What changed, Commission Delegated Regulation (EU) No 528/2014 of 12 March 2014 supplementing Regulation (EU) No 575/2013

+ ### Article 1 — Determination of the Own funds requirements for the non-delta risk of options and warrants
− ### art_1
− Article 1
− 
+ (a) the simplified approach as set out in Articles 2 and 3 of this Regulation;
− | (a) | the simplified approach as set out in Articles 2 and 3 of this Regulation; |
− | --- | --- |
+ (b) the delta plus approach as set out in Articles 4, 5 and 6 of this Regulation;
− | (b) | the delta plus approach as set out in Articles 4, 5 and 6 of this Regulation; |
− | --- | --- |
+ (c) the scenario approach as set out in Articles 7, 8 and 9 of this Regulation.
− | (c) | the scenario approach as set out in Articles 7, 8 and 9 of this Regulation. |
− | --- | --- |
+ (a) break down baskets of options or warrants into their fundamental components;
− | (a) | break down baskets of options or warrants into their fundamental components; |
− | --- | --- |
+ (b) break down caps and floors or other options which relate to interest rates at various dates, into a chain of independent options referring to different time periods (‘caplet’ and ‘floorlets’);
− | (b) | break down caps and floors or other options which relate to interest rates at various dates, into a chain of independent options referring to different time periods (‘caplet’ and ‘floorlets’); |
− | --- | --- |
+ (c) treat options or warrants on fixed-to-floating interest rates swaps into options or warrants on the fixed interest leg of the swap;
− | (c) | treat options or warrants on fixed-to-floating interest rates swaps into options or warrants on the fixed interest leg of the swap; |
− | --- | --- |
+ (d) treat options or warrants that relate to more than one underlying among those described in Article 5(3), as a basket of options or warrants where each option has a single distinct underlying.
− | (d) | treat options or warrants that relate to more than one underlying among those described in Article 5(3), as a basket of options or warrants where each option has a single distinct underlying. |
− | --- | --- |
+ ### Article 2 — Conditions for application of the simplified approach
− ### art_2
+ Institutions that only purchase options and warrants may only use the simplified approach
− Article 2
+ ### Article 3 — Determination of own funds requirements according to the simplified approach
+ 
+ 1. Institutions applying the simplified approach shall calculate the own funds requirements relative to non-delta risks of call and put options or warrants as the higher amount between zero and the difference between the following values:
− Institutions that only purchase options and warrants may only use the simplified approach
+ (a) the gross amount, as described in paragraphs 2 to 5;
− ### art_3
+ (b) the risk weighted delta equivalent amount, which shall be calculated as the market value of the underlying instrument, multiplied by the delta and then multiplied by one of the following relevant weightings:
− Article 3
+ (i) for specific and general equity risk or interest rate risk, ►C1 according to Part Three,** ◄ ** Title IV, Chapter 2 of Regulation (EU) No 575/2013;
− 1. Institutions applying the simplified approach shall calculate the own funds requirements relative to non-delta risks of call and put options or warrants as the higher amount between zero and the difference between the following values:
+ (ii) for commodity risk, according to Part Three, Title IV, Chapter 4 of Regulation (EU) No 575/2013; and
− | (a) | the gross amount, as described in paragraphs 2 to 5; |
− | --- | --- |
+ (iii) for foreign exchange risk, according to Part Three, Title IV, Chapter 3 of Regulation (EU) No 575/2013.
