obligation would be particularly disproportionate considering the sheer
volume of PRIIPS in scope at the level of each manufacturer.
As regards PRIIP made available to retail investors in a non-continuous manner or closed-ended
PRIIPs, the KID being a pre-contractual document, there is no ground to update it and re-assess it if no
further agreements will ensue the distribution phase, i.e. if the product is not sold again once it has been
issued. It should be noted that these products not offered continuously or closed-ended, do not include only
most structured products and closed funds but also convertibles and OTC derivatives, the former and the
latter being negotiated bilaterally at a point in time and hence not open to further purchase. Changing market
conditions and more specifically any change in the risk and reward profile of the product will be reflected in
the valuations that the client receives anyhow. The RTS should therefore not impose regular reviews and
updates of the KID of these products. The only occasion when it should be reviewed is when a request for
purchase is received outside of the marketing period, in which case an update should be made if the
conditions described in (i) below are fulfilled. For the sake of clarity, the KID of non-continuously offered or
closed-ended products should explicitly indicate the marketing/offering period, for example in the section
“What is this product?”.
As regards products continuously available, an annual assessment seems adequate but the conditions
under which this assessment should result in an update of the KID should not be defined extensively, at the
risk otherwise of having to update the KID of the whole stocks of such products every year (see figures
provided in our general comments). This would be extremely costly and uneconomical for manufacturers.
Such update should be made:
(i) On the occurrence of any material change to the risk and reward profile of the product having a direct
impact on any of the following sections of the KID:
a. What is this product? (e.g. if the mechanics or terms of the products change, for instance a
change in observation dates which would trigger a notice to the holders to be sent, or upon a
restructuring ).
b. What are the costs? (e.g. when the costs impacting performance of the product change)
c. How long can I hold it and can I take my money out? (e.g. change in the liquidity terms)
(ii) Under the same conditions as defined by CESR in its guidelines on the methodology for the calculation of
a SRRI (CESR/10-673), i.e. the KID should be updated when the risk indicator differs from the displayed risk
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10 février 2015
indicator for 4 consecutive months on each of the computation dates. The risk indicator should be computed
every week.
For reference, CESR’s guidelines on the methodology for the calculation of a SRRI (CESR/10-673) set the
following conditions to updating the KID because of a change in the risk indicator:
“The synthetic risk and reward indicator shall be revised if the relevant volatility of the UCITS has
fallen outside the bucket corresponding to its previous risk category on each weekly or monthly data
reference point over the preceding 4 months.
3. Subject to the paragraph above, if the volatility of the UCITS has moved so as to correspond to
more than one bucket during the 4-month period, the UCITS shall be attributed the new risk class
corresponding to the bucket which its relevant volatility has matched for the majority of the weekly or
monthly data reference point during the preceding 4 months.”
Q50: Where a PRIIP is being sold or traded on a secondary market, do you foresee particular
challenges in keeping the KID up-to-date?
The focus of the question on products “being sold or traded on secondary market” is the right one, as these
products should not be confused with the ones listed on an exchange but with no actual trading or sales,
among which many are non-continuously available products.
The challenges that can be foreseen for these products is the one mentioned in our answer to Q49: their
sheer volume would make it impractical to have to update their KIDs annually. It is important therefore to
define precisely and not extensively the criteria that will trigger an update, considering in particular the fact
that the valuation of these products already includes any change in the risk and reward profile of the product.
However this issue is irrelevant for insurance products.
Q51: Where a PRIIP is offering a wide range of investment options, do you foresee any particular
challenges in keeping the KID up-to-date?
With respect to insurance products, such updates should only be made upon occurrence of major changes
(i.e., new investment options, any change in costs…). However no updates should be made in respect of
unit-linked investment as the KID should refer to them in a generic manner (please refer to costs sections)
and such assets are approved by certain insurance companies very regularly (on a daily or weekly basis).
Updating the KID further to the approval of any underlying asset backing a unit would be far too cumbersome
and expensive.
Q52: Are there circumstances where an active communication model should be provided?
As explained in its answer to Q49, BNPP is not in favor of an active communication model. It could be
argued that this would be relevant in the context of investment advice but this would significantly change the
extent of this investment service and would be at odds with the policy choices made so far in this respect
(MIFID/MIFIR).
