Question ID
2023_6904
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Market risk
Article
329
Paragraph
3
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
5/1
Type of submitter
Other
Subject matter
Determination of own funds requirements for gamma risk according to the ‘Delta plus approach’, for option positions in Exchange-traded funds (ETFs), when the reporting institutions apply the look-through method for the funds
Question

How should the gamma impact be calculated for options positions on Exchange-traded funds (ETFs), when the look-through approach is applied to those funds and the components of the fund are from across several sectors?

Background on the question

In the case of Options on Exchange Traded Funds where the look-through method is applied, as the underlying components of an ETF may be from across several sectors, it is not clear how Gamma impact should be calculated, considering that the formula depends on the underlying of the option.
The EBA FINAL draft Regulatory Technical Standards "On non-delta risk of options in the standardized market risk approach under Articles 329(3), 352(6) and 358(4) of Regulation (EU) No 575/2013 (Capital Requirements Regulation -CRR)" references 4 types of underlying (Interest Rates, Equities, Foreign Exchange and Gold, Commodities) but does not reference ETFs.

In order to calculate the gamma impact of each individual option, according to the Regulatory Technical Standards, the formula used is  ½* Gamma* VU2 - where the calculation of VU depends on the underlying asset of the option – and the regulation says that, in case of interest rates, VU is equal to the assumed change in yield indicated in column 5 of Table 2 of Article 339 of Regulation (EU) No 575/2013;  for equity options VU is the market value of the underlying multiplied by the weighting indicate in Article 343 of Regulation (EU) No 575/2013;  for commodity options is equal to the market value of the underlying, multiplied by the weighting indicated in point (a) of Article 360.1 of Regulation (EU) No 575/2013.

 Since the underlying investments of the fund that is being looked through can be in interest rates, equities, foreign exchange and commodities at the same time, the legislation says to treat the fund as positions in the underlying instruments of the fund, however, it is not clear how does this translate to the situation when the fund is the underlying of the option and the gamma impacts of options referring to the same underlying types have to be summed up, since a single option has multiple underlying types.

Submission date
Final publishing date
Final answer

In accordance with Article 350(1) of Regulation (EU) No 575/2013, where an institution applies the look-through to a CIU, the institution needs to assume that it holds directly the positions held by the CIU itself.

Accordingly, when computing the own funds requirements for non-delta risk of options in the standardised approach in accordance with Commission Delegated Regulation (EU) No 528/2014, the institution needs to apply the method specified therein assuming that it directly holds the positions held by the CIU itself.

Let us assume that the CIU is made by two underlyings (A and B) belonging to two different risk classes, and let us assume that the institution needs to compute gamma risk for an option on that CIU by using the the delta plus approach referred to in Article 5 of Commission Delegated Regulation (EU) No 528/2014.

The institution needs to compute two gamma impacts: one reflecting the gamma impact of the option in relation to underlying A, and one reflecting the gamma impact of the option in relation to underlying B. The gamma impact is to be determined in accordance with the formulae specified in Annex I of Commission Delegated Regulation (EU) No 528/2014, and reflecting the risk class of the underlying for which the gamma impact is calculated. 

In accordance with Article 5(1)(b) of Commission Delegated Regulation (EU) No 528/2014, the gamma impact referring to the underlying A, shall then be summed up with the gamma impacts of all individual options or warrants which refer to the same distinct underlying type of underlying A. What constitutes a distinct underlying type is set out in Article 5(1)(3) of that Commission Delegated Regulation (EU) No 528/2014.

Analogously, the gamma impact referring to the underlying B, shall then be summed up with the gamma impacts of all individual options or warrants which refer to the same distinct underlying type of underlying B. 

Article 5(1)(c) of Commission Delegated Regulation (EU) No 528/2014 is then to be applied. 

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

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