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

+ **1.** Institutions shall calculate their own funds requirements for market risk in relation to the non-delta risk of options or warrants as required by Article 329(3), Article 352(6) and Article 358(4) of Regulation (EU) No 575/2013, according to one of the following approaches:(a) the simplified a…
− 1. Institutions shall calculate their own funds requirements for market risk in relation to the non-delta risk of options or warrants as required by Article 329(3), Article 352(6) and Article 358(4) of Regulation (EU) No 575/2013, according to one of the following approaches:
+ **2.** When calculating own funds requirements on a consolidated basis institutions may combine the use of different approaches.On an individual basis, institutions may only combine the scenario approach and the delta plus approach subject to the conditions established in Articles 4 to 9.
− (a) the simplified approach as set out in Articles 2 and 3 of this Regulation;
+ **3.** For the purposes of the calculation referred to in paragraph 1, institutions shall take the following steps:(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 c…
− (b) the delta plus approach as set out in Articles 4, 5 and 6 of this Regulation;
+ ### Article 2
− (c) the scenario approach as set out in Articles 7, 8 and 9 of this Regulation.
− 
− 2. When calculating own funds requirements on a consolidated basis institutions may combine the use of different approaches.On an individual basis, institutions may only combine the scenario approach and the delta plus approach subject to the conditions established in Articles 4 to 9.
+ Only institutions that exclusively purchase options and warrants may use the simplified approach.
− 3. For the purposes of the calculation referred to in paragraph 1, institutions shall take the following steps:
− 
− (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’);
− 
− (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.
− 
− ### Article 2 — Conditions for application of the simplified approach
− Institutions that only purchase options and warrants may only use 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:(a) the gross amount, as described in paragraphs 2 to 5;(b…
− 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:
+ **2.** For options or warrants which fall under one of the following two categories, the gross amount referred to in paragraph 1 shall be determined according to paragraphs 3 to 4:(a) where the buyer has the unconditional right to buy the underlying asset at a predetermined price at the expiration d…
− (a) the gross amount, as described in paragraphs 2 to 5;
+ **3.** The gross amount referred to in paragraph 1 shall be calculated as the maximum between zero and the market value of the underlying security multiplied by the sum of specific and general market risk own funds requirements for the underlying minus the amount of the profit, if any, resulting fro…
− (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:
+ **4.** Where the option or warrant incorporates a right to buy the underlying asset (‘long call’) or a right to sell the underlying asset (‘long put’), the gross amount referred to in paragraph 1 shall be the lesser of the following two amounts:(a) the market value of the underlying security multipl…
− (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;
− 
− (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.
+ **5.** For all types of options or warrants which do not have the characteristics referred to in paragraph 2, the gross amount referred to in paragraph 1 shall be the market value of the option or warrant.
− 2. For options or warrants which fall under one of the following two categories, the gross amount referred to in paragraph 1 shall be determined according to paragraphs 3 to 4:
− 
− (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’).
− 3. The gross amount referred to in paragraph 1 shall be calculated as the maximum between zero and the market value of the underlying security multiplied by the sum of specific and general market risk own funds requirements for the underlying minus the amount of the profit, if any, resulting from th…
− 
− (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’).
− 
− 4. Where the option or warrant incorporates a right to buy the underlying asset (‘long call’) or a right to sell the underlying asset (‘long put’), the gross amount referred to in paragraph 1 shall be the lesser of the following two amounts:
− 
− (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’).
− 
− 5. For all types of options or warrants which do not have the characteristics referred to in paragraph 2, the gross amount referred to in paragraph 1 shall be the market value of the option or warrant.
− 
+ **1.** Where institutions opt to apply the Delta-plus approach, for options and warrants whose gamma is a continuous function in the price of the underlying and whose vega is a continuous function in the implied volatility (‘continuous options and warrants’), the own funds requirements for non-delta…
− 1. Where institutions opt to apply the Delta-plus approach, for options and warrants whose gamma is a continuous function in the price of the underlying and whose vega is a continuous function in the implied volatility (‘continuous options and warrants’), the own funds requirements for non-delta ris…
+ **2.** Implied volatility shall be taken to be the value of the volatility in the option or warrant pricing formula for which, given a certain pricing model and given the level of all other observable pricing parameters, the theoretical price of the option or warrant is equal to its market value, wh…
− (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 …
+ **3.** The own funds requirements for non-delta risks related to non-continuous options or warrants shall be determined as follows:(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…
− (b) the requirement relating to the first partial derivative of the value of an option or warrant, with reference to the implied volatility.