In any case, if the choice of an active communication model was made, there are two important conditions
that should be satisfied:
- The update of the KID should not be based on extensive criteria to ensure feasibility considering the
number of products in scope;
- The entity in direct relation with the investor should be the one responsible for ensuring this
communication.
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Q53: Do you agree that Recital 83 of the MiFID II might be used as a model for technical standards on
the timing of the delivery of the KID?
Yes, BNPP agrees. However the KID should not be personalized per customer. This should remain a precontractual information document.
Q54: Are you aware of any other criteria or details that might be taken into account?
The various insurance covers (death, disability…), the beneficiaries provision in case of death of the insured
person, the various investment assets in a generic manner and the financial service options (stop loss,
protection of profits…) should be disclosed in the KIDs relating to insurance products.
Q55: Do you think that the ESAs should aim to develop one or more overall templates for the KID?
Given the wide range of products in scope (structured deposits, life insurances policies, warrants and
certificates, CFDs, structured products, OTC derivatives…), manufacturers will have no other choice than
automating the production of KIDs, when possible, for cost reasons, feasibility and consistency. Major
manufacturers of products will indeed have several thousands of new products in scope every year –
automation of KIDs will be necessary to accommodate this volume, or at least a portion of it. Indeed, the
production of KIDs cannot be fully industrialized since some of the products in scope are customised by
nature (such as OTC products) and do not lend themselves to automation. It is more likely that automation of
the production of the KIDs will only be possible for products distributed in a public offering context.
However, even though automation will not be possible for all types of products, templates of KIDs for the
different types of products concerned, will still be very useful. Considering the wide range of products in
scope, a single KID template would indeed be inadequate. Instead, a KID template should be developed for
each category of PRIIPS.
In BNPP’s view, it is essential that such templates be developed at European level. This would facilitate
comparison between products by investors, would provide more legal certainty, would make implementation
easier for manufacturers and would also help categorizing the products in scope. Such approach would be
consistent with the one adopted for the implementation of the UCITS IV Directive, whereby several templates
of Key investor Information document were established after discussions with professionals.
This should be part of the level 2 measures for the reasons explained in Q34.
Q56: Do you think the KID should be adjusted to reflect the impact of regular payment options (on
costs, performance, risk) where these are offered? If so, how?
With respect to insurance products, the various possibilities should be explained in the pay-out options. This
can be done narratively.
Q57: Are there other cost or benefit drivers that you are aware of that have not been mentioned?
Please consider both one-off and ongoing costs.
Q58: Do you have any evidence on the specific costs or benefits that might be linked to the options
already explored earlier in this Discussion Paper? Please provide specific information or references
broken down by the specific options on which you wish to comment.
Q59: Are you aware of situations in which costs might be disproportionate for particular options, for
instance borne by a specific group of manufacturers to a far greater degree in terms relative to the
turnover of that group of manufacturers, compared to other manufacturers?
- 34 -
10 février 2015
- 35 -
10 février 2015
APPENDIX I
Methodology for the determination of the risk indicator
Preamble
This methodology is designed to be consistent with the methodology used for UCITS, which is based on
volatility2.
It is transparent and accessible to third parties and supervisors, mitigating the risk of manipulation.
It provides a true representation of risks to customers and distributors and ensures an appropriate spread of
any type of PRIIPS across different risk classes.
2
CESR Guidelines for UCITS - CESR/10-673
- 36 -
10 février 2015
The Components of the risk indicator
The SRRI should embody the 2 main risks supported by the investor when investing in a PRIIP:
1. The Market Risk of the product, which can
be assessed by evaluating both:
o The capital protection at maturity (if
any), and
o The sensitivity of the product to market
moves
2. The Credit Risk of the product, which can
assessed by evaluating:
o The issuer or the guarantor risk (the credit
risk criteria is not directly relevant for
UCITS funds)*
Given the importance for investors to consider these 2 types of risk before investing in a PRIIP, we
assume that they should be presented separately through a 2-dimension rating composed of:
1. A Number-based rating from 1 to 7 to
present the Market Risk of the product
2. A Letter-based rating from A to G to
present the Credit Risk of the product
Illustration:
The safest products will have a SRRI of «1A» i.e. the lowest levels applicable for both the Market
Risk (1) and the Credit Risk (A)
The riskiest products will have a SRRI of «7G»: the highest levels applicable for both the Market
Risk (7) and the Credit Risk (G)
Other potential risk factors of the product which are not covered by this 2-dimension indicator (e.g.
liquidity risk) should be appropriately described in the risk section of the KIID. If applicable, the KIID should
also make a reference to the prospectus where all risks applicable to the product are detailed.
