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kermittfrog
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Posts: 23
Joined: September 9th, 2010, 10:25 am
Location: Frankfurt

(Sensible) Definition of a derivative conctract's notional amount

July 21st, 2016, 4:44 pm

Dear Wilmotters,

these days we are increasingly involved with implementing the regulatory requirements for market risks in the trading books (FRTB).

One of the inputs required for the calcuation is the NOTIONAL of a derivative position, which will be simply multiplied by 0.1% (or 1%) for mildly/wildly exotic products; "exotic" being defined by the Basel committee...

We are still wondering, what would be the notional for certain derivatives, say exotic equity options. I scanned the forum for quite some time, always retrieving the usual definition " # of Contracts times underlying value", or "#C x Underlying x Delta", etc. I am wondering, whether this definition is sensible when it comes to FRTB considerations.

Did any of you run across this issue; probably from a market risk / FRTB perspective?
 
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freddiemac
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Joined: July 17th, 2006, 8:29 am

Re: (Sensible) Definition of a derivative conctract's notional amount

July 25th, 2016, 1:34 pm

Not too familiar but there are FAQs on the SA-CCR that deals with similar issues (see Q11). I am sure that similar FAQs exist for FRTB or are in the process of being produced by BCBS. If you have unanswered questions that needs clarification you should contact your local supervisor or the  BCBS. HTH

http://www.bis.org/bcbs/publ/d333.pdf 
 
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Samsaveel
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Joined: April 20th, 2008, 5:47 am

Re: (Sensible) Definition of a derivative conctract's notional amount

July 28th, 2016, 6:03 am

for the Residual risk add-on you either take the gross notional amount or,  if the gross is nonexistent,  take the maximum potential loss, for the latter you have to get the Expected Effective Positive Exposure which is defined in SA-CCR as : 1.4 *( MtM +PFE(vol of underlying risk driving the contract value, residual time to maturity of the contract)). Clarification is required from BCBS whether collateral diversification is taken into account at the trade level.
 
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kermittfrog
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Posts: 23
Joined: September 9th, 2010, 10:25 am
Location: Frankfurt

Re: (Sensible) Definition of a derivative conctract's notional amount

July 29th, 2016, 12:35 pm

To both of you, thank you very much for your replies.

To Samsaveel: In the final iteration of the FRTB (January 2016), the maximum potential loss clause has been removed (compared to previous QISes)

Nevertheless, I will have a look at your proposal, thanks again!
 
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Samsaveel
Posts: 33
Joined: April 20th, 2008, 5:47 am

Re: (Sensible) Definition of a derivative conctract's notional amount

August 4th, 2016, 4:05 am

The final draft text on FRTB "Minimum Capital requirements for market risk" dated January of this year sets out "Revised standards",see page (5) under executive summary, the word "Standard" can be in interpreted as "Acceptable but of less than top quality" .The process to get those internal models approved is rigorous, your domestic regulator will be closely involved at every stage of the process. You propose a methodology, they will assess if your proposed methodology correctly reflects your risk profile,if you have a difference of opinion, you need to provided propositions to justify -back up- your standpoint at issue. You can choose any methodology as long as it does what it is intended to do and is accepted by the regulator.