Prudential Regulation Authority Rulebook

25.1

A firm may use the basic relevant risk-free interest rate term structure for the EUR, adjusted for currency risk, to calculate the best estimate with respect to insurance or reinsurance obligations denoted in a currency pegged to the EUR, provided that all of the following conditions are met:

1. (1) the pegging ensures that the exchange rate between that currency and the EUR stays within a range not wider than 20% of the upper limit of the range;
2. (2) the economic situation of the EUR area and the area of that currency are sufficiently similar to ensure that interest rates for the EUR and that currency develop in a similar way;
3. (3) the pegging arrangement ensures that the relative changes in the exchange rate over a one-year-period do not exceed the range referred to in (1) in the event of extreme market events, that correspond to the confidence level set out in Solvency Capital Requirement – General Provisions 3.3 and 3.4; and
4. (4) one of the following criteria is complied with:
   1. (a) participation of that currency in the European Exchange Rate Mechanism (ERM II);
   2. (b) existence of a decision from the Council of the European Union which recognises pegging arrangements between that currency and the EUR;
   3. (c) establishment of the pegging arrangement by the law of the country establishing that country's currency.

For the purpose of (3), the financial resources of the parties that guarantee the pegging must be taken into account.

25.2

The adjustment for currency risk referred to in 25.1 must be negative and must correspond to the cost of hedging against the risk that the value in the pegged currency of an investment denominated in EUR decreases as a result of changes in the level of the exchange rate between the EUR and the pegged currency.