− | (b) | the risk weighted delta equivalent amount, which shall be calculated as the market value of the underlying instrument, multiplied by the delta and then multiplied by one of the following relevant weightings:(i)for specific and general equity risk or interest rate risk, according to of Part T…
− | --- | --- |
− | (i) | for specific and general equity risk or interest rate risk, according to of Part Three, Title IV, Chapter 2 of Regulation (EU) No 575/2013; |
− | (ii) | for commodity risk, according to Part Three, Title IV, Chapter 4 of Regulation (EU) No 575/2013; and |
− | (iii) | for foreign exchange risk, according to Part Three, Title IV, Chapter 3 of Regulation (EU) No 575/2013. |
+ (a) where the buyer has the unconditional right to buy the underlying asset at a predetermined price at the expiration date or at any time before the expiration date, and where the seller has the obligation to fulfil the buyer's demand (‘simple call options or warrants’);
− | (a) | where the buyer has the unconditional right to buy the underlying asset at a predetermined price at the expiration date or at any time before the expiration date, and where the seller has the obligation to fulfil the buyer's demand (‘simple call options or warrants’); |
− | --- | --- |
+ (b) where the buyer has the unconditional right to sell the underlying asset in the same manner as described in point (a) (‘simple put options or warrants’).
− | (b) | where the buyer has the unconditional right to sell the underlying asset in the same manner as described in point (a) (‘simple put options or warrants’). |
− | --- | --- |
+ (a) the option or warrant incorporates a right to sell the underlying asset (‘long put’) and is combined with holdings in the underlying asset (‘long position in the underlying instrument’);
− | (a) | the option or warrant incorporates a right to sell the underlying asset (‘long put’) and is combined with holdings in the underlying asset (‘long position in the underlying instrument’); |
− | --- | --- |
+ (b) the option or warrant incorporates a right to buy the underlying asset (‘long call’) and is combined with the promise to sell holdings in the underlying instrument (‘short position in the underlying asset’).
− | (b) | the option or warrant incorporates a right to buy the underlying asset (‘long call’) and is combined with the promise to sell holdings in the underlying instrument (‘short position in the underlying asset’). |
− | --- | --- |
+ (a) the market value of the underlying security multiplied by the sum of specific and general market risk requirements for the underlying asset;
− | (a) | the market value of the underlying security multiplied by the sum of specific and general market risk requirements for the underlying asset; |
− | --- | --- |
+ (b) the value of the position determined by the mark-to-market method or the mark-to-model method as provided in points (b) and (c) of Article 104(2) of Regulation (EU) No 575/2013 (‘market value of the option or warrant’).
− | (b) | the value of the position determined by the mark-to-market method or the mark-to-model method as provided in points (b) and (c) of Article 104(2) of Regulation (EU) No 575/2013 (‘market value of the option or warrant’). |
− | --- | --- |
+ ### Article 4 — Overview of determination of own funds requirements according to the Delta-plus approach
− ### art_4
− Article 4
− 
+ (a) the own funds requirements relating to the partial derivative of delta with reference to the price of the underlying which, for bond options or warrants is the partial derivative of delta with reference to the yield-to-maturity of the underlying bond, and for swaptions is the partial derivative …
− | (a) | the own funds requirements relating to the partial derivative of delta with reference to the price of the underlying which, for bond options or warrants is the partial derivative of delta with reference to the yield-to-maturity of the underlying bond, and for swaptions is the partial derivat…
− | --- | --- |
+ (b) the requirement relating to the first partial derivative of the value of an option or warrant, with reference to the implied volatility.
− | (b) | the requirement relating to the first partial derivative of the value of an option or warrant, with reference to the implied volatility. |
− | --- | --- |
+ 
+ (a) where the options or warrants have been bought, as the maximum amount between zero and the difference between the following values:
+ (i) the market value of the option or warrant, understood in the manner described in Article 3(4);
+ 
+ (ii) the risk weighted delta equivalent amount, understood in the manner described in Article 3(1)(b);
+ 
+ (b) where the options or warrants have been sold, as the maximum between zero and the difference between the following amounts:
+ 
+ (i) the relevant market value of the underlying asset, which shall be taken to be either the maximum possible payment at expiry date, if it is contractually fixed, or the market value of the underlying asset or the effective notional value if no maximum possible payment is contractually fixed;
− | (a) | where the options or warrants have been bought, as the maximum amount between zero and the difference between the following values:(i)the market value of the option or warrant, understood in the manner described in Article 3(4);(ii)the risk weighted delta equivalent amount, understood in the…
− | --- | --- |
− | (i) | the market value of the option or warrant, understood in the manner described in Article 3(4); |
− | (ii) | the risk weighted delta equivalent amount, understood in the manner described in Article 3(1)(b); |
+ (ii) the risk weighted delta equivalent amount, understood in the manner described in Article 3(1)(b).
