ANNEX IV
PERFORMANCE SCENARIOS
Number of scenarios
1. The performance scenarios under this Regulation which shall show a range of possible returns, shall be the following:
a favourable scenario;
a moderate scenario;
an unfavourable scenario;
a stress scenario.
2. The stress scenario shall set out significant unfavourable impacts of the PRIIP not covered in the unfavourable scenario referred to in point 1(c) of this Annex. The stress scenario shall show intermediate periods where those periods are shown for the performance scenarios under point 1(a) to (c) of this Annex.
3. An additional scenario for insurance-based investment products shall be based on the moderate scenario referred to in point 1(b) of this Annex, where the performance is relevant in respect of the return of the investment.
4. The minimum investment return shall also be shown not taking into account the situation where the PRIIP manufacturer or party bound to make, directly or indirectly, relevant payments to the retail investor, is not able to pay.
Calculation of unfavourable, moderate and favourable scenario values for the recommended holding period for Category 2 PRIIPs
Case 1: PRIIPs referred to in point 1 of Annex VIII with sufficient historical data
5. The following rules shall apply to PRIIPs referred to in point 1 of Annex VIII, where, at the time the calculation is made, the following criteria are satisfied in relation to the length of yearly consecutive historical values for the PRIIP:
it is greater than 10;
it is five years longer than the length of the PRIIP’s recommended holding period.
6. Where the recommended holding period is five years or less, the unfavourable, moderate and favourable scenarios shall be calculated over the last 10 years from when the calculation is made. Where the recommended holding period is more than five years, the unfavourable, moderate and favourable scenarios shall be calculated over a time period which is equal to the recommended holding period plus five years from when the calculation is made.
7. The calculation of the unfavourable, moderate, and favourable scenarios shall include the following steps:
within the time period specified in point 6 of this Annex, identification of all overlapping sub intervals individually equal in length to the duration of the recommended holding period, and which start or end in each of the months, or at each of the valuation dates for PRIIPs with a monthly valuation frequency, which are contained within that period;
for PRIIPs with a recommended holding period of more than one year, identification of all overlapping sub intervals individually equal or shorter in length to the duration of the recommended holding period, but equal to or longer than one year, and which end at the end of the time period identified in point 6 of this Annex;
for each sub interval referred to in points (a) and (b), calculation of the performance of the PRIIP in accordance with the following:
based on the performance of the PRIIP during the exact duration of each sub interval;
net of all applicable costs;
on the basis that any distributable income of the PRIIP has been reinvested;
by using a linear transformation to obtain the performance in sub intervals shorter than the recommended holding period, in order to render all sub- intervals of comparable length;
rank the sub intervals identified in accordance with point (a) according to the performance calculated in accordance with point (c), to identify from within those sub intervals the median and best sub intervals in terms of performance;
rank together the sub intervals identified in accordance with points (a) and (b) according to the performance calculated in accordance with point (c), to identify from within those sub intervals the worst sub interval in terms of performance.
8. The unfavourable scenario shall represent the worst evolution of the PRIIP’s value in accordance with i point 7(e) of this Annex.
9. The moderate scenario shall represent the median evolution of the PRIIP’s in accordance with point 7(d) of this Annex.
10. The favourable scenario shall represent the best evolution of the PRIIP’s value in accordance with point 7(d) of this Annex.
11. The scenarios shall be calculated at least on a monthly basis.
Case 2: PRIIPs referred to in point 1 of Annex VIII without sufficient historical data and with the possibility to use a benchmark
12. For PRIIPs referred to in point 1 of Annex VIII, the unfavourable, moderate and favourable scenarios shall be calculated as specified in points 6 to 11 of this Annex, using data of a benchmark to supplement the values for the PRIIP less all applicable costs, where:
the length of PRIIP values do not meet the criteria set out in point 5 of this Annex;
the benchmark is appropriate to estimate performance scenarios in accordance with the criteria specified in point 16 of this Annex; and
there is historical data for the benchmark that meets the criteria set out in point 5 of this Annex.
If the information on the objectives of the PRIIP makes reference to a benchmark, that benchmark shall be used, provided the conditions in the first subparagraph are met.
