AI Summary of Article 42 Deduction of holdings of own Common Equity Tier 1 instruments
This regulatory provision outlines how institutions should calculate their holdings of own Common Equity Tier 1 instruments. Institutions are generally required to base this calculation on gross long positions, but exceptions apply under specific conditions.
Notably, institutions may utilise net long positions where both long and short positions relate to the same underlying exposure, with no counterparty risk, and are classified within the same book. Additionally, deductions for synthetic holdings and the potential to net positions stemming from index securities are detailed, emphasising the importance of maintaining consistent classifications in trading versus non-trading books.
Article 42 Deduction of holdings of own Common Equity Tier 1 instruments
For the purposes of point (f) of Article 36(1), institutions shall calculate holdings of own Common Equity Tier 1 instruments on the basis of gross long positions subject to the following exceptions:
(a) institutions may calculate the amount of holdings of own Common Equity Tier 1 instruments on the basis of the net long position provided that both the following conditions are met:
(i) the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk;
(ii) either both the long and the short positions are held in the trading book or both are held in the non-trading book;
(b) institutions shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by calculating the underlying exposure to own Common Equity Tier 1 instruments included in those indices;
(c) institutions may net gross long positions in own Common Equity Tier 1 instruments resulting from holdings of index securities against short positions in own Common Equity Tier 1 instruments resulting from short positions in the underlying indices, including where those short positions involve counterparty risk, provided that both the following conditions are met:
(i) the long and short positions are in the same underlying indices;