Matching adjustment

[Viki2010]

Is the direction of the adjustment always the same ie increasing the disc rate?

 

[Shahzad nazir]

Application of MA is optional for companies. If a company thinks it is beneficial, only then the company will apply for MA to PRA.
Other option is to apply for VA which is based on notional portfolio of assets for each EU country.
So answering to your question is yes, it has to be +ve adjustment to gain benefit/compensation for holding assets till maturity.

 

[Viki2010]

Thanks Shahzad. I know it is optional and has to be approved by the PRA etc.
The reason I am asking is because the core reading is worded "adjusting the rate" and not explicitly "increasing the rate". .....

 

[Mbotha]

Hi Viki2010

The non-core reading on page 10 clarifies this: " So, the discount rate can be increased to take credit for the extra return offered by corporate bonds (over government bonds) that relates to the illiquidity premium..."

So the matching adjustment is always an increase to the risk-free rate.

 

[Viki2010]

I've seen the non core reading but I wanted to be sure that it can never me a decrease since the core reading uses strictly the word " adjusted"

 

[Lindsay Smitherman]

Yes the others are correct: it is an increase to the discount rate. I suspect that the word "adjusted" was used simply because it is an "adjustment"!