FCT and ORSA

oxalisoxalis
in OSFI.ORSA

Hi Graham,

is it correct to say that both are forward looking and include a projection of 3-5 years? we conduct FCT only when directed by OSFI, does that mean we don't need to perform FCT annually, only when requested by OSFI? but for ORSA we have to perform every year?

It's not very clear to me how in general FCT and ORSA, and stress testing are related to each other, my understanding is that both FCT and ORSA use stress testing technique to assess the capital required, so stress testing is just a technique but not a framework like FCT or ORSA that we have to perform? if both test impact of the plausible adverse scenarios(PAS), does it mean they both look at the same PAS, or they each select different PAS?

It would be really helpful if you can elaborate a bit more on this, thank you!

Comments

  • grahamgraham

    You have good questions, but here is some advice regarding how to prepare for an exam question on this topic:

    • Use the BattleTable in the ORSA reading to review the old exam questions that discuss DCAT versus ORSA. The examiner's reports indicate what the graders expect for this type of question.
    • Try not to go down a rabbit hole here. Your questions show you are thinking deeply about the the inter-relationships between FCT, ORSA, and stress-testing but as long as you have a basic understanding of the relationships, that's enough to answer exam questions successfully.

    In any case, what I felt was important here is in this section from the FCT wiki article:

    But just to give you a few quick answers to your questions:

    • FCT is a specific type of stress-testing technique. (Other stress-testing techniques include sensitivity analysis and different kinds of scenario-testing.)
    • FCT and ORSA are both forward-looking
    • FCT and ORSA should be performed at least once during each financial year.
    • FCT and ORSA do not need to look at the same adverse scenarios, but in practice they often would, especially if a joint report is made.
  • oxalisoxalis

    Is the forecast period for both ORSA and FCT 3-5 years?

  • grahamgraham

    The recommendation in the current FCT reading is for the forecast period to be 3-5 years, but there is no specific minimum. It seems the final decision is left up to the actuary.

    The ORSA reading does not address the forecast period as far as I can tell, but the FCT reading recommends that FCT and ORSA should be consistent in terms of the forecast period.

  • oxalisoxalis

    Hi Graham,

    Can you please clarify these terms?

    • regulatory capital requirement
    • supervisory capital requirement
    • minimum capital requirement? i.e. MCT>100%?

    Thank you!

  • grahamgraham

    Unfortunately, these definitions are not made clear in any of the syllabus readings (as far as I could tell) but there was a forum discussion about it from 2020 here:

    There is also a brief discussion in the wiki here:

  • oxalisoxalis

    Thank you so much!

  • oxalisoxalis

    do we perform ORSA annually just like FCT?

  • Staff-T1Staff-T1

    At least annually - Sometimes more often if circumstances call for it (change in risk appetite or risk profile)

  • suomisuomi

    Does the Peer reviewer review OSRA?

  • Staff-T1Staff-T1

    Not to my knowledge, no

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