Clarification of the treatment of positions in commodities for the purposes of calculating net and gross position according to Article 360(1) of Regulation (EU) No 575/2013 (CRR)

Should long and short positions in the same commodity (or the same derivative based on the commodity) be netted against each other in the first place and then the net and gross positions should be calculated taking into account positions in other derivatives with the same commodity as the underlying instrument?

According to Article 360(1) the capital requirement is calculated for each commodity separately, taking into account net position and gross position in that commodity. According to Article 357(3) for the purpose of Article 360(1), the excess of an institution’s long positions over its short positions, or vice versa, in the same commodity and identical commodity futures, options and warrants shall be its net position in each commodity. However, gross position is not explicitly defined. With regard to the abovementioned provisions, it is not clear whether long and short positions in the same commodity (or the same derivative based on the commodity) should be netted against each other in the first place and then the net and gross positions should be calculated taking into account positions in derivatives with the same commodity as the underlying instrument, or all positions in the commodity (spot and derivatives) should be accounted for separately. To clarify the problem, let’s consider the following example: Positions in the trading book based on the same commodity: A. Long CFD = 10 B. Short CFD = -5 C. Long Futures 3 month = 3 D. Short Futures 6 month = - 2 For the above: I. CFD = 10 – 5 = 5 long Net position = 5 + 3 – 2 = 6 Gross position = 5 + 3 + 2 = 10 Or II. Net position = 10 – 5 + 3 – 2 = 6 Gross position = 10 + 5 + 3 + 2 = 20 Taking into account the rationale behind Basel provisions (the 3% of the gross position charge is calculated in order to protect the institution against basis risk, interest rate risk and forward gap risk), the solution I seems correct.