How is the “same underlying exposure” identified, for the purpose of Articles 45, 59 and 69 CRR?
Art, 45, 59 and 69 CRR allows institutions to calculate holdings of own funds instruments of financial sector entities on the basis of the net long position in the same underlying exposure provided that - the maturity of the short position matches the maturity of the long position or has a residual maturity of at least one year; - either both the long position and the short position are held in the trading book or both are held in the non-trading book; In sum, not only the maturity and the designated book have to match but also the condition of the “same underlying exposure”. Only in this case, a short position is offsettable. Unfortunately, the CRR is silent on the definition of “same underlying exposure”. From our point of view all instruments which belong to the same class of own funds (i. e. CET1, AT1 or Tier2) of anissuer build up the identical risk and consequently should be considered as “same underlying exposure”. An increase of share capital where the additional shares issued have a different ISIN for example in our view belong to the same capital position as the outstanding shares.
Articles 45, 59, 69 of the CRR provide that, with respect to the deductions to be made under Article 36(1)(h) and (i) for CET1, Article 56(c) and (d) for AT1 and Article 66(c) and (d) for Tier 2, respectively, institutions may calculate direct, indirect and synthetic holdings of CET1, AT1 and Tier 2 instruments of financial sector entities on the basis of the net long position in the same underlying exposure provided that the specified conditions are met.
The reference to a ‘same underlying exposure’ means that the positions to be matched are in relation to underlying exposures sharing the exact same characteristics and bearing the exact same risks. As such, a position in an instrument of an issuer may only be matched with a position in another instrument of the same issuer if both instruments share the exact same characteristics (eg. same maturity, currency, interest rate, ranking in creditor hierarchy, conversion/write-down requirements, call dates etc., and same ISIN where applicable). If any of the characteristics differs, it is not possible to calculate such positions on a net basis.
Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).