Case 3: PRIIPs referred to in point 1 of Annex VIII without sufficient historical data and with no benchmark, or with a benchmark without sufficient historical data, or any other Category 2 PRIIP
13. For PRIIPs referred to in point 1 of Annex VIII that are not covered by case 1 or case 2 above or any other Category 2 PRIIP, the unfavourable, moderate and favourable scenarios shall be calculated as specified in points 6 to 11 of this Annex using benchmarks regulated by Regulation (EU) 2016/1011 of the European Parliament and of the Council ( 12 ). Those benchmarks represent the asset classes in which the PRIIP invests or the underlying investments to which the PRIIP is exposed, to supplement the values for the PRIIP or the benchmark referred to in point 12 of this Annex. All asset classes in which the PRIIP could invest more than 25 % of its assets or underlying investments that represent more than 25 % of the exposure shall be considered. Where such a benchmark does not exist, an appropriate proxy shall be used.
14. If the PRIIP invests in different asset types or offers exposure to different types of underlying investments and more than one benchmark as referred to in point 13 of this Annex has been identified, the scenarios shall be calculated using a ‘composite benchmark’, considering the weights of the estimated investment in each type of assets or underlying investments.
15. For Category 2 PRIIPs for which there is not an appropriate benchmark or proxy with sufficient historical data which meets the criteria set out in point 5 of this Annex for the PRIIP, performance scenarios shall be calculated in accordance with points 21 to 27 of this Annex using 15 years of historical returns of the PRIIP or an appropriate benchmark or proxy.
Cases 2 and 3: Use of appropriate benchmarks or proxies
16. In order to assess whether the use of a particular benchmark or proxy is appropriate to estimate the performance scenarios, PRIIP manufacturers shall use the following criteria, provided that such criteria are consistent with the objectives of the PRIIP and the type of assets in which the PRIIP invests or the underlying investments to which the PRIIP offers exposure and are relevant for the PRIIP:
risk-return profile where the benchmark or proxy and the PRIIP fall into the same category of SRI or volatility and expected return or both;
expected return;
asset allocation composition (where the asset composition of the PRIIP reflects a composite index, the reference benchmark or proxy for the purpose of the calculation of performance scenarios shall consistently reflect the weights of the composite index);
potential assets in which the PRIIP invests, consistent with the investment policy;
exposure to underlying asset classes;
geographical exposures;
sector exposures;
income distribution of the PRIIP;
liquidity measures (e.g.: daily trading volumes, bid-ask spreads etc.);
duration;
credit rating category;
volatility or historical volatility or both.
PRIIP manufacturers may use criteria additional to those listed in the first subparagraph provided they demonstrate that those additional criteria are relevant in terms of the objectives of the PRIIP and the type of assets in which the PRIIP invests or the type of underlying investments to which the PRIIP offers exposure.
17. PRIIP manufacturers shall be able to demonstrate the consistency of the benchmarks with the objectives of the PRIIP and shall document their decision, including a clear justification of the benchmark used.
Calculation of the stress scenario for Category 2 PRIIPs
18. For Category 2 PRIIPs, the calculation of the stress scenario shall have the following steps:
identify a sub interval of length w which corresponds to the following intervals:
|
|
1 year |
> 1 year |
|
Daily prices |
21 |
63 |
|
Weekly prices |
8 |
16 |
|
Monthly prices |
6 |
12 |
identify for each sub interval of length w the historical lognormal returns rt, where t = t1, t2, …, tw ;
measure the volatility based on the following formula starting from ti = t1 rolling until ti = t H – w +1 where H is the number of historical observations in the period:
Where Mw is the count of number of observations in the sub interval and 
is the mean of all the historical lognormal returns in the corresponding sub interval.
infer the value that corresponds to the 99th percentile for one year and the 95th percentile for the other holding periods; that value shall be the stressed volatility 
.
19. For Category 2 PRIIPs, the expected values at the end of the recommended holding period for the stress scenario shall be:
Where:
N is the number of trading periods in the recommended holding period, and where the other terms are defined in point 12 of Annex II;
z α is a proper selected value of the PRIIP at the extreme percentile that corresponds to 1 % for one year and to 5 % for the other holding periods.
20. The stress scenario value shown shall not be better than the value of the unfavourable scenario.
Calculation of scenario values for the recommended holding period for certain Category 1 PRIIPs, Category 3 PRIIPs and Category 4 PRIIPs
21. The favourable scenario shall be the value of the PRIIP at the 90th percentile of an estimated distribution of outcomes over the recommended holding period less all applicable costs.
22. The moderate scenario shall be the value of the PRIIP at the 50th percentile of an estimated distribution of outcomes over the recommended holding period less all applicable costs.
