EBA · 2016_2571 Final Q&A

Own funds requirements for non-continuous options which are perfectly matched

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
352
Topic
Market risk
Submitted by
Credit institution
Submitted
2016-01-14
Answered
2016-11-11
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

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

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.

Answer

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.

Original source: European Banking Authority, Q&A ID 2016_2571

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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