PRIIPs market risk measure (MRM)

The MRM is the market half of a KID's summary risk indicator. Annex II of Delegated Regulation (EU) 2017/653 defines it from the annualized volatility that corresponds to the 97.5% VaR over the recommended holding period, the VEV. The scale is fixed: class 1 below 0.5%; class 2 from 0.5% to under 5%; class 3 from 5% to under 12%; class 4 from 12% to under 20%; class 5 from 20% to under 30%; class 6 from 30% to under 80%; class 7 at 80% and above. The bands are uneven: the low classes separate money market and short bond funds, the high ones group broadly. Category 1 skips the calculation and gets 7, or 6 for point 4(c) products, priced less often than monthly or lacking a benchmark or proxy. For a Gaussian return, the VEV lands very close to the annual volatility, since 3.842 is almost 1.96²; skew and kurtosis then move it, upward when the left tail is heavy. The threshold effect is familiar to every fund manager. Two funds whose volatility differs by a few tenths of a point can get two different classes, and the class shown bears on the client profile the distributor may sell to. Article 15 of the delegated regulation requires the KID to be reviewed at least every twelve months, checking each time whether the MRM or the CRM has moved enough to shift the SRI to another class; if so, the KID is revised. The MRM says nothing about credit; the CRM, combined with it, can raise the final score.