Book traversal links for D. Supervisory Delta Adjustment
D. Supervisory Delta Adjustment
C 52/2017 STA Effective from 1/4/2021Question D1: What is the Supervisory Delta for FX Swaps and FX Forwards?
These are linear contracts, so the Supervisory Delta is either +1 (for long positions) or -1 (for short positions).
Question D2: The Standards states that the Supervisory Delta for a short position (one that is not an option or CDO) should be -1. However, if netting is not permitted, should the Supervisory Delta be set to +1 for all the short (as well as the long) positions?
In principle, the Supervisory Delta should be -1 if the position is short. However, in the case of a single-trade netting set, there is no possibility of offsetting, so the sign of the Supervisory Delta does not affect the calculation.
Question D3: In the case of an option strategy such as a straddle or strangle involving more than one type of option (e.g. a long call and a long put), which Supervisory Delta should be used?
In the case of positions that involve combinations of options, the position should be decomposed into its simpler option components, appropriate Supervisory Deltas determined for each component, and the weighted average Supervisory Delta applied to the position as a whole.
Question D4: In the case of an option strategy involving multiple options with only one leg having a possibility of exercise, can we consider this structure as a "short" position if we are net receiver of the premium and a "long" position if we are net payer of premium?
As noted above, in the case of positions that involve combinations of options, the position should be decomposed into its simpler option components, appropriate Supervisory Deltas determined for each component, and the weighted average Supervisory Delta applied to the position as a whole. In this case, some of the Supervisory Deltas would be positive, and some would be negative. The sign of the overall Supervisory Delta would depend on the relative size of the positions, and the associated magnitude (in absolute value) of the deltas.
Question D5: Should the same set of Supervisory Deltas be used in the case of path dependent options such as barrier options, or other complex options? For such products, the simple option delta formula may not be appropriate.
Banks should apply the standardised formulas for the CCR calculations, including the Supervisory Delta adjustment for all options. Note that use of a single, simplified formula for the Supervisory Delta for options is a feature of the Standardised Approach. Like all standardised approaches, the SA-CCR involves numerous trade-offs between precision and simplicity. Many other aspects of the Standardised Approach use approximations, such as the assumption that a single correlation should be used for all commodity derivatives, or the use of a single volatility for all FX options. Banks should certainly use more analytically appropriate deltas for internal purposes such as valuation and risk management.