On. Dec. 20, the FIA Principal Traders Group submitted comments to the Commodity Futures Trading Commission’s division of swap dealer and intermediary oversight regarding the methodology for calculating notional amount for certain options and swaptions that are traded over-the-counter. The calculation is part of the CFTC’s swap dealer definition, which requires firms whose trading activity is above certain thresholds to register as swap dealers.
FIA PTG said the methodology for computing the notional value of options should include the delta equivalents. For example, the notional value of a swaption would be calculated by multiplying the notional value of the underlying swap by the delta of the swaption. Adding a delta equivalent component would better reflect the market impact of that option transaction and would be more consistent with industry practice, FIA PTG said.
FIA PTG further recommended that end-of-day deltas and prices published by designated clearing organizations be used when computing the notional value of options. “Market participants, including FIA PTG member firms, often run their own proprietary intraday delta and pricing models for position management and to assess risk and market exposure. These proprietary models could be used for the notional value computation, but the costs involved in capturing, recording and computing these values at time of trade as well as the variance in models used by individual market participants lead us to recommend the use of end‐of‐day DCO published values instead,” the group said.
Lastly the group recommended that a transaction with multiple legs should be valued on a net basis, with the notionals of all the legs added together, rather than each leg individually as if it were a standalone trade.