Question
Article 45 of CRR specifies for the direct deductions in Article 36(1)(h) and (j) that we may calculate a net-long in the same underlying if positions are in the same book and has a contractual maturity of 1 year. Q1. Could a ‘short’ Total Return Swap (TRS) that hedges the economic risk of a long underlying position be included in the net-long calculation, such that it off-sets the direct deduction? Q2. Does the settlement convention of a TRS have any impact on the regulatory treatment (either/cash or physical)? Total Return Swaps are already mentioned in the definitions of synthetic holdings in Article 15b- of the ‘EBA FINAL draft regulatory technical standards on own funds [Part 3]’, however it remains unclear if this paragraph only constitutes definitions of long positions or whether they can net out. Q3. Could EBA confirm that a short synthetic holding could be netted if it is the exact opposite position of a long synthetic holding?
Background on the question
Some banks own shares of other FSEs that provide some of the core financial services and infrastructure. The banks could be interested in maintaining a long term interest in the FSEs and would be interested in hedging the capital consumptions for a period of time. Another example is the traditional securities finance business where clients go long index exposure via a Total Return Swap and banks hedge with physical long positions in the index constituents (some of which are FSEs).
Answer
A 'short' Total Return Swap (TRS) may be included in the net-long calculation of direct, indirect and synthetic holdings in the same underlying exposure provided that it meets both the conditions referred to in Article 45(a) of Regulation (EU) No 575/2013 for the deductions required by points (h) and (i) of Article 36(1). See further Q&A 1509. The form of settlement does not matter. Institutions could offset positions for the purpose of Common Equity Tier 1 deductions as long as the relevant offsetting conditions (see point 1 above) are met. A short synthetic holding could be netted if it is the exact opposite position of a long synthetic holding provided that the offsetting conditions referred in the response to in Point 1 above are met.