+ **4.** The value for gamma and vega used in the calculation of own funds requirements shall be calculated using an appropriate pricing model as referred to in Article 329(1), Article 352(1) and Article 358(3) of Regulation (EU) No 575/2013 Where either gamma or vega cannot be calculated in accordanc…
− 2. Implied volatility shall be taken to be the value of the volatility in the option or warrant pricing formula for which, given a certain pricing model and given the level of all other observable pricing parameters, the theoretical price of the option or warrant is equal to its market value, where …
− 
− 3. The own funds requirements for non-delta risks related to non-continuous options or warrants shall be determined as follows:
− 
− (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;
− (ii) the risk weighted delta equivalent amount, understood in the manner described in Article 3(1)(b).
− 
− 4. The value for gamma and vega used in the calculation of own funds requirements shall be calculated using an appropriate pricing model as referred to in Article 329(1), Article 352(1) and Article 358(3) of Regulation (EU) No 575/2013 Where either gamma or vega cannot be calculated in accordance wi…
− 
+ **1.** For the purposes of Article 4(1)(a), the own funds requirements for gamma risk shall be calculated by a process consisting of the following sequence of steps:(a) for each individual option or warrant a gamma impact shall be calculated;(b) the gamma impacts of individual options or warrants wh…
− 1. For the purposes of Article 4(1)(a), the own funds requirements for gamma risk shall be calculated by a process consisting of the following sequence of steps:
+ **2.** For the purpose of the step in point (a) of paragraph 1, gamma impacts shall be calculated in accordance with the formula described in Annex I.
− (a) for each individual option or warrant a gamma impact shall be calculated;
+ **3.** For the purposes of the step in point (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;(b) for equities and stock indices: each market as defined in …
− (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.
− 
− 2. For the purpose of the step in point (a) of paragraph 1, gamma impacts shall be calculated in accordance with the formula described in Annex I.
− 
− 3. For the purposes of the step in point (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;
− 
− (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;
− 
− (d) for commodities: commodities considered identical as defined in Article 357(4) of Regulation (EU) No 575/2013.
− 
+ **1.** For each distinct underlying type, as referred to in Article 5(3), an institution shall define a scenario matrix which contains a set of scenarios.
− 1. For each distinct underlying type, as referred to in Article 5(3), an institution shall define a scenario matrix which contains a set of scenarios.
+ **2.** The first dimension of the scenario matrix shall be the price changes in the underlying above and below its current value. That range of changes shall consist of the following:(a) for interest rate options or warrants, plus/minus the assumed change in interest rates set out in column 5 of Tab…
− 2. The first dimension of the scenario matrix shall be the price changes in the underlying above and below its current value. That range of changes shall consist of the following:
+ **3.** The price change scenarios in the underlying shall be defined by a grid of at least seven points which includes the current observation and divides the range indicated in paragraph 2 in equally spaced intervals.
− (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;
+ **4.** The second dimension of the scenario matrix shall be defined by volatility changes. The range of changes in volatilities shall be between plus/minus 25 % of the implied volatility, where implied volatility shall be understood as referred to in Article 4(2). That range shall be divided into a …
− (b) for options or warrants on equity or equity indices, plus/minus the weighting provided in Article 343 of Regulation (EU) No 575/2013;
+ **5.** The scenario matrix is determined by all possible combinations of points, as referred to in paragraphs 3 and 4. Each combination shall constitute a single scenario.
− (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.
− 
− 3. The price change scenarios in the underlying shall be defined by a grid of at least seven points which includes the current observation and divides the range indicated in paragraph 2 in equally spaced intervals.
− 
− 4. The second dimension of the scenario matrix shall be defined by volatility changes. The range of changes in volatilities shall be between plus/minus 25 % of the implied volatility, where implied volatility shall be understood as referred to in Article 4(2). That range shall be divided into a grid…
− 
− 5. The scenario matrix is determined by all possible combinations of points, as referred to in paragraphs 3 and 4. Each combination shall constitute a single scenario.
− 
− 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)
− 
− Own funds requirement = – min (0,PC-DE)
− 
− where
− 
− (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;** ◄ …
− 
− (b) DE is the ‘delta effect’ calculated as follows:
− 
− DE = ADEV × PPCU
− 
− where
− 
− (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);
− 
− (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.** ◄ **
− 
− (1) OJ L 176, 27.6.2013, p. 1.
− 
− (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…
− 
− (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).