23. The unfavourable scenario shall be the value of the PRIIP value at the 10th percentile of an estimated distribution of outcomes over the recommended holding period less all applicable costs.
24. Where the PRIIP manufacturer considers that there is a material risk that these scenarios may provide retail investors with inappropriate expectations about the possible returns they may receive, they may use lower percentiles than those specified in points 21, 22 and 23 of this Annex.
25. For Category 3 PRIIPs, the method to derive the estimated distribution of the PRIIP’s outcomes over the recommended holding period shall be identical to the method specified in points 19 to 23 of Annex II. However, the expected return of each asset shall be the return observed over the period calculated without discounting the expected performance using the expected risk-free discount factor.
26. For Category 3 PRIIPs, the following adjustments shall be made for the calculation of the stress scenario compared to the calculation for Category 2 PRIIPs:
infer the stress volatility 
based on the methodology defined in points 18(a), (b) and (c) of this Annex;
rescale historical returns rt, based on the following formula:
conduct bootstrapping on 
as described in point 22 of Annex II;
calculate the return for each contract by summing returns from selected periods and correcting those returns to ensure that the expected return measured from the simulated return’s distribution is as follows:
where E*[rbootstrapped ] is the new simulated mean.
27. For Category 3 PRIIPs, the stress scenario shall be the value of the PRIIP at the extreme zα percentile as defined in point 19 of this Annex of the simulated distribution as set out in point 26 of this Annex.
28. For Category 4 PRIIPs, the method set out in point 27 of Annex II shall be used in respect of those factors that are not observed in the market, combined as necessary with the method for Category 3 PRIIPs. The relevant methods for Category 2 PRIIPs set out in points 5 to 20 of this Annex and the relevant methods for Category 3 PRIIPs set out in points 21 to 27 of this Annex shall be used for the relevant components of the PRIIP where the PRIIP combines different components. The performance scenarios shall be a weighted average of the relevant components. Product features and capital guarantees shall be taken into consideration in the performance calculations.
29. For Category 1 PRIIPs as defined in point 4(a) of Annex II, and Category 1 PRIIPs as defined in point 4(b) of Annex II that are not traded on a regulated market or on a third- country market considered to be equivalent to a regulated market in accordance with Article 28 of Regulation (EU) No 600/2014, performance scenarios shall be calculated in accordance with points 21 to 27 of this Annex.
Calculation of scenario values for the recommended holding period for other types of Category 1 PRIIPs
30. For Category 1 PRIIPs that are futures, call options and put options traded on a regulated market or on a third-country market considered to be equivalent to a regulated market in accordance with Article 28 of Regulation (EU) No 600/2014, performance scenarios shall be shown in the form of pay-off structure graphs. A graph shall be included to show performance for all scenarios for the different levels of the underlying value. The horizontal axis of the graph shall show the various possible prices of the underlying value and the vertical axis shall show the profit or loss at the different prices of the underlying value. For every price of the underlying value, the graph shall show the resulting profit or loss and at which price of the underlying value the profit or loss shall be zero.
31. For Category 1 PRIIPs as defined in point 4(c) of Annex II a reasonable and conservative best estimate of the expected values for the performance scenarios set out in points 1(a),(b) and (c) of this Annex at the end of the recommended holding period shall be provided.
The scenarios selected and shown shall be consistent with and complement the other information contained in the key information document, including the overall risk profile for the PRIIP. The PRIIP manufacturer shall ensure the consistency of the scenarios with internal product governance conclusions, including amongst others, any stress-testing undertaken by the PRIIP manufacturer for the PRIIP, and data and analysis used for the purposes of producing the other information contained with the key information document.
The scenarios shall be selected to give a balanced presentation of the possible outcomes of the PRIIP in both favourable and unfavourable conditions, but only scenarios that can be reasonably expected shall be shown. The scenarios shall not be selected so as give undue prominence to favourable outcomes at the expense of unfavourable ones.
Calculation of scenario values for intermediate holding periods
32. For PRIIPs with a recommended holding period between one and 10 years, performance shall be shown at two different holding periods: at the end of the first year and at the end of the recommended holding period.
33. For PRIIPs with a recommended holding period of 10 years or more, performance shall be shown at three holding periods: at the end of the first year, after half of the recommended holding period rounded up to the end of the nearest year, and at the end of the recommended holding period.
