How should the condition in Article 42 a) i)
“(i) the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk”
be applied when there are long and short positions on the same underlying reference with the same counterparty under the same master netting agreement ?
Are the single net amounts fixed by such contracts to be considered rather than the gross amounts?
Explanatory note: The master netting agreement we are considering complies with the conditions required under CRR (Article 206)
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:
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).
This question has been rejected because the question is not sufficiently clear, or has not sufficiently identified a provision of a legal framework covered by this tool that creates uncertainty and for which an explanation is merited in terms or practical implementation or application.