Should the own fund requirement of foreign-currency option non-delta risk be calculated by all institutions, or only if the net open FX position is greater than 2%?
Article 351 of Regulation (EU) No 575/2013 (CRR) requires institution to calculate net open position in accordance with the procedure set out in Article 352 and prescribe own funds requirement if this position exceeds 2% limit of its own funds. In accordance with Article 352(5), institutions shall adequately reflect other risk associated with options, apart from the delta risk, in the own funds requirement. It is not clear whether the own fund requirement of non-delta risk options based on Article 352(5) should be calculated only when the net position calculated by Article 352(1)-(4) exceeds the 2% limit of own funds?
The own funds requirement for foreign exchange risk, including non-delta risks of positions in foreign-currency options, shall only be calculated if the institution's overall net foreign-exchange position and its net gold position calculated as per Article 352 of Regulation (EU) No 575 /2013 (CRR) is greater than 2% of the institution's total own funds.
To determine the overall net foreign-exchange position as set out in Article 352, the institution will need to include the net delta equivalent of the foreign-currency options as per Article 352(1)(d) of the CRR.
The calculation of the overall net foreign-exchange position however does not require including non-delta risks of foreign-currency options.
Only if the overall net foreign-exchange position (including the net delta equivalent of the foreign-currency option) and its net gold position exceeds 2% of the institution's total own funds, the own funds requirement for foreign exchange risk (including non-delta risks) will have to be calculated .
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.