On 22 May 2013 the EBA launched two consultation papers on draft RTS to define (i) the term market for the purpose of calculating the ‘general’ component of market risk for equities under the standardised rules; and (ii) a range of methods to reflect in the own funds requirements non-delta risks for options and warrants.

  1. Draft RTS on the definition of market The term market has to be defined for the purpose of calculating the general market risk component for equities under the standardised rules, thus assuming that two equities in the same market are subject to the same general risk. In these draft RTS, the EBA is consulting on two definitions of market based on the criteria of nationality and currency.
  2. Draft RTS on option risks under the standardised approach for market risk These draft RTS aim at defining a range of methods to reflect, in the own funds requirements, all the risks, other than delta risk, in a manner proportionate to the scale and complexity of institutions’ activities in options and warrants.

The EBA’s proposal is broadly in line with the Basel II framework which provides for the three following methods:

  • a simplified approach to be applied only by institutions that buy options;
  • the delta-plus method that can be also applied by institutions that sell options;
  • the scenario approach that is more sophisticated and addressed to institutions dealing with a considerable trading activity in options;

Although the EBA has agreed to refer to the treatment of option risk outlined in the Basel framework, these RTS deviate from Basel due to regulatory specificities included in the CRR or where the EBA has considered that the treatment in Basel was not specific enough.

The consultation of both draft RTS runs until 31 August 2013.