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IFR/IFD – Market risk
How can an investment firm apply for permission to use a model on the basis of which it can calculate its own delta?
Pursuant to Article 22(a) of the IFR in conjunction with Articles 329(1), 352(1) and 358(3) of the CRR, an investment firm may calculate delta itself, using an appropriate model, for OTC options or where delta is not available from the exchange concerned, subject to permission by the competent authorities. Investment firms may submit an application for permission to DNB, attaching the following information:
- A request for permission for the above signed by the Management Board.
- Specification of the application:
- A description of how the institution complies with Article 329, Article 352 and/or Article 358 of the CRR: An overview of the financial instruments / instrument groups for which delta is not available and for which permission is requested.
- A specification per instrument or instrument group of the model used for the calculation of the firm's own delta.
- A description of model governance: which departments are responsible for the calculation, validation and monitoring of the model (for the calculation of the firm's own delta)?
- III. Model description:
- A description of the model.
- Assumptions underlying the model (constant volatility? European/American, etc.).
- Relevant other inputs / variables.
- Model validation:
- Reasoned validation strategy.
- A specification of the data used for any tests.
- A specification of the underlying values used in the validation.
- A critical review of the validation results, including an explanation regarding any differences with a benchmark model.
- An investment mandate or equivalent document describing the products in which the applicant trades, a description of the procedure(s) for enforcing the mandate and the procedures that apply when the mandate is deviated from.
Investment firms that already received permission from DNB for the use of own deltas under Article 329(1), Article 352(1) and/or Article 358(3) of the CRR do not need to apply for permission again when the IFR enters into force.
- Collective investment schemes
- Investment firms