hi there,
I have three quick qs.
1. is MA=Bond Spread - FS?
2. According to Eiopa i see that FS=max(PD+CoD; 35%LTAS).
However the following sentence from the latest Technical documentation for int rates mentions
"In general, the MA should be calculated on the basis of the amount FS – PD = max(CoD, 35%·LTAS – PD)"
does this mean that MA=Bond Spread-(FS-PD)?
On the other hand CMP notes mention the following: discounting = rf+Spread-FS= rf+(ILP+CRP)-FS= rf++ILP.
3. So how MA is related to ILP?
I know , and has also been mentioned above that VA is related with liquidity too but somehow (at least mathematically MA is also related to illiquidity)
Hi
Good questions:
1 & 2. The official definition of the fundamental spread is set out in the Solvency 2 text, which as you say is based on the higher of PD + COD; or a % of the LTAS. The % is different for corporate and government bonds.
Most people (including myself

) are ‘lazy’ and only refer to PD + COD when speaking / thinking about the dynamics of the fundamental spread. This probably wouldn’t occur if / were the LTAS element of the calculation to be the biting component.
The conceptual and legal definition of the FS is: FS=max(PD+CoD; x%LTAS)
My understanding is that the additional text in the technical documentation you quote:
"In general, the MA should be calculated on the basis of the amount FS – PD = max(CoD, 35%·LTAS – PD)" was added to correct for an inconsistency that exists within the approach used to calculate the PD and COD in a manner that didn’t breach legally binding text!
The COD is based on the assumption that a bond, following downgrade, would be replaced with an equivalent bond at the original (ie pre downgrade) credit rating.
This assumption then gets ignored for the purpose of calculating the PD. And consequently causes an inconsistency between the two components.
If memories serves correctly, the industry highlighted this issue owing to concerns that the FS effectively baked in a double count. The stated approach (ie to deduct the PD) was judged to be acceptable on both legal and technical grounds as a way to remove this double count (PD risk still remains).
3. MA and VA are conceptually harvesting the same thing: an illiquidity premium. The calculation approach differs for various (non technical) reasons.