Question
Does Portfolio 1.4, described in Annex V, require exchange traded options? If there is no exact 10% ITM and OTM instrument available on the exchange - should the instrument available with a strike price nearest to the 10% OTM/ITM be taken? Or should an OTC option FTSE with exact strike prices be captured?
Background on the question
The instructions in Annex V for portfolio 1.4 (Equity) prescribe that banks must take contracts of put options with a strike price that is 10% OTM based on the end-of-day index value, without any further explanations concerning the situation when no exact 10% ITM and OTM instruments are available. In case of such situation are banks allowed to take the instrument available with strike price nearest to the 10% OTM/ITM or it is expected that banks should capture an OTC option FTSE with exact strike prices?
Answer
Portfolio 1.4 of Annex V of the Draft ITS on Supervisory Reporting for Institutions for benchmarking the internal approaches (ITS on benchmarking) does not require an exchange traded option but an OTC option with exact strike price as defined in Annex V should be priced accordingly by institutions. Point k) in the common instructions of Annex V state that "It shall be assumed that all options are traded over the counter (OTC) unless explicitly specified otherwise in the portfolio". DISCLAIMER: The present Q&A on Supervisory reporting is provisional. It will be reviewed after the Implementing Regulation is in force and published in the Official Journal, which may differ from the text of the draft ITS to which this Q&A relates.