* An investor in a UCITs does not have direct credit risk on the UCITs funds itself since eligible assets of a UCITs have
to be held physically in a segregated custody account, or when eligible assets do not satisfy diversification ratios, the
UCITs must hold a collateral against them, and collateral must fulfil the diversification ratios required by the UCITS 4
Directive 2009/65/EC.
Determination of the Market Risk rating
- 37 -
10 février 2015
1. A risk measure based on volatility
Volatility is a common measure of risk as stated by the CESR: “Volatility is a well-known and wellestablished concept in finance, a measure conceptually easy to grasp and, at the same time, able to
capture the effects of very different risk factors” (CESR’s 10/673 guidelines on the methodology for the
calculation of the synthetic risk and reward indicator in the Key Investor Information Document, July 2010).
For that reason, our approach uses the 5-year realized volatility of the various assets underlying
the PRIIP, which can be easily determined using historical levels of such assets:


These data can be obtained easily from market data providers (e.g. Bloomberg, or publically
available sources for some indices and stocks)
The observation period of 5 years is coherent with the observation period currently used for the
calculation of the SRRI of funds.
As PRIIPS usually embed multiple components/assets, an aggregate volatility is calculated for each
product (the “Aggregate Volatility”).
Once calculated, the Aggregate Volatility
determines the Market Risk Rating of the product,
i.e. a number between 1 and 7.
AGGREGATE VOLATILITY
The table on the right provides volatility intervals
and the corresponding SRRI Market Risk Rating.
The SRRI Market Risk Rating increases with the
risk borne by the investor.
This Aggregate Volatility corresponding table
is fully consistent with the one currently used
to determine the SRRI of funds according to
the CESR methodology.
This Market Risk Rating can be determined for
products linked to any type of assets, as long as
they have an observable volatility.
- 38 -
Market Risk
Rating
Volatility above
or equal to:
Volatility
less than:
1
2
3
0%
0.5%
2%
0.5%
2%
5%
4
5
6
7
5%
10%
15%
25%
10%
15%
25%
∞
10 février 2015
2. How to determine the Aggregate Volatility
A product is characterized by 2 main features:
A level of capital protection at maturity if any
An exposure to the performance/behaviour of an
underlying (an index, a stock, a fund, a basket of
indices, a basket of stocks, a basket of funds…)
To be coherent, the Aggregate Volatility of a product should be determined considering these 2
features:
The potential capital protection offered to the
investor at maturity: the “Bond Component”
The sensitivity of the product to the moves of the
underlying: the “Risky Component”
a. Determination of the Bond Component Risk Contribution
The level of capital protection at maturity of a product, if any, is a key parameter to determine its overall
risk/reward profile as it removes or mitigates the risk of capital loss borne by investors.
We can identify the Bond Component by considering the level of capital protection at maturity.
A good approximation of the volatility of the Bond Component is the volatility of a corresponding Zero
Coupon Bond. Since historical data related to volatilities of Zero Coupon Bonds are not publically
broadcasted, we can approximate this value considering the corresponding rate volatility multiplied by the
tenor of the product.
Bond Component Risk Contribution =
Capital Protection x Tenor x Rate Volatility
b. Determination of the Risky Component Risk Contribution
A product usually embeds an exposure to a risky asset (an index, a stock, a fund, a basket of
these…). By construction, the product is sensitive to the moves of such risky asset, which can be
assessed by computing the Delta of the product, one of the main parameters used by product providers.
The Delta of a product:
 measures the actual exposure of the product to a given risky asset.
 is always determined by the product provider during its design, and throughout the life of the
product. For products sold only during a specific offering period, we consider the Delta of such
products at the predefined strike date.
 is specific to each product but it is broadly consistent between product providers for a
given product.