− | (b) | where the options or warrants have been sold, as the maximum between zero and the difference between the following amounts:(i)the relevant market value of the underlying asset, which shall be taken to be either the maximum possible payment at expiry date, if it is contractually fixed, or the…
− | --- | --- |
− | (i) | the relevant market value of the underlying asset, which shall be taken to be either the maximum possible payment at expiry date, if it is contractually fixed, or the market value of the underlying asset or the effective notional value if no maximum possible payment is contractually fixed; |
− | (ii) | the risk weighted delta equivalent amount, understood in the manner described in Article 3(1)(b). |
+ ### Article 5 — Determination of the Own funds requirements for gamma risk according to the Delta-plus approach
− ### art_5
− Article 5
− 
+ (a) for each individual option or warrant a gamma impact shall be calculated;
− | (a) | for each individual option or warrant a gamma impact shall be calculated; |
− | --- | --- |
+ (b) the gamma impacts of individual options or warrants which refer to the same distinct underlying type shall be summed up;
− | (b) | the gamma impacts of individual options or warrants which refer to the same distinct underlying type shall be summed up; |
− | --- | --- |
+ (c) the absolute value of the sum of all of the negative values resulting from step (b) shall provide the own funds requirements for gamma risk. Positive values resulting from step (b) shall be disregarded.
− | (c) | the absolute value of the sum of all of the negative values resulting from step (b) shall provide the own funds requirements for gamma risk. Positive values resulting from step (b) shall be disregarded. |
− | --- | --- |
+ (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;
− | (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; |
− | --- | --- |
+ (b) for equities and stock indices: each market as defined in the rules to be developed pursuant to Article 341 (3) of Regulation (EU) No 575/2013;
− | (b) | for equities and stock indices: each market as defined in the rules to be developed pursuant to Article 341 (3) of Regulation (EU) No 575/2013; |
− | --- | --- |
+ (c) for foreign currencies and gold: each currency pair and gold;
− | (c) | for foreign currencies and gold: each currency pair and gold; |
− | --- | --- |
+ (d) for commodities: commodities considered identical as defined in Article 357(4) of Regulation (EU) No 575/2013.
− | (d) | for commodities: commodities considered identical as defined in Article 357(4) of Regulation (EU) No 575/2013. |
− | --- | --- |
− 
− ### art_6
+ ### Article 6 — Determination of the Own funds requirements for vega risk according to the Delta-plus approach
− Article 6
+ (a) for each individual option the value of vega shall be determined;
− | (a) | for each individual option the value of vega shall be determined; |
− | --- | --- |
+ (b) for each individual option an assumed plus/minus 25 % shift in the implied volatility shall be calculated, where implied volatility shall be understood in the manner described in Article 4(2);
− | (b) | for each individual option an assumed plus/minus 25 % shift in the implied volatility shall be calculated, where implied volatility shall be understood in the manner described in Article 4(2); |
− | --- | --- |
+ (c) for each individual option the vega value resulting from the step in point (a) shall be multiplied by the assumed shift in implied volatility resulting from the step in point (b);
− | (c) | for each individual option the vega value resulting from the step in point (a) shall be multiplied by the assumed shift in implied volatility resulting from the step in point (b); |
− | --- | --- |
+ (d) for each distinct underlying type, understood in the manner described in Article 5(3), the values resulting from the step in point (c) shall be summed up;
− | (d) | for each distinct underlying type, understood in the manner described in Article 5(3), the values resulting from the step in point (c) shall be summed up; |
− | --- | --- |
+ (e) the sum of absolute values resulting from the step in point (d) shall provide the total own funds requirement for vega risk.
