In the second article of our blog series on the new CCI regime, our Head of Investor & Digital Services, Seamus O’Cuill, examines the implications of the proposed Risk and Reward Metric (RRM).
Introduction to the CCI Risk and Reward Metric
The FCA proposes introducing a CCI Risk and Reward Metric (RRM), calculated based on the volatility of the past five years. This metric will be assigned to one of 10 buckets, with the basic volatility calculation always being part of the overall assessment.
Requirements
The new calculation mirrors the current SRRI calculation but involves assigning classes into one of 10 buckets (rather than 7). The RRM buckets are as follows:
| Risk Class | Annualised Volatility Interval |
|---|---|
| 1 | 0% to <0.5% |
| 2 | 0.5% to <2% |
| 3 | 2% to <5% |
| 4 | 5% to <9% |
| 5 | 9% to <12% |
| 6 | 12% to <16% |
| 7 | 16% to <20% |
| 8 | 20% to <30% |
| 9 | 30% to <50% |
| 10 | 50% and above |
Note: There is no guidance yet on whether the calculation will use the mode value over a 17-week/4-month period (depending on price frequency) as per the UCITS KIID SRRI. The market interpretation is that it will.
Comparison
The table below compares the SRRI and the CCI RRM ratings:
| Rating | UCITS KIID SRRI | CCI RRM |
|---|---|---|
| 1 | 0<0.5% | 0<0.5% |
| 2 | 0.5<2% | 0.5<2% |
| 3 | 2<5% | 2<5% |
| 4 | 5<10% | 5<9% |
| 5 | 10<15% | 9<12% |
| 6 | 15<25% | 12<16% |
| 7 | 25% + | 16<20% |
| 8 | N/A | 20<30% |
| 9 | N/A | 30<50% |
| 10 | N/A | 50% + |
Impact
Seamus O’Cuill, Head of Investor & Digital Services at Funds-Axis, observed:
“There are multiple considerations arising from the new calculation:
- Product manufacturers can adopt the new legislation immediately or wait until 18 months after it is enacted. Early adopters will need to perform the new calculation within a very short time frame.
- With 10 buckets instead of 7 and narrower bands around the 8% to 20% range, there is likely to be more movement between buckets compared to the SRRI. Manufacturers must ensure robust monitoring processes to meet their obligations.
- Manufacturers distributing in both the UK and Europe will need to prepare both the new Risk and Reward Metric and the PRIIPs Summary Risk Indicator, placing significant demand on them and potentially distracting from day-to-day functions.
The team at Funds-Axis is working through the Consultation Papers with our clients and is ready to go live with the new RRM calculation as currently provided for in the Consultation Papers.
If you wish to avail of a free trial of our RRM calculation module, please contact us.”
