PRIIPs credit risk measure (CRM) and summary risk indicator (SRI)
Score from 1 to 6 for a PRIIP's credit risk, drawn from the issuer's or guarantor's credit quality step adjusted for maturity, then combined with the MRM to give the summary risk indicator from 1 to 7.
A structured EMTN can have a quiet payoff and a fragile issuer. Part 2 of Annex II of Delegated Regulation (EU) 2017/653 measures that second risk. The starting point is the credit quality step (CQS) of the entity that has to pay, issuer or guarantor, as derived from the ratings of an external credit assessment institution. That step is then adjusted for the product's maturity or recommended holding period, in three columns: up to one year, from one to twelve years, beyond. A CQS 3 drops to 2 under one year; a CQS 4 gives 3, 4 or 5 depending on the column; a CQS 5 gives 4, 5 or 6. The adjusted step converts into a CRM: 0 and 1 give 1, then 2 gives 2, and so on up to 6. An unrated issuer gets a default step, 3 for a credit institution or insurer regulated in a well-rated Member State, 5 otherwise. Mitigating factors, such as collateral, can lower the score. Part 3 finally combines MRM and CRM in a table. With a CRM of 1 or 2, the SRI equals the MRM. With 3, it is at least 3; with 4 or 5, at least 5; with 6, at least 6. Credit never lowers the market score. For a UCITS or an AIF, credit is assessed on a look-through basis, on the underlying investments. On a life insurance policy or a bank certificate, it often sets the number shown.
A 5-year structured note, MRM of 3, issued by a bank at CQS 4. The maturity falls in the one-to-twelve-year column: the adjusted step stays at 4, the CRM is 4. The CRM 4 row of the table lifts the SRI to 5 for any MRM from 1 to 5: the KID shows 5, two notches above market risk alone. The same note at 10 months moves to the up-to-one-year column, where CQS 4 gives 3: CRM 3, and the CRM 3 row leaves an MRM of 3 at 3. The SRI drops to 3. At 15 years, CQS 4 would become 5, CRM 5, and the SRI would stay at 5.
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