− | (e) | the sum of absolute values resulting from the step in point (d) shall provide the total own funds requirement for vega risk. |
− | --- | --- |
− 
− ### art_7
+ ### Article 7 — Conditions of application of the scenario approach
− Article 7
+ (a) they have established a risk control unit that monitors the risk of the options portfolio of the institutions and reports the results to the management;
− | (a) | they have established a risk control unit that monitors the risk of the options portfolio of the institutions and reports the results to the management; |
− | --- | --- |
+ (b) they have notified competent authorities of a predefined scope of exposures to be covered by this approach consistently over time;
− | (b) | they have notified competent authorities of a predefined scope of exposures to be covered by this approach consistently over time; |
− | --- | --- |
+ (c) they integrate the results of the scenario approach in the internal reporting to the management of the institution.
− | (c) | they integrate the results of the scenario approach in the internal reporting to the management of the institution. |
− | --- | --- |
+ ►C1 For the purposes of point (b),** ◄ ** institutions shall define the precise positions that are subject to the scenario approach, including the type of product or identified desk and portfolio, the distinctive risk management approach that applies to such positions, the dedicated IT application t…
− For the purposes of point (c), institutions shall define the precise positions that are subject to the scenario approach, including the type of product or identified desk and portfolio, the distinctive risk management approach that applies to such positions, the dedicated IT application that applies…
− 
− ### art_8
+ ### Article 8 — Definition of the scenario matrix according to the scenario approach
− Article 8
+ (a) for interest rate options or warrants, plus/minus the assumed change in interest rates set out in column 5 of Table 2 of Article 339 of Regulation (EU) No 575/2013;
− | (a) | for interest rate options or warrants, plus/minus the assumed change in interest rates set out in column 5 of Table 2 of Article 339 of Regulation (EU) No 575/2013; |
− | --- | --- |
+ (b) for options or warrants on equity or equity indices, plus/minus the weighting provided in Article 343 of Regulation (EU) No 575/2013;
− | (b) | for options or warrants on equity or equity indices, plus/minus the weighting provided in Article 343 of Regulation (EU) No 575/2013; |
− | --- | --- |
+ (c) for foreign exchange and gold options or warrants, plus/minus the weighting indicated in Article 351 of Regulation (EU) No 575/2013 or, where appropriate, plus/minus the weighting indicated in Article 354 of Regulation (EU) No 575/2013;
− | (c) | for foreign exchange and gold options or warrants, plus/minus the weighting indicated in Article 351 of Regulation (EU) No 575/2013 or, where appropriate, plus/minus the weighting indicated in Article 354 of Regulation (EU) No 575/2013; |
− | --- | --- |
+ (d) for commodity options (warrants), plus/minus the weighting indicated in point (a) of Article 360(1) of Regulation (EU) No 575/2013.
− | (d) | for commodity options (warrants), plus/minus the weighting indicated in point (a) of Article 360(1) of Regulation (EU) No 575/2013. |
− | --- | --- |
+ 
+ ### Article 9 — Determination of the own funds requirements according to the scenario approach
+ 
+ According to the scenario approach, the own funds requirement on non-delta risk of options or warrants shall be calculated through a process consisting of the following sequence of steps:
+ 
+ (a) for each individual option or warrant, all the scenarios referred to in Article 8 shall be applied to calculate simulated net loss or gain corresponding to each scenario. That simulation shall be done using full revaluation methods, by simulating the price changes by the use of pricing models an…
+ 
+ (b) for each distinct underlying type, as referred to in Article 5(3), the values obtained as a result of the calculation in point (a) and referring to the individual scenarios, shall be aggregated;
+ 
+ (c) for each distinct underlying type as referred to in Article 5(3), the ‘relevant scenario’ shall be calculated as the scenario for which the values determined in step (b) result in the largest loss, or the lowest gain if there are no losses;
+ 
+ (d) for each distinct underlying type, as referred to in Article 5(3), the own funds requirements shall be calculated in accordance with the formula described in Annex II;
+ 
+ (e) the total own funds requirement in the case of non-delta risk of options or warrants shall be the sum of the own fund requirements obtained from the calculation referred to in step (d) for all distinct underlying types as referred to in Article 5(3).
