Response to joint Discussion Paper on Key Information Documents (KIDs)
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We are also concerned that the question "Is risk and return balanced?" may infer that the bank is making an assessment of "reasonable" return with reference to the reading investors specific risk appetite, to which the manufacturer will not be privy. Instead, the scenarios should give the client insight into how the price behaves a across a range of occurrences."
However, we are concerned with the scope of the definitions and the level of detail in describing them. HSBC believes the KID should describe the price behaviour due to a change in the main risk factors. However, it should not explain the reason why the risk factor itself has changed. This is a fundamental position - as the main thing that matters is the view on the risk factors of a PRIIP of the very investor buying the PRIIP - and this is highly personal and by definition cannot be generalized in a KID.
Furthermore, we would like to point out that, in the case of credit linked note, the definition of credit risk should encompass the credit events of both the issuer of the PRIIPS and the issuer of the underlying asset. In the case of the credit linked note, the credit events of the issuer of the underlying asset should not be considered as market risk.
HSBC strongly believes that the KID should not set out performance scenarios which include or are based on probabilities. We believe the end investor’s information needs are best met when the KID outlines how the product will perform in a factual set of circumstances without referencing the likelihood of those circumstances occurring. The best approach is to present to the retail investor three possible outcomes (one on the negative side, one the positive side and one intermediate).
HSBC has many concerns with probabilistic modelling, including the creation of a material risk of fewer investors taking investment advice, having misunderstood the probability analysis, thus leading to an elevated risk of poor investment outcomes for the PRIIPs investor.
For longer dated products it is more appropriate to incorporate aging in the scenario-analysis on the risk factors.
2: Do you agree with the description of the consumer´s perspective on risk expressed in the Key Questions?
HSBC notes the proposed Basic Questions related to uncertainty (dispersion of possible returns)". As noted elsewhere in our response, we have concerns about probability related content in the KID due to our belief that investors may misunderstand what information expressed in this manner is seeking to convey.We are also concerned that the question "Is risk and return balanced?" may infer that the bank is making an assessment of "reasonable" return with reference to the reading investors specific risk appetite, to which the manufacturer will not be privy. Instead, the scenarios should give the client insight into how the price behaves a across a range of occurrences."
3: Do your agree that market, credit and liquidity risk are the main risks for PRIIPs? Do you agree with the definitions the ESA’s propose for these?
Yes, HSBC agrees that market, credit and liquidity risks are the main risks for PRIIPS.However, we are concerned with the scope of the definitions and the level of detail in describing them. HSBC believes the KID should describe the price behaviour due to a change in the main risk factors. However, it should not explain the reason why the risk factor itself has changed. This is a fundamental position - as the main thing that matters is the view on the risk factors of a PRIIP of the very investor buying the PRIIP - and this is highly personal and by definition cannot be generalized in a KID.
Furthermore, we would like to point out that, in the case of credit linked note, the definition of credit risk should encompass the credit events of both the issuer of the PRIIPS and the issuer of the underlying asset. In the case of the credit linked note, the credit events of the issuer of the underlying asset should not be considered as market risk.
4: 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.
For liquidity risk, we do not consider “the bid-offer spread” and “the number of market makers excluding the manufacturer” to be as anywhere near as relevant as the “average volume traded”.5: 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?
HSBC believes that contingent costs should be addressed separately.6: 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?
HSBC has participated in and endorses the ISDA response to this question 6.HSBC strongly believes that the KID should not set out performance scenarios which include or are based on probabilities. We believe the end investor’s information needs are best met when the KID outlines how the product will perform in a factual set of circumstances without referencing the likelihood of those circumstances occurring. The best approach is to present to the retail investor three possible outcomes (one on the negative side, one the positive side and one intermediate).
HSBC has many concerns with probabilistic modelling, including the creation of a material risk of fewer investors taking investment advice, having misunderstood the probability analysis, thus leading to an elevated risk of poor investment outcomes for the PRIIPs investor.
7: How would you ensure a consistent approach across both firms and products were a modelling approach to be adopted?
In our opinion the use of probabilistic modelling can provide misleading information to the investor. Please see our response to question 6.8: What time frames do you think would be appropriate for the performance scenarios?
For shorter dated products we should use expiry date. For structured products with a pre-defined maturity, the strategies are meant to be held until expiry so they should be evaluated that way. By doing this we show a fair representation of the different outcomes for the investment horizon that the client has when entering the transaction and we avoid having to make assumptions on all the market variables that affect the pricing throughout the life of the transaction but do not matter anymore at maturity. In our view, the ‘at expiry’ analysis is the only way to truly isolate the behaviour of the underlying asset (which is the driver of the investment and the instrument on which the investor has a view) from the other market variables.For longer dated products it is more appropriate to incorporate aging in the scenario-analysis on the risk factors.