# Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament and of the Council with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (Text with EEA relevance), Division 3: List of examples of non-standard derivatives with the related commitment methodology being used:

Extent: E+W+S+N.I.

Variance swaps: Variance swaps are contracts that allow investors to gain exposure to the variance (squared volatility) of an underlying asset and, in particular, to trade future realised (or historical) volatility against current implied volatility. According to market practice, the strike and the variance notional are expressed in terms of volatility. For the variance notional, this gives:
variance notional = vega notional 2 × strike The vega notional provides a theoretical measure of the profit or loss resulting from a 1 % change in volatility.
As realised volatility cannot be less than zero, a long swap position has a known maximum loss. The maximum loss on a short swap is often limited by the inclusion of a cap on volatility. However without a cap, a short swap’s potential losses are unlimited.
The conversion methodology to be used for a given contract at time t is:
Variance notional * (current) variancet (without volatility cap)
Variance notional * min [(current) variancet volatility cap2] (with volatility cap)
whereby: (current) variancet is a function of the squared realised and implied volatility, more precisely:
(current) variance t = t T × realized volatility (0,t) 2 + T − t T × implied volatility (t,T) 2
Volatility swaps
By analogy with the variance swaps, the following conversion formulae should be applied to volatility swaps:
Vega notional * (current) volatilityt (without volatility cap)
Vega notional * min [(current) volatilityt; volatility cap] (with volatility cap)
whereby the (current) volatility t is a function of the realised and implied volatility.

---
Source: https://www.legislation.gov.uk/eur/2013/231/annex/II/division/3 (the official version)
Page: https://openlegislation.uk/eu-regulation-2013-231/annex-II/division-3
Contains public sector information licensed under the Open Government Licence v3.0. Source: legislation.gov.uk, The National Archives.