EBA · 2024_7006 Final Q&A

Vega and curvature risk requirements for positions in instruments without exercisable optionality that are sensitive to vega risk factors

Name: Vega and curvature risk requirements for positions in instruments without exercisable optionality that are sensitive to vega risk factors: EBA Q&A — EU Financial Regulatory Q&A
Creator: European Banking Authority
License: https://creativecommons.org/licenses/by/4.0/

Regulation: Regulation (EU) No 575/2013 (CRR)
Article: 325e, para. 2
Topic: Market risk
Submitted by: Competent authority
Submitted: 2024-02-15
Answered: 2024-05-03
Answer provided by: ESAs (EBA, ESMA, EIOPA)

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Question

Should only instruments that are options be subject vega and curvature own funds requirements, or they may apply also to instruments that lack an exercisable optionality?

Background

Article 325e(2) of Regulation (EU) No 575/2013 (CRR) lays down that positions in instruments with optionality are subject to the delta, vega and curvature risk requirements. Conversely, positions in instruments without optionality are subject solely to the delta risk requirement; Article 325e(3) CRR allows banks to extend the treatment to the curvature risk (but not the vega risk) requirement under specific conditions. The question arises as to how instruments that lack optionality in the sense of an exercisable right for the holder of the option, but which nevertheless exhibit a vega sensitivity and would therefore result in a vega risk capital requirement, should be treated.

Answer

The term instruments with optionality includes not only instruments that exhibit a contractual option which can be exercised by the holder of the option, but more broadly also any instruments whose value is sensitive to changes in vega risk factors. Such instruments may therefore be subject to all of the delta, vega and curvature risk requirements.

Original source: European Banking Authority, Q&A ID 2024_7006

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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