According to Article 42 (a) institutions may calculate the amount of holdings of own Common Equity Tier 1 instruments on the basis of the net long position provided that both the following conditions are met:

(i) the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk;

(ii) either both the long and the short positions are held in the trading book or both are held in the non-trading book; 

Consider the following two cases: 

1. We have a long forward position with underlying Own Common Equity Tier I instruments =30 and short forward position with underlying Own Common Equity Tier I instruments=20. Both long and short positions are maintained with the same counterparty and are included in a master netting agreement. 

2. We have a long forward position with underlying Own Common Equity Tier I instruments =30 and short forward position with underlying Own Common Equity Tier I instruments=40. Both long and short positions are maintained with the same counterparty and are included in a master netting agreement. 

According to Article 42 a) i)  long and short positions can be netted if the short positions involve no counterparty risk. 

Interpretative doubts arise regarding the identification of short position within a master netting agreement. In our view, the master netting agreement should be considered one single contract,  the single net amounts fixed by such contracts rather than the gross amounts involved should be considered. In this regard if the single net amount is long there’s no short position (point 1 in the example above). If the single net amount is  short, it should be analyzed if the short position does involve counterparty risk.   

Explanatory note: The master netting agreement we are considering complies with the conditions required under CRR (Article 206).