- Question ID
- Legal act
- Regulation (EU) No 575/2013 (CRR)
- Market risk
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Not applicable
- Type of submitter
- Subject matter
Delta calculation internal models
Is an institution required to obtain competent authority’s permission for delta calculation internal model in the situation when the position in option is being closed back-to-back (additional adjustments of closing position due to daily change of the position being closed) on a weekly basis?
- Background on the question
According to Article 329(1) CRR “For OTC-options, or where delta is not available from the exchange concerned, the institution may calculate delta itself using an appropriate model, subject to permission by the competent authorities.“ Additionally Q&A 3314 clarifies that for positions closed back-to-back there is no need for competent authority’s approval for delta calculation internal model – the position is always 0.
The question is related to the case when an institution has portfolio of structured deposits with embedded options. Position is closed back-to-back for given buckets, but this product is offered to many natural persons - the problem arises when even one structured deposit from the bucket is withdrawn. Then, in fact the position is open and in consequence generates risk – it’s very small, but it exists. The institution closes position on a weekly basis and additionally at the end of the month as the cost of closing transactions with very low nominal is too high to do it on a daily basis.
Can this situation be treated as fulfilling requirements for back-to-back closed option position and as a consequence there is no need to receive competent authority’s permission to use internal model for delta calculation?
- Submission date
- Final publishing date
- Final answer
Q&A 3314 clarifies that for positions that are back-to-backed there is no need for competent authority’s approval for delta calculation internal model.
That is limited to cases where a position is perfectly back-to-back at all points in time. Where that is not the case, the institution is required to have the permission referred to in Article 329(1) CRR.
- Answer prepared by
Answer prepared by the EBA.