EU SSR Rules Netting Explained
For EU SSR rules, our engine automatically net longs and shorts at the portfolio level, and then it aggregates all the portfolios with net shorts at the portfolio level up to the top entity. In other words, the rule nets positions in its calculations but amalgamates those individual nettings at the top entity.
The rule has the following Value Expression:
.Having(Sum(PercentTotalSharesOutstandingSSRIncludingTreasuryShares) < 0)
Throughout this article, the property PercentTotalSharesOutstandingSSRIncludingTreasuryShares will be referred to as PercentTSO for brevity.
A common question is how the netting works. Consider where there are short physical shares in Company A in Portfolio 1 and long equity swaps in Company A in Portfolio 2, where both the derivative and underlier have the same ISIN. It is expected that FundApps should be netting the two positions, but the results are disregarding the long positions and only including the short position.
As mentioned, the way this rule works is by looking at the net short position of each portfolio. Under this scenario Portfolio 1 has PercentTSO of -3%, while Portfolio 2 has a net position of 2%. Given that the rule requires this property to be less than 0 for it to be taken into account, the long equity swap position in Portfolio 2 will not be included as it does not meet this criterion. So PercentTSO that would appear under the results for this rule will be -3% as opposed to -1% (-3% + 2%) as may be expected.
Portfolio 1 had a long equity in Company A of 1.5% and short swaps in Company A of -1%.
Under this scenario, the portfolio would not be included as its net position is 0.5% (a long position, rather than a short position).
To summarise, the rule includes portfolios that are net short and then aggregates those together for the total short position.
To explain this graphically, the below screenshot