The Volatility Adjustment Becomes Your Calculation

Where: 

Macro VA:  GAR_85% × CSSR_Euro × max (RCS_country – 1.3 × RCS_Euro ; 0) × ω_country

Three changes sit inside that expression.

The general application ratio rises from 65% to 85%. The RCS is published by EIOPA and may be adjusted by an undertaking-specific adjustment (USA). And a new undertaking-specific factor, the credit spread sensitivity ratio (CSSR), is applied.

For undertakings with euro-denominated obligations there is a further component. Those that do not apply a USA must instead apply a macroeconomic VA, calculated by reference to the country reference portfolio and scaled by a country adjustment factor. The two are mutually exclusive, and the technical documentation (RFR Technical Documentation, Risk and Financial Stability Department, EIOPA, May 2026) is explicit that where the USA is not used, the macroeconomic component is not optional.

The USA is worth noting for its asymmetry. It is the lower of 105% and the ratio of the RCS of the undertaking's own bond portfolio to the published figure. Capped above, it has no floor. An undertaking holding a portfolio of higher credit quality and lower spread than the reference portfolio could find the adjustment materially below 100%, reducing its VA accordingly.

Because the numerator in the CSSR measures how asset values respond to a shift in the discount curve, an asset's marginal contribution depends principally on its spread duration rather than its spread level. In the illustrative portfolio, holdings rank by marginal contribution almost exactly in order of duration:

A holding of twelve years' duration contributes roughly three times as much per euro invested as one of four years, regardless of the spread either carries. Amortising exposures such as mortgages have materially shorter durations than their term suggests and contribute accordingly.

Investment decisions oriented towards return maximisation will not necessarily result in a materially higher VA and may in fact forgo some VA where the incremental spread is generated through credit selection at the shorter end of the curve, rather than through duration extension. Return and the VA were never previously in tension, because the VA did not depend on portfolio composition at all.

Derivatives do not appear in either leg of the reference portfolio classification set out in the technical documentation and are therefore excluded from the fixed-income term. The denominator, meanwhile, is the BEL, which is unhedged by construction. An interest-rate swap programme consequently contributes nothing to either side of the ratio.

Swaps do not, of themselves, reduce the CSSR. Adding a swap programme to a bond portfolio leaves both terms of the ratio, and the VA, unaffected.

The choice of instrument used to close a duration gap now has a consequence it did not previously have. Consider two allocations of an identical bond portfolio, constructed so that total duration exposure, including swaps, is the same:

_{*The long-bond holding in the second allocation is solved so that total duration exposure, including the swap, equals that of the first. The swap supplies the 2.9 years of duration removed from the bond portfolio.}

The effect on own funds and the solvency ratio depends on liability duration and the undertaking's own capital position, but the direction is unambiguous. The allocation holding more of its duration in bonds attracts the higher adjustment.

The long-dated bonds allocation earns the higher adjustment but it also ties up more spread risk capital. The swap allocation avoids that charge, at the cost of collateral calls and counterparty exposure. Both allocations involve a trade-off. What has changed is that the VA now falls on one side of it rather than neither.

A further consideration arises for undertakings with euro-denominated obligations. It is a supervisory question rather than a technical one.

Mortgages and loans fall within the corporate leg of the reference portfolio classification. Calculating a risk correction for them requires a long-term average spread (LTAS), which Article 51(4) of the Delegated Regulation (EU Delegated Regulation amending Delegated Regulation (EU) 2015/35) requires to be based on thirty years of data, with unavailable data replaced by constructed data on prudent assumptions.

EIOPA publishes LTAS for government exposures by country and for corporate exposures by currency, sector and credit quality step. No series is published for mortgages or loans. It acknowledges the position that no model bonds have been developed for securitisations and loans, including mortgage loans, "due to the lack of data" (G.1.3 - RFR Technical Documentation, Risk and Financial Stability Department, EIOPA, May 2026), with any specific treatment deferred until the relevant information becomes available.

An undertaking holding a material mortgage portfolio must therefore construct or map an LTAS and satisfy its supervisory authority both that the mapping is appropriate and that the underlying data is of sufficient quality. That determination is not within the undertaking's control, and the USA requires separate prior approval in any event.

Three routes therefore lead to the same destination, the first two governing access, the third a matter of attractiveness:

• Where a mapping cannot be agreed, the USA is unavailable

• Where it can be agreed but the published RCS has not exceeded the undertaking's own in each of the four preceding quarterly reporting periods (likely for portfolios richer in spread than the reference portfolio), the eligibility condition is not met

• Where both are satisfied, the adjustment may still reduce the VA below the published RCS, while declining to apply it produces the same outcome as being ineligible

In each case, the macroeconomic component applies. For undertakings in this position, the discount curve becomes partly dependent on sovereign spreads in other member states, an exposure that arises through the valuation framework rather than through any holding, and which cannot readily be hedged.

The illustrative undertaking ends close to where it started: 14 bps VA published today, 15.99 bps under the revised framework, 13.74 bps once the undertaking-specific adjustment applies. On that evidence the transition is not a balance-sheet event.

Each of the preceding sections, however, moved the VA figure. A CSSR of 51.8% forgoes roughly half of the 30.9 bps available at a ratio of one. Holding duration in swaps rather than bonds, at unchanged interest-rate exposure, costs a further 7 bps. The undertaking-specific adjustment, once eligible, removes 2.25 bps more. None of these decisions previously touched the volatility adjustment.

That turns the analysis into three questions an undertaking can already answer from data EIOPA publishes. How far the CSSR sits from unity, since that gap is the adjustment being forgone. How much of the duration position is held in derivatives, and what that costs in adjustment terms. And whether the undertaking's own risk-corrected spread sits above or below the published figure, since that determines whether it faces the undertaking-specific adjustment or the macroeconomic component.

The last has a clock attached. The adjustment is optional, but eligibility is retrospective, requiring the published RCS to have exceeded the undertaking's own in each of the four preceding quarterly reporting periods. An undertaking intending to apply it from January 2027 needs the calculation running during 2026. 

The figures in this article derive from an internally constructed illustrative model built on the revised extrapolation method applying from 2027, being the first smoothing point and last liquid forward rate approach, validated against EIOPA's published curves. Corporate spread inputs are inferred rather than observed, and mortgage long-term average spreads are assumed in the absence of a published series.

Several aspects of the framework remain subject to further specification in the Delegated Regulation and technical standards. Nothing here constitutes advice, and undertakings should form their own view on the matters discussed in consultation with their advisers and supervisory authority.

Since the introduction of the standardized risk weight floor, the importance of the (p) factor in SEC-SA is of particular importance. The currently applicable (p) factor is in fact lowered in the transitory arrangement for the output floor (CRR article 465) to 0.25 for STS positions and 0.5 for non-STS positions (from 0.5 and 1.0) respectively.