Question ID:
2017_3137
Legal Act:
Regulation (EU) No 575/2013 (CRR) as amended
Topic:
Market risk
Article:
352
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Article/Paragraph:
-
Disclose name of institution / entity:
No
Type of submitter:
Investment firm
Subject Matter:
Clarification of the treatment of contracts for difference (CFD)
Question:

Shall long (short) positions in CFDs, where the underlying is denominated in foreign currency, be treated as a single long (short) foreign currency position equal to the market value of the notional position of the underlying or market value of the CFD in the quote currency?

Background on the question:

Q&A 2014_1506 states that CFDs should be treated as exposure to the amount of the underlying instrument to which they refer, however the treatment of CFDs for the purposes of calculation of the overall net foreign exchange position, where the underlying is denominated in foreign currency, is not explicitly stated in the CRR, nor in the Q&As. Q&A 2014_1171 refers to derivatives denominated in foreign currency and states that “non-FX derivatives denominated in a foreign currency should be treated as a cash position in the underlying’s base currency, equal to the market value of the underlying, as per the treatment for ‘other options’ referred to in Article 352(1)(e) of CRR”. At the same time Article 352(1)(e) of CRR states: “market value of other options”, which means market value of the option (balance sheet value), not market value of the underlying as in the Q&A. Therefore, the treatment of CFDs for the purposes of calculation of the overall net foreign exchange position, where the underlying is denominated in foreign currency, could be as follows: 1) market value of the underlying asset (notional) or 2) market value of the CFD (balance sheet, mark-to-market value). The following example further clarifies the issue. Institution has a long position in a CFD contract on 1 share of Amazon.com Inc (AMZN.US). • Current Market value of underlying: 830 USD • Opening Market value of underlying: 833 USD • Current Market value of the CFD: -3 USD (the balance sheet value of the CFD reflects the difference between the current price and the opening price, here it would be a financial liability of 3 USD) Overall net foreign exchange position (assuming no other FX positions) could therefore be: 1) market value of the underlying asset currency position: long 830 USD or 2) market value of the CFD currency position: short 3 USD Taking into account the nature of CFD contracts (the value of the CFD results from the difference in price of the underlying, so if there is no change, there is no exposure to foreign exchange risk), as well as the rules of decomposition of futures/forwards (Q&A 2015_1812: Long CFD on 1 share of Amazon could be decomposed into Long current market value of the underlying 830 USD and Short Opening market value of the underlying (borrowing) 833 USD, which results in Net short 3 USD), solution 2 seems correct.

Date of submission:
31/01/2017
Published as Final Q&A:
29/11/2019
EBA Answer:

The treatment specified in Q&A 2015_1812 shall be applied analogously to CFDs for the purpose of calculating the net open position in the foreign currency in accordance with Article 352(1) of Regulation (EU) No 575/2013 (CRR). Hence, CFDs have to be decomposed into a combination of long and short positions for that  purpose.

 

According to the example mentioned above, the CFD has to be decomposed into a long position of 830 USD and a short position of 833 USD. As a result the net open position in USD is 3 USD (short).

 

By way of the clarification provided in this answer, Q&A 2014_1171 has been repealed.

Status:
Final Q&A