Risky Component Risk Contribution =
Capital at Risk x Delta x Volatility of the Risky Asset
With: Capital at Risk = MAX(0, Issue Price – Level of Capital Protection)
c. Determination of the Aggregate Volatility
- 39 -
11 February 2015
The Aggregate Volatility of the product is then determined as the sum of the Bond Component Risk
Contribution and the Risky Component Risk Contribution:
Bond Component Risk Contribution =
Capital Protection x Tenor x Rate Volatility
+
Risky Component Risk Contribution =
Capital at Risk x Delta Risky Asset x Volatility of the Risky Asset
Driven by the capital
protection at maturity
Driven by the exposure
to the risky asset
=
Aggregate Volatility of the Product
For products whose SRRI needs to be updated throughout their lives,
we take into account the evolution of the mark-to-market of the
product (MtM(t)) *
During the life of the product:
[Capital Protection x Tenor x Rate Volatility + ( MtM(t) – Level of Capital Protection)** x Delta x Volatility of the Risky Asset]
MtM(t)
* This formula is applicable throughout the life of the product. For instance, a product with an Issue Price of 100% and a
Capital Protection of 100% may have a mark to market above par. If continuously available and purchased at a mark to
market price of 130%, the investor puts 30% of its investment at risk. The above formula takes into account the mark to
market so that the Risky Component Risk Contribution is added and weighted by the difference between the MtM and the
capital guaranty level, i.e. 30% in this case. Appendix 4.c provides further examples of SRRI calculation when the mark to
market is above Issue Price.
For products with a Capital Protection Level of 0%, the formula can be simplified and the Aggregate Volatility of the Product
is actually equal to the Risky Component Risk Contribution.
The formula above can be used during the offering period (MtM(t) being replaced by the Issue Price)
** Floored at zero.
Illustration
Example of a product with an 80% capital protection at maturity indexed to the Euro Stoxx 50 index, offering 100% of
the index final performance in 5 years, issue Price at 100%. (Product number 3 in Appendix 4.a)
Capital Protection: 80%
Tenor: 5 Years
Rate Volatility: 0.209%
Bond Component Risk Contribution
80% x 5 x 0.209% = 0.84%
+
Risky Component Risk Contribution
20% x 63.2% x 22.3% = 2.82%
Capital at Risk: 20%
Delta of risky asset: 63.2%
Volatility of risky asset: 22.3%
=
Aggregate Volatility of the Product
0.84% + 2.82% = 3.69%
 Market Risk Rating of this product = 3
1
2
3
4
5
6
7
Determined according to the
SRRI/Aggregate Volatility
corresponding table
11 February 2015
Illustration (continued)
Pricing sources used for Rate and Rate Volatility
We use historical volatility data taken from Bloomberg “HVG” function. This corresponds to an
assumption of a normal distribution for rates. To make this volatility number homogenous with a Black
and Scholes volatility, we need to multiply it by the rate level. The Rate Volatility inputs used in this
illustration and Appendix 4.a are the ones in the 5th column of the below table.
Tenor
Interest rate
Bloomberg code
Rate
Rate 5 years historical
volatility (1250 days )
Rate Volatility
(log-normal volatility )
Zero-coupon
Volatility
2
EIISDA02
0.21%
51.26%
0.109%
0.22%
3
EIISDA03
0.28%
51.09%
0.143%
0.43%
4
EIISDA04
0.38%
46.13%
0.175%
0.70%
5
EIISDA05
0.50%
41.48%
0.209%
8
EIISDA08
0.95%
31.18%
0.297%
1.05%
2.38%
10
EIISDA10
1.22%
28.42%
0.347%
3.47%
Broad applicability of the approach:



The methodology offers a continuous approach to evaluate the Market Risk Rating of both capital
protected products and pure option-based structures (with no capital protection at maturity)
100% capital protected products: the Risky Component is considered equal to 0, so that the
total level of risk is equivalent to that of a zero coupon bond with the same maturity. After
Issue Date, the Mark-to-Market is taken into account.
Delta-one structures (no capital protection): the Bond Component is considered equal to 0
and the Capital at Risk is equal to 100%, therefore the total level of risk is equivalent to that of
the Risky Asset.
11 February 2015
3. Determination of the Credit Risk Rating
The Credit Risk Rating is expressed as a letter ranging from A to G. It is determined to assess the
issuer or the guarantor risk (if applicable), according to the below generic classification of credit ratings.
