Question ID
2014_1008
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Market risk
Article
329, 352, 358
Paragraph
3, 6, 4
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
Article 5(3)
Name of institution / submitter
S J Metrics Limited
Country of incorporation / residence
United Kingdom
Type of submitter
Other
Subject matter
Risks other than Delta for non-linear products
Question

The EBA RTS 2013/13 on non-delta risk of options in the standardised market risk approach under Articles 329(3), 352(6) and 358(4) of Regulation (EU) No 575/2013 (CRR) proposes a scenario approach for non-delta risks. Interest rate spread options do not readily fit into the proposed scenario approach as the underlying interest rate applies to two date and the relative performance of each. How should the distinct underlying be constructed for this type of product?

Background on the question

The scenario approach requires a matrix of parameter shifts to be constructed for each distinct underlying. Where the underlying is an interest rate the distint underlying is based upon currency and maturity of the interest rate.

Submission date
Final publishing date
Final answer

The question relates to the treatment of an "interest rate spread" option in which the variable rate is referenced to a long-term (or difference between a long and a short term) interest rate. Article 5(3) of the RTS states that:

For the purposes of step (b) of paragraph 1, a distinct underlying type shall be:

(a) For interest rates in the same currency, each maturity time band as set out in Table 2 of Article 339 of Regulation (EU) No 575/2013;

Article 339 states that:

The institution shall assign its net positions to the appropriate maturity bands in column 2 or 3, as appropriate, in Table 2 in paragraph 4. It shall do so on the basis of residual maturity in the case of fixed-rate instruments and on the basis of the period until the interest rate is next set in the case of instruments on which the interest rate is variable before final maturity( 26)

Accordingly, the underlying is determined considering the relevant maturity band in which the variable interest rate is next set.

Status
Final Q&A
Answer prepared by
Answer prepared by the EBA.
Note to Q&A

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

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