PRIIPs Category 3 risk-free discount factor - MRM and Performance scenarios

Question

PRIIPs regulation Annex II (MRM) states in point 16: "The VaR shall be the value of the PRIIP at a confidence level of 97.5% at the end of the recommended holding period discounted to the present date using the expected risk-free discount factor from the present date to the end of the recommended holding period."

In Annex IV point 12.b) (for favourable, moderate and unfavourable scenarios) states: "the expected performance shall be calculated at the end of the recommended holding period, and without discounting the expected performance using the expected risk-free discount factor."

In Annex IV point 14 the regulations states: "For Category 3 PRIIPs, the stress scenario shall be the value of the PRIIP at the extreme percentile as defined in point 11 of this Annex of the simulated distribution as set out in point 13 of this Annex."; thus not mentioning point 12 where we are working without discounting.

Thus, my questions are:

• Why do we specifically discount (risk-free) in MRMs and do not discount for performance scenarios (favourable, moderate and unfavourable)?
• Why is stress scenario different from avourable, moderate and unfavourable or is this just a mistake and should also not be discounted?
• Why would we like to have a scenario where we do not have benefits from a risk-free interest?

Answer 1

When computing the MRM VaR you are trying to answer the question "how much of today's investment value may the investor lose ?". Thus you need to discount the end of holding period VaR back to the beginning of the holding period to express the loss in terms of today's money.

When computing expected performance (i.e. expected return on the investment) you do not discount as performance is computed as the difference between the end of holding period value and the beginning of the period value. But I think you are right, performance under the stress scenario should also be undiscounted.