34. For PRIIPs with a recommended holding period of one year or less, no performance scenarios for intermediate holding periods shall be shown.
35. For Category 2 PRIIPs, the values to be shown for the intermediate periods for the unfavourable, moderate and favourable scenarios shall be calculated in accordance with points 5 to 14 of this Annex, using the time period specified in point 6, but based on the outcomes achieved over the intermediate holding period.
36. For Category 2 PRIIPs, the values to be shown for the intermediate periods for the stress scenario shall be calculated using the formulas in points 18 and 19 of this Annex with the N defined to be the number of trading periods from the start date to the end date of the intermediate period. Point 20 of this Annex shall also apply to the intermediate periods.
37. For PRIIPs as referred to in points 15 and 29 of this Annex, Category 3 PRIIPs and Category 4 PRIIPs, unless point 38 of this Annex applies, the scenario values to be shown for the intermediate holding period shall be estimated by the PRIIP manufacturer in a manner consistent with the estimation at the end of the recommended holding period.
38. For Category 1 PRIIPs that are futures, call options and put options traded on a regulated market or on a third-country market considered to be equivalent to a regulated market in accordance with Article 28 of Regulation (EU) No 600/2014, or for PRIIPs referred to in point 90(d) of Annex VI, performance scenarios may be shown at the end of the recommended holding period only.
General requirements
39. The performance scenarios of the PRIIP shall be calculated as net of all applicable costs in accordance with Annex VI for the scenario and holding period being presented.
40. Performance scenarios shall be calculated using amounts consistent with those used for the calculation of costs as specified in points 90 and 91 of Annex VI.
41. For those PRIIPs that are forward contracts, future contracts, contracts for difference or swaps, performance scenarios shall be calculated assuming that the amount specified in point 40 is the notional amount.
42. Performance scenarios shall be presented in monetary units. Figures shall by default be rounded to the nearest 10 EUR or relevant currency, unless there are specific payout conditions, such that it could be misleading to round the figures to the nearest 10 EUR in which case the PRIIP manufacturer may present figures to the nearest Euro. Without prejudice to point 7 of this Annex, the monetary figures shall show the sum of the amounts that would be received by the retail investor (net of costs) during the holding period, comprising:
the payments due at the end of the holding period, including the capital reimbursed;
the coupons or other amounts received before the end of the holding period, without assuming reinvestment of those amounts.
43. For PRIIPs that are forward contracts, future contracts, contracts for difference or swaps, performance scenarios in monetary units shall show the profit or loss obtained in the holding period.
44. Performance scenarios shall also be presented in percentage terms, as the average annual return of the investment. That figure shall be calculated considering the scenario value as numerator and the initial investment amount or the price paid as denominator in accordance with the following formula:
(scenario value/initial investment)^(1/T) – 1, if T > 1. Where T is the length of the holding period in years
45. For recommended holding periods shorter than one year, performance scenarios in percentage terms shall reflect the projected return over that period, non-annualised.
46. For PRIIPs that are forward contracts, future contracts, contracts for difference, or swaps, the percentage return shall be calculated considering the notional amount of the contract and a footnote shall be added to explain that calculation. The formula for the calculation shall be the following:
(Net profit or loss/Notional Amount)^(1/T) -1, if T> 1.
The footnote shall indicate that the potential return is calculated as a percentage over the notional amount.
47. For insurance based investment products, the following shall apply in addition to the methods referred above including under point 28 of this Annex when calculating the performance scenarios in respect of the investment:
future profit participation shall be taken into account;
assumptions on future profit participation shall be consistent with the assumption on the annual rates of return of the underlying assets;
assumptions on how future profits are shared between the PRIIP manufacturer and the retail investor and other assumptions on future profit sharing shall be realistic and in line with the current business practice and business strategy of the PRIIP manufacturer. Where there is sufficient evidence that the undertaking will change its practices or strategy, the assumptions on future profit sharing shall be consistent with the changed practices or strategy. For life insurers within the scope of Directive 2009/138/EC, those assumptions shall be consistent with the assumptions on future management actions used for the valuation of technical provisions in the Solvency II-balance-sheet;
where a component of the performance relates to profit participation that is payable on a discretionary basis, that component shall only be assumed in the favourable performance scenarios;
the performance scenarios shall be calculated on the basis of the investment amounts set out in point 40 of this Annex.
( 12 ) Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (OJ L 171, 29.6.2016, p. 1).