This Credit Risk Rating grid offers the advantage of being consistent with the generic classification used
by all major rating agencies (i.e.: Standard & Poor’s, Moody’s and Fitch…)
Ratings
generic
classification
SRRI Credit
Risk
Prime
A
Corresponding S&P rating
classification
Corresponding Moody's
rating classification
Corresponding Fitch rating
classification
Long-term
Long-term
Long-term
Short-term
AAA
Short-term
Aaa
AAA
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A1
A+
A2
A
AA+
A-1+
High grade
B
A+
Upper medium
grade
F1+
A
A-
F1
A3
A-2
BBB+
Lower medium
grade
P-1
A-1
C
D
AP-2
Baa1
BBB
Baa2
A-3
F2
BBB+
BBB
P-3
F3
BBB-
Baa3
BBB-
BB+
Ba1
BB+
BB
Ba2
BB
Ba3
BB-
B+
B1
B+
B
B2
B
B-
B3
B-
Substantial risks
CCC+
Caa1
Extremely
speculative
CCC
Caa2
Non-investment
grade
speculative
E
BBB
Highly
speculative
Default imminent
with little
prospect for
recovery
In default



F
CCC-
C
Short-term
B
Caa3
Not prime
CCC
C
CC
Ca
G
C
D
/
C
DDD
/
DD
/
D
/
The SRRI Credit Risk Rating is determined according to the S&P rating if available, else
according to the Moody’s rating if available, else according to the Fitch rating, else according to
any other rating agency recognized by ESMA, else by considering the rating of the bonds issued
by the same issuer.
If none of this data is available to assess the Credit Risk, the rating is considered as being equal
to the riskiest note (G).
If the product includes a repackaging of bonds, its Credit Risk Rating is attributed by assessing
the Credit Risk Rating of each of the repackaged bonds.
11 February 2015
4. APPENDICES
a. Illustration of the Market Risk Rating of various types of products
Bond Component
Product Payoff
Tenor
Underlying
1
100% of the final
performance, 100% capital
protection
8 Years
Carmignac
Patrimoine
Fund
100%
2
final performance capped
at +100%, 90% capital
protection
8 Years
Euro Stoxx
50 Index
3
100% of the final
performance, 80% capital
protection
5 Years
4
Market Risk
Rating
Risk
Component
Historical 5y
Volatility of the
Underlying
Delta of the
Underlying
2.38%
0%
8.1%
61.4%
3
90%
2.38%
10%
22.3%
44.8%
3
Euro Stoxx
50 Index
80%
1.05%
20%
22.3%
63.2%
3
Athena*
European Barrier-50%
5 Years
10% annual gain
early redemption trigger 0%
Euro Stoxx
50 Index
0%
1.05%
100%
22.3%
47.0%
5
5
Athena*
European Barrier-25%
5 Years
10% annual gain
early redemption trigger 0%
Euro Stoxx
50 Index
0%
1.05%
100%
22.3%
78.8%
6
6
Athena*,
European Barrier-40%
8 Years
6% annual gain
early redemption trigger 0%
Euro Stoxx
50 Index
0%
2.38%
100%
22.3%
83.3%
6
21.5%
26.1%
23.2%
31.6%
36.0%
48.7%
21.5%
29.50%
23.2%
29.50%
36.0%
29.50%
7
8
Athena**,
European Barrier -30%,
10% annual gain, early
redemption trigger
>-15%,
5 Years
Athena**,
European Barrier -30%, early 5 Years
redemption trigger
>0%, 8% annual gain
The worst of
3 stocks:
Total
Sanofi
Santander
Equally
weighted
basket of 3
stocks:
Total
Sanofi
Santander
Capital
protection at Zero-coupon
Volatility
maturity
Risky Component
0%
0%
1.05%
1.05%
100%
100%
7
6
*Product which can be redeemed early automatically at 100% + 10% (10% for products 4 and 5, 6% for product 6) per elapsed year as soon
as at the end of a year the underlying asset performance since inception is positive or null. If not previously redeemed early, after 5 years (8
years for product 6), the investor receives 100% of its initial principal if the underlying asset performance is >-50% (respectively -25% for
product 5 and -40% for product 6). If underlying asset performance is <-50% (respectively -25% for product 5 and -40% for product 6) the
investor receives the final value of the underlying asset (expressed as a percentage of its initial value). For avoidance of doubts, in this last
case, the investor will receive less than the principal invested.
