Overview
The EU short-selling regulation came into effect on 1st November 2012 and sets out the disclosure requirements for net short sovereign debt positions in European Union jurisdictions. FundApps captures this by calculating the percentage of the total issued debt outstanding of the sovereign issuer a holder has in PercentEUDebtOutstanding.
To do so, FundApps must account for both the total outstanding debt of the sovereign issuer and the equivalent amount of that debt the holder has.
Equivalent Debt Held
The equivalent debt holdings are calculated in the property: EquivalentDebtEU; which at the most simplistic level, is what FundApps defines as the “effective notional” exposure from holding the asset. For more complex assets however, the way FundApps calculates EquivalentDebtEU is dependent on:
The asset class
The level of the instrument being analysed; the calculation is recursive. The top level instrument on a derivative will be calculated differently to an underlying asset of a multi-level derivative.
The effective notional is a property calculated as the explicit quantity of the asset held multiplied by the notional, or by face value for bonds and convertibles.
For straight bonds, the equivalent debt holdings are duration adjusted:
EquivalentDebtEU = DurationAdjustment x EffectiveNotional
Options are delta adjusted:
EquivalentDebtEU = Delta x PutAdjustment x EffectiveNotional
For all assets, excluding bonds, options and components of indices, baskets and ETFs:
EquivalentDebtEU = EffectiveNotional
Components of indices, baskets and ETFs are calculated as above but in addition, are multiplied by the constituent weighting.
The EquivalentDebtEU calculation is recursive in the sense that it will calculate on every instrument within the chain of an asset, whether it is a single-layer or a multi-level derivative. The case of a single-layer asset, the EquivalentDebtEU will be calculated as above. In the instance where there is more than one layer to the asset, the calculation will first look to see if a parent asset exists and if true, then that instrument will use its parent’s EquivalentDebtEU instead of EffectiveNotional in the calculations above.
If(IsDefined(ParentAsset), ParentAsset.EquivalentDebtEU,….)
e.g for the Bond future above, the EquivalentDebtEU at the bond level is calculated as:
EquivalentDebtEU = DurationAdjustment x ParentAsset.EquivalentDebtEU
The result FundApps will calculate on the underlying bond component of any asset will represent the equivalent debt holdings in that asset.
Total Debt Outstanding
For the EU Short Selling rules for sovereign debt, FundApps automatically scrapes the current values for each sovereign issuer's TotalDebtOutstanding since official regulatory data is available from ESMA. This data is viewable in FundApps under the heading "EU Sovereign Debt" on the screen Main Menu -> Regulatory Data (please see screenshot below).
To ensure that this data is applied to the sovereign debt (or derivatives on sovereign debt) instruments provided in your file, you must include the exact sovereign issuer name as shown on the ESMA list in the IssuerName field. FundApps will then perform a match from the sovereign debt issuer string in this field to the regulatory data and auto-populate TotalDebtOutstanding.
Where the issuer name matches a sovereign issuer on the list, the total debt outstanding will be taken from ESMA’s list. Where a match can not be made, clients can specify TotalDebtOutstanding in their input file; please see the documentation page.
Please note that the PercentEUDebtOutstanding value on the Entity Asset page is truncated to five decimal places. If the percentage is too small (<0.00001), FundApps will display "NaN.00000" instead. The system is still calculating the field correctly, and the actual value used in the relevant rules can be found on the Assets properties page.