3.1 Firms that need to use own estimates of delta for the purposes of the simplified standardised approach for options, should provide the PRA with confirmation that they meet the minimum standards set out below for each type of option for which they calculate delta. Firms should only provide this confirmation if they meet the minimum standards. Where a firm meets the minimum standards, they will be permitted to use own estimates of delta for the relevant option. Firms should read the requirements for the granting of the permissions set out in Articles 329, 352, and 358 of the Market Risk: Simplified Standardised Approach (CRR) Part, as appropriate, before applying for any of these permissions.

3.2 If a firm has a permission under any of these Articles but ceases to be able to provide assurance with regard to a particular option type which is currently within its permissions, a capital add-on may be applied and a rectification plan agreed. If a firm is unable to comply with the rectification plan within the mandated time-frame, further supervisory measures may be taken. This may include variation of permissions so that they are no longer allowed to trade those particular types of option for which they do not meet the minimum standards.

Minimum standards

3.3 The level of sophistication of the pricing models, which are used to calculate own estimates of delta for use in the simplified standardised approach for options, should be proportionate to the complexity and risk of each option and the overall risk of the firm’s options trading business. In general, it is considered that the risk of sold options will be higher than the risk of the same options when bought.