**Product which can be redeemed early automatically at 100% + 10% (respectively 8% for product 8) per elapsed year as soon as at the end
of a year all underlying asset performances since inception are >-15% (respectively the equally weighted basket performance since
inception is >0%). If not previously redeemed early, after 5 years, the investor receives 100% of its initial principal if all underlying asset
performances (respectively the equally weighted basket performance) are > -30%. If underlying asset performance is <-30% the investor
receive the final value of the worst performing underlying asset (respectively the final value of the equally weighted basket) expressed as a
percentage of its initial value. For avoidance of doubts, in this last case, the investor will receive less than the principal invested.
11 February 2015
Bond Component
9
10
11
Risky Component
SRRI
Historical
Capital
Market Risk
Zero-coupon
Risk
5y Volatility Delta of the
protection at
Rating
Volatility
Component
of the
Underlying
maturity
Underlying
Product Payoff
Tenor
Underlying
100% capital protection
final performance capped
at +25%
5 Years
Euro Stoxx
50 Index
100%
1.05%
0%
22.3%
20.5%
2
Euro Stoxx
50 Index
0%
2.38%
100%
22.3%
88.68%
6
Euro Stoxx
50 Index
0%
2.38%
100%
22.3%
142.66%
7
Euro Stoxx
50 Index
0%
2.38%
100%
22.3%
30.48%
4
Digital Note *
European Barrier -40% ,
5% annual coupon if
underlying > 80% of initial
level
8 Years
Digital Note *
European Barrier -40% ,
10% annual coupon if
underlying > 100% of initial
level
8 Years
12 Phoenix memory coupon ** 8 Years
European Barrier- 60% ,
Annual observations ,
4.5% coupon if underlying
> 80% of initial level ,
early redemption trigger 0%
*Product which pays an annual coupon of 5% (respectively 10% for product 11) if the underlying closes above 80% of its initial level
on the annual observation date (respectively 100% of its initial level for product 11). After 8 years if underlying asset performance is
>=-40%, the investor receives 100% of the capital back, otherwise the investor receive the final value of the underlying asset
(expressed as a percentage of its initial value). For avoidance of doubts, in this last case, the investor will receive less than the
principal invested.
**Product which pays an annual coupon of 4.5% if the underlying closes above 80% of its initial level on the annual observati on date.
If coupons are missed for one or several years, they are recovered on the next observation date where the underlying closes above
80%. In addition, the product can be redeemed early automatically at 100% if the underlying asset performances since inception is
positive. If not previously redeemed early, after 8 years, the investor receives 100% of its initial principal if the underlying asset
performance is >= -60%. If underlying asset performance is <-60% the investor receives the final value of the underlying asset
expressed as a percentage of its initial value. For avoidance of doubts, in this last case, the investor will receive less than the
principal invested.
11 February 2015
Bond Component
Product Payoff
13
14
15
16
Digital Note *
80% capital protection +
100% performance of the
underlying capped at 0%
20% annual coupon if
underlying > 100%
Tenor
Underlying
2 years
The worst of
3 stocks:
Volkswagen,
BASF, Bayer
Digital Note *
80% capital protection +
100% performance of the
underlying capped at 0%
6.2% annual coupon if
underlying > 100%
2 years
Reverse Convertible **
European Barrier -30% ,
10% guaranteed coupon
paid at maturity
Delta-one
At maturity product pays the
underlying final value
expressed as a percentage of
the initial value.
Risky Component
SRRI
Historical
Capital
Market Risk
Zero-coupon
Risk
5y Volatility Delta of the
protection at
Rating
Volatility
Component
of the
Underlying
maturity
Underlying
80%
0.22%
20%
35.93%
27.07%
27.25%
24.31%
25.97%
30.31%
35.93%
16.7%
27.25%
16.7%
25.97%
16.7%
4
Equally
weighted
basket of 3
stocks:
Volkswagen,
BASF, Bayer
80%
3 years
iShares MSCI
Brazil ETF
(EWZ UP)
0%
0.43%
100%
27.41%
37.67%
5
5 years
Carmignac
Patrimoine
Fund
0%
0.43%
100%
8.1%
100%
4
0.22%
20%
3
*Product which pays an annual coupon of 20% (respectively 6.2% for product 14) if the underlying (respectively the equally
weighted basket) closes above 100% (respectively 80% for product 14) of its initial level on the annual observation date. After 2
years if underlying asset performance is positive, the investor receives 100% of the capital back, otherwise the investor receive
the final value of the underlying asset (expressed as a percentage of its initial value) floored at 80%. For avoidance of doubts, in
this last case, the investor will not receive less than 80% of the principal invested.
