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Status: Please note you should read all Brexit changes to the FCA Handbook and BTS alongside the main FCA transitional directions. Where these directions apply the 'standstill', firms have the choice between complying with the pre-IP completion day rules, or the post-IP completion day rules. To see a full list of Handbook modules affected, please see Annex B to the main FCA transitional directions.

You are viewing the version of the document as on 2021-01-01.

Article 3 Determination of own funds requirements according to the simplified approach

  1. (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:

    1. (a)

      the gross amount, as described in paragraphs 2 to 5;

    2. (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:

      1. (i)

        for specific and general equity risk or interest rate risk, according to Part Three, Title IV, Chapter 2 of Regulation (EU) No 575/2013;

      2. (ii)

        for commodity risk, according to Part Three, Title IV, Chapter 4 of Regulation (EU) No 575/2013; and

      3. (iii)

        for foreign exchange risk, according to Part Three, Title IV, Chapter 3 of Regulation (EU) No 575/2013.

  2. (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:

    1. (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");

    2. (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. (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 the instant execution of the option ("in the money"), where one of the following conditions is met:

    1. (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");

    2. (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. (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:

    1. (a)

      the market value of the underlying security multiplied by the sum of specific and general market risk requirements for the underlying asset;

    2. (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. (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.