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?
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).
Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.