+ ### Article 10 — Entry into force
+ 
+ This Regulation shall enter into force on the twentieth day following that of its publication in the *Official Journal of the European Union*.
+ 
+ This Regulation shall be binding in its entirety and directly applicable in all Member States.
+ 
+ ### ANNEX I
+ 
+ 
+ 
+ ### Formula to be used for the purposes of Article 5(2)
+ 
+ Formula to be used for the purposes of Article 5(2):
+ 
+ Gamma impact = × Gamma × VU2
+ 
+ where VU:
+ 
+ (a) for options or warrants on interest rates or bonds is equal to the assumed change in yield indicated in column 5 of Table 2 of Article 339 of Regulation (EU) No 575/2013;
+ 
+ (b) for equity options or warrants and equity indices the market value of the underlying multiplied by the weighting indicated in Article 343 of Regulation (EU) No 575/2013;
+ 
+ (c) for foreign exchange and gold options or warrants is equal to the market value of the underlying, calculated in the reporting currency and multiplied by the weighting indicated in Article 351 of Regulation (EU) No 575/2013 or — if appropriate — the weighting indicated in Article 354 of Regulatio…
+ 
+ (d) for commodity options or warrants 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.
+ 
+ ### ANNEX II
+ 
+ 
+ 
+ ### Formula to be used for the purposes of Article 9(d)
+ 
+ Formula to be used for the purposes of Article 9(d)
− ### art_9
+ Own funds requirement = – min (0,PC-DE)
+ 
+ where
− Article 9
+ (a) PC (‘Price Change’) is the sum of price changes of the options with the same distinct underlying type understood in the manner described in Article 5(3) (negative sign for losses and positive sign for gains) and corresponding to the ►C1 relevant scenario determined in step (c) of Article 9;** ◄ …
− According to the scenario approach, the own funds requirement on non-delta risk of options or warrants shall be calculated through a process consisting of the following sequence of steps:
+ (b) DE is the ‘delta effect’ calculated as follows:
− | (a) | for each individual option or warrant, all the scenarios referred to in Article 8 shall be applied to calculate simulated net loss or gain corresponding to each scenario. That simulation shall be done using full revaluation methods, by simulating the price changes by the use of pricing model…
− | --- | --- |
+ DE = ADEV × PPCU
− | (b) | for each distinct underlying type, as referred to in Article 5(3), the values obtained as a result of the calculation in point (a) and referring to the individual scenarios, shall be aggregated; |
− | --- | --- |
+ where
− | (c) | for each distinct underlying type as referred to in Article 5(3), the ‘relevant scenario’ shall be calculated as the scenario for which the values determined in step (b) result in the largest loss, or the lowest gain if there are no losses; |
− | --- | --- |
+ (i) ADEV (‘aggregated delta equivalent value’) is the sum of negative or positive deltas, multiplied by the market value of the underlying of the contract, of options that have the same distinct underlying type understood in the manner described in Article 5(3);
− | (d) | for each distinct underlying type, as referred to in Article 5(3), the own funds requirements shall be calculated in accordance with the formula described in Annex II; |
− | --- | --- |
+ (ii) PPCU (‘percentage price change of the underlying’) is the percentage price change of the underlying understood in the manner described in Article 5(3), corresponding to the ►C1 relevant scenario determined in step (c) of Article 9.** ◄ **
− | (e) | the total own funds requirement in the case of non-delta risk of options or warrants shall be the sum of the own fund requirements obtained from the calculation referred to in step (d) for all distinct underlying types as referred to in Article 5(3). |
− | --- | --- |
+ (1) OJ L 176, 27.6.2013, p. 1.
− ### art_10
+ (2) Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 1…
− Article 10
+ (3) Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ L 331, 15.12.2010, p. 12).
− This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.