PRIIP categories (Annex II, categories 1 to 4)

Before any risk calculation, Annex II of Delegated Regulation (EU) 2017/653 places each PRIIP in a category, and the manufacturer does not pick its own: the European supervisors' Q&As rule out reclassifying for convenience. Category 1 gathers products where the investor can lose more than the amount invested, the derivatives listed in points 4 to 10 of Section C of Annex I to MiFID II in the original text, and those not priced at least monthly or lacking an appropriate benchmark or proxy (point 4(c)), which is where a new product with too short a history and no proxy ends up. No calculation: MRM 7 by default, MRM 6 for the point 4(c) cases. Category 2 covers linear exposure, direct or at a constant multiple, to the price of the underlying, provided there are at least two years of daily prices, four years of weekly prices or five years of monthly prices. Its VaR comes from a Cornish-Fisher expansion. Category 3 takes nonlinear payoffs, autocalls, capital-protected notes, call spreads, under the same history requirement, and its VaR comes from a bootstrap simulation. Category 4 targets products whose value depends in part on factors not observed in the market, with the example the text gives itself: insurance products that pass a share of the manufacturer's profits on to the saver. A French euro-fund life policy with profit participation falls here, and its volatility is computed component by component before being weighted. The most disputed boundary runs between 1 and 2 or 3 for products with a multiplier: a tracker that cannot go below zero can stay in category 2 or 3, a CFD tips into 1. It fixes the method and, for category 1, often the score itself.