Question ID:
2015_1813
Legal Act:
Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 – CRR2
Topic:
Market risk
Article:
360
Paragraph:
1
COM Delegated or Implementing Acts/RTS/ITS/GLs:
Not applicable
Article/Paragraph:
None
Type of submitter:
Competent authority
Subject Matter:
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)
Question:
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?
Background on the question:
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.
Date of submission:
10/02/2015
Published as Final Q&A:
25/09/2015
EBA Answer:

Long and short positions in the same instrument or contract are netted because the net market risk and payoff from the combined long and short positions is identical to that resulting from holding the net position in the instrument or contract (i.e. longs and shorts are exact opposites and there is no basis risk).

Pursuant to Article 360(1)(a), for net positions ("long or short") positions in the same commodity, or commodity derivative contracts (futures, options, forwards, warrants, etc.) are netted in order to calculate the net position in that particular contract. Article 357(3) of Regulation (EU) No 575/2013 (CRR) allows the net positions in different contracts (including the physical commodity stock) of the same commodity to be netted against each other to calculate the net position in the commodity. On the other hand, pursuant  to Article 360(1)(b) the gross position("long plus short")  in a commodity is the sum of absolute values of net positions in different contracts (including the physical commodity stock) of the same commodity. This means that net positions in different contracts of the same commodity cannot be netted against each other.

Provided the Long CFD in the example is on the same underlying as the Short FCD, the first calculation would therefore be the correct one.

Status:
Final Q&A