These draft RTS aim at defining a range of methods to reflect, in the own funds requirements, all the risks, other than delta risk, in a manner proportionate to the scale and complexity of institutions’ activities in options and warrants.
Adopted and published on the Official Journal
The European Banking Authority (EBA) issued today amendments to the adopted Regulatory Technical Standards (RTS) on the treatment of non-delta risk of options in the standardised market risk approach. These RTS were published by the European Commission as Delegated Act on 20 May.
During the legal adoption process of these RTS, The European Commission introduced changes, which have inadvertently altered their meaning. The EBA is, therefore, proposing to amend the text of this Delegated Act to ensure it reflects the intention of the text originally submitted to the European Commission in December 2013.
The European Banking Authority (EBA) published today final draft Regulatory Technical Standards (RTS) on non-delta risk of options in the standardised market risk approach. The standards will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in the European Union (EU).
These RTS define a range of methods to reflect, in the own funds requirements, all the risks, other than delta risk, in a manner proportionate to the scale and complexity of institutions' activities in options and warrants. The EBA's proposal implements the Basel II framework which provides for the following methods: (i) a simplified approach to be applied only by institutions that buy options; (ii) the delta-plus method that can be also applied by institutions that sell options; and (iii) the scenario approach that is more sophisticated and addressed to institutions dealing with a considerable trading activity in options. In addition, for certain non-standard options, a new conservative treatment is introduced.
The EBA has developed these final draft RTS in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (colloquially known as Capital Requirements Regulation or CRR).
The final draft standards have been sent today to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.
The European Banking Authority (EBA) published today final draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) related to market risk. In particular, the EBA published (i) RTS on the definition of materiality thresholds for specific risk in the trading book; (ii) ITS on closely correlated currencies; (iii) RTS on non-delta risk of options in the standardised market risk approach; and (iv) ITS on appropriately diversified indices. The standards will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in the European Union (EU).
In particular, the final draft RTS on the definition of materiality thresholds for specific risk in the trading book set out criteria for assessing when the specific risk of debt instruments in the trading book – both at a solo and consolidated level - is ‘material' enough to trigger an evaluation by the competent authority. After this evaluation, competent authorities will be able to determine whether they shall encourage banks to enhance their internal assessment capacity and increase the use of internal models for capital calculations.
The final draft ITS on closely correlated currencies identify a list of relevant closely correlated currencies for the purposes of calculating the capital requirements for foreign-exchange risk according to the standardised rules. Currencies are considered to be closely correlated if they meet the specific criteria set out in Article 354 of the Capital Requirements Regulation (CRR). Positions in currency pairs that are deemed to be closely correlated are subject to lower capital requirements. The EBA will update this list on a yearly basis incorporating any additional relevant currencies as well as the latest available market data.
The final draft RTS on non-delta risk of options in the standardised market risk approach define a range of methods to reflect, in the own funds requirements, all the risks, other than delta risk, in a manner proportionate to the scale and complexity of institutions' activities in options and warrants. The EBA's proposal implements the Basel II framework which provides for the following methods: (i) a simplified approach to be applied only by institutions that buy options; (ii) the delta-plus method that can be also applied by institutions that sell options; and (iii) the scenario approach that is more sophisticated and addressed to institutions dealing with a considerable trading activity in options. In addition, for certain non-standard options, a new conservative treatment is introduced.
The final draft ITS on appropriately diversified indices list relevant exchange traded and appropriately diversified indices for which specific risk can be ignored on the basis of the following criteria: (i) the index must comprise a minimum number of equities; (ii) none of the equities or concentration of equities must significantly influence the volatility of the index; the index must comprise equities that are diversified both from (iii) a geographical and (iv) economic perspective.
The EBA has developed these final draft RTS and ITS in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (colloquially known as Capital Requirements Regulation or CRR).
The final draft standards have been sent today to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.
The European Banking Authority launches today a consultation paper on draft Regulatory Technical Standards (RTS) to define a range of methods to reflect in the own funds requirements non-delta risks for options and warrants. The consultation runs until 31 August 2013.
These draft RTS aim at defining a range of methods to reflect, in the own funds requirements, all the risks, other than delta risk, in a manner proportionate to the scale and complexity of institutions’ activities in options and warrants.
The EBA’s proposal is broadly in line with the Basel II framework which provides for the three following methods:
Although the EBA has agreed to refer to the treatment of option risk outlined in the Basel framework, these RTS deviate from Basel due to regulatory specificities included in the CRR or where the EBA has considered that the treatment in Basel was not specific enough. The three methods allowed in Basel are included in the paper, though some specific changes have been introduced. In addition, a fallback treatment for complex options is also proposed.
Furthermore, these draft RTS consult on the possibility of allowing a combination of different methods within an institution or solely between separate legal entities within a group.
The EBA is requested to submit these draft RTS to the European Commission by 31 December 2013.
Background
The final comprise on the Capital Requirements Regulation and Capital Requirements Directive (CRR/CRD) provides a mandate for the EBA to define the term market for the purpose of calculating the general component of market risk for equities under the standardised rules.
The final text of the CRR also provides a mandate for the EBA to define a range of methods to reflect, in the own funds requirements, all the risks other than the delta risks in a proportionate way to the scale and complexity of institutions’ activities in options and warrants.
Consultation process
Comments to the consultation paper on non-delta risk of options can be sent to the EBA by e-mail to EBA-CP-2013-16@eba.europa.eu by 31 August 2013, indicating the reference EBA/CP/2013/16.
All contributions received will be published following the close of the consultation, unless requested otherwise.
A joint public hearing will take place at the EBA premises on 17 July 2013 from 10:00 to 13:00, UK time. To register for the public hearing, click here.