EBA · 2014_1658 Final Q&A

Deduction of direct holdings of CET 1 instruments of FSEs

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
45, para. a
Topic
Own funds
Submitted by
Credit institution
Submitted
2014-12-02
Answered
2015-06-19
Answer provided by
ESAs (EBA, ESMA, EIOPA)
Browse ECB SSM Register → More Q&As on this regulation →

Question

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?

Background

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).

Answer

A 'short' Total Return Swap (TRS) may be included in the net-long calculation of direct, indirect and synthetic holdings in the same underlying exposure provided that it meets both the conditions referred to in Article 45(a) of Regulation (EU) No 575/2013 for the deductions required by points (h) and (i) of Article 36(1). See further Q&A 1509 . The form of settlement does not matter. Institutions could offset positions for the purpose of Common Equity Tier 1 deductions as long as the relevant offsetting conditions (see point 1 above) are met. A short synthetic holding could be netted if it is the exact opposite position of a long synthetic holding provided that the offsetting conditions referred in the response to in Point 1 above are met.

Original source: European Banking Authority, Q&A ID 2014_1658

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

Similar Q&As

Fulfilment of conditions reported under Article 45(a) CRR for a synthetic holding held in the banking book and with a maturity less than 1 year

Answered 2022-04-01

Treatment of Hedges for Equity-Linked Employee Compensation Schemes and Impact on FSE Capital Deductions

Answered 2014-12-19

Short positions in financial institution capital instruments

Answered 2017-06-30

Definition of short position

Answered 2022-04-01

Commitment to buy newly issued shares and synthetic holding deduction

Answered 2017-11-03

More Q&As on this topic

C01.00 - CIU deduction from own funds

Answered 2025-03-21

4.0 Reporting Framework - COREP_OF C02 Template

Answered 2025-03-21

Direct contributions to reserves from shareholders

Answered 2025-02-07

Permission to reduce AT1, Tier 2 or eligible liabilities instruments and deduction rules in the context of a liability management exercise without replacement.

Answered 2024-04-05

Treasury shares – how to report them in Own Funds and in the NSFR

Answered 2024-02-23

📋 Track EU financial regulation continuously

Forseti monitors EU financial regulation and delivers personalised alerts anchored to verified official sources.

Start free trial → Learn more

14-day free trial. No credit card required.