Netting of Exposures arising from CIUs

Under the approach of Article 350(2) CRR, shall netting be permitted between positions in the underlying assumed investments of the CIU and other positions held by the institution, e.g. stock positions which are traded to hedge the underlying risk exposure of the CIUs?

Articles 348-350 CRR set out the own funds requirements relating to CIUs. Article 350(2) CRR provides, subject to the conditions outlined in Article 350(2)(a)-(b) CRR, that “ institutions may calculate the own funds requirements for position risk, comprising specific and general risk, for positions in CIUs by assuming positions representing those necessary to replicate the composition and performance of the externally generated index or fixed basket of equities ”. Assuming that a CIU meets the conditions specified in Article 349 CRR, it is eligible for the approaches outlined in Article 350 CRR. Article 350(1) CRR states that where the institution is aware of the underlying investments of a CIU, it may look through to the underlying investments and net them with positions held elsewhere: " Where the institution is aware of the underlying investments of the CIU on a daily basis, the institution may look through to those underlying investments in order to calculate the own funds requirements for position risk, comprising specific and general risk. Under such an approach, positions in CIUs shall be treated as positions in the underlying investments of the CIU. Netting shall be permitted between positions in the underlying investments of the CIU and other positions held by the institution, provided that the institution holds a sufficient quantity of shares or units to allow for redemption/creation in exchange for the underlying investments ". Article 350(2) CRR permits institutions to assume the positions necessary to replicate the CIUs performance but does not indicate whether the positions assumed may be netted with other positions held by the institution. Permitting such positions to be netted would appear to be a reasonable economic interpretation given that the conditions outlined in Article 350(2)(a)-(b) CRR would first have to be satisfied. This would also be consistent with the treatment which is outlined for stock index futures in Article 344(3) CRR.