Does a short position on an equity future contract net off against a long position in its underlying equity, considering that the underlying security and the equity are identical, deliverable, quoted on an official exchange and cleared through the corresponding CCP?

For the purpose of the calculation of the exposure value with regards large exposures, Article 390(3) of CRR establishes that institutions shall calculate the exposures to individual clients which arise on the trading book by adding together certain items. Among them, the positive excess of an institution's long positions over its short positions in all the financial instruments issued by the client in question. This net position is calculated according to Article 327, but this article is not clear regarding netting a long (short) position on stock futures with a short (long) position on equity.

With respect to the calculation of the net position in each instrument, a short position on a stock future can be netted off against a long position on equity, as long as the equity underlying the futures contract is the same as the equity in which the long position exists (which can e.g. be confirmed if the underlying of the future has the same ISIN as the equity in which the long position exists). Article 327(1) of Regulation EU No 575/2013 (CRR) explicitly recognises identical financial futures for the netting of short and long positions in the same equity.

If this condition is met, the institutions only have to recognise the positive excess of the long positions over the short positions for Article 390(3)(a) CRR.

For positions in different financial instruments, Article 390(3)(b) determines that institutions may offset their long positions and short positions in instruments issued by a given client, but only where the financial instrument underlying the short position is junior to the financial instrument underlying the long position or where the underlying instruments are of the same seniority.

Update 16.09.2021: This Q&A has been updated in light of the change(s) – applying from 28.06.2021 – introduced to Regulation (EU) No 575/2013 (CRR).