**Product which pays a guaranteed coupon of 10% after 3 years. At maturity, in addition to the guaranteed coupon, if the
underlying asset performance is >=-30% , the investor receives 100% of the capital back, otherwise, the investor receives the final
value of the underlying asset expressed as a percentage of its initial value. For avoidance of doubts, in this last case, the investor
may receive less than the principal invested, but not less than the guaranteed coupon of 10%.
11 February 2015
b. Illustration of the Credit Risk Rating recorded for various issuers/guarantors
Issuer/Guarantor
Standard & Poor's
rating
Corresponding
generic
classification
SRRI Credit Risk
Rating
Banco Bilbao Vizcaya Argentaria SA
BBB
Lower Medium
D
Banco Santander SA
BBB+
Lower Medium
D
Bank of America Corp
A-
Upper Medium
C
Bank of Tokyo-Mitsubishi UFJ Ltd/The
(USD)
A+
Upper Medium
C
Barclays Bank PLC
A
Upper Medium
C
BNP Paribas SA
A+
Upper Medium
C
BPCE Group
A
Upper Medium
C
Citigroup Inc
A-
Upper Medium
C
Commerzbank AG
A-
Upper Medium
C
Credit Agricole SA
A
Upper Medium
C
Credit Suisse Group AG
A-
Upper Medium
C
Deutsche Bank AG
A
Upper Medium
C
Goldman Sachs Group Inc/The
A-
Upper Medium
C
HSBC Bank PLC
AA-
High Grade
B
ING Bank NV
A
Upper Medium
C
Intesa Sanpaolo SpA
BBB
Lower Medium
D
JPMorgan Chase & Co
A
Upper Medium
C
Lloyds Bank PLC
A
Upper Medium
C
Macquarie Bank Ltd
A
Upper Medium
C
Mizuho Bank Ltd (USD)
A+
Upper Medium
C
Morgan Stanley
A-
Upper Medium
C
Natixis
A
Upper Medium
C
Nomura Securities Co Ltd
A-
Upper Medium
C
Royal Bank of Scotland PLC/The
A-
Upper Medium
C
Societe Generale SA
A
Upper Medium
C
Standard Chartered Bank
AA-
High Grade
B
Sumitomo Mitsui Banking Corp (USD)
A+
Upper Medium
C
UBS AG
A
Upper Medium
C
UniCredit SpA
BBB
Lower Medium
D
Wells Fargo & Co
A+
Upper Medium
C
Source: Bloomberg and websites of the issuers/guarantors, June 2014
11 February 2015
c. Illustration of the Market Risk Rating evolution taking into account the product’s mark to
market
Bond Component
Product Payoff
Tenor Underlying
Risky Component
Capital
Zero-
Mark-
protection
coupon
to-
at maturity Volatility Market
1
2
100% of the final performance, 100%
8
capital protection *
Years
Risk
Component
Volatility of
the
Underlying
SRRI
Market
Delta of the
Risk
Underlying
Rating
Carmignac
Patrimoine
100%
2.38%
190%
90%
8.1%
100%
4
90%
2.38%
150%
60%
22.3%
65%
4
Fund
final performance capped at +100%,
8
Euro Stoxx
90% capital protection
Years
50 Index
* In this example the mark-to-market of product 1 increases to 190% and delta to 100%, the Risky Component Risk
Contribution therefore becomes 90% * 100% * 8.14% = 7.32%. Other inputs (volatility of the zero coupon, volatility of
the underlying) are assumed to be unchanged. Adding the Bond Component Contribution, of 100% * 2.38% , the
Aggregate Volatility of the product becomes 5.10% ( [ 7.32% + 2.38% ] / 190% ) which increases the SRRI by 1
notch to 4 , from 3 initially. Note that in this M-t-M scenario, product 1 is very close to the delta 1 (product 16), it is
therefore consistent that both of them have the same SRRI.
