Document ID: chunk:federal_register_of_legislation:F2023L00676:front:0:p6
Version: federal_register_of_legislation:F2023L00676
Segment Type: other
Provision Reference: 
Character Range: 13262–16151

amount may be recognised as a floor to the stressed value of the asset in each of the real interest rates and expected inflation stresses. In the credit spreads stress the minimum amount may be recognised as a floor to the stressed value, but it must be reduced by multiplying it by (1 – default factor).

Derivatives
28.         Derivatives include forwards, futures, swaps, options and other similar contracts. Derivatives expose life companies to the full range of investment risks, even though in many cases there may be no, or only a very small, initial outlay.
29.         Changes to the capital base that would arise from changes in the value of derivatives must be included in the risk charges arising from each of the asset risk stresses.
30.         A capital charge must be applied to the fair value of over-the-counter derivatives in the default stress to allow for the risk of counterparty default. This is in addition to any charges that would arise from other asset risk stresses.

Extended Licence Entity
31.         In certain circumstances, a life company may choose to hold assets in a Special Purpose Vehicle (SPV) or other related entity, rather than on its own balance sheet. Detailed information on the treatment of an 'Extended Licence Entity' (ELE) is set out in Attachment B.

Management actions
32.         When determining the change in liabilities in response to each of the asset stresses, a life company must make allowance for the actions that it could take in response to each of the stresses.
33.         These actions may include, but are not limited to:
(a)          reducing termination values;
(b)          reducing future discretionary additions to benefits; and
(c)          altering the asset exposures of the fund after the stresses have occurred.
34.         The allowances for management actions must be appropriate, justifiable and equitable. Any representations made in the relevant product disclosure documents must be taken into account in determining the management actions that would be applied. Management actions must satisfy policy owners' reasonable expectations.
35.         It must not be assumed that termination values will be reduced below minimum termination values. It may be assumed that termination values are reduced at the reporting date.
36.         The management actions assumed for friendly societies must be in accordance with the existing rules of the benefit fund and not the broader management actions that may be accessed through a process of amending those rules.

Real interest rates stress
37.         This stress measures the impact on the capital base of a fund from changes in real interest rates.
38.         Real interest rates are the portion of the nominal risk-free interest rates (before addition of any illiquidity premium) that remain after deducting expected CPI inflation.
39.         All assets and