- Question ID
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2016_2571
- Legal act
- Regulation (EU) No 575/2013 (CRR)
- Topic
- Market risk
- Article
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352
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Regulation (EU) No 528/2014 - RTS on non-delta risk of options in the standardised market risk approach
- Article/Paragraph
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4
- Type of submitter
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Credit institution
- Subject matter
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Own funds requirements for non-continuous options which are perfectly matched
- Question
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If a bank transacts in 2 back-to-back non-continuous options so that there is no residual market risk, is there a requirement that each transaction is separately capitalised as is implied by the Regulation. If netting is not allowed this will lead to a significant own funds requirement for what is in effect a zero market risk position, particularly given the treatment of short options positions where a maximum payout is not specified?
- Background on the question
-
There does not appear to be a provision for netting perfectly matched back-to-back non-continuous transactions under the delta-plus approach whereas applying the delta-plus approach to back-to-back continuous options will lead to a zero risk charge since gamma and vega numbers net off.
- Submission date
- Final publishing date
-
- Final answer
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Delegated Regulation (EU) No 528/2014 (RTS of non-delta risk of options) specifies a range of methods to reflect other risks, apart from delta risk, in the own funds requirements of institutions.
The RTS does not deal with the specific case referred to in the question, i.e. perfectly matched back to back bought and sold options that are symmetrically identical in all its terms. The case described involves that, in practice, the transactions would pose no market risk for the bank (though they certainly produce counterparty risk).
In this regard, perfectly matching back-to-back options would have no 'delta risk' nor other 'non-delta risks' associated to them; accordingly, perfectly matching options (regardless of whether they are continuous or not) should not be subject to market capital requirements.
These options would still subject to counterparty risk capital charges.
- Status
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Final Q&A
- Answer prepared by
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Answer prepared by the EBA.
- Note to Q&A
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Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.
Disclaimer
The Q&A refers to the provisions in force on the day of their publication. The EBA does not systematically review published Q&As following the amendment of legislative acts. Users of the Q&A tool should therefore check the date of publication of the Q&A and whether the provisions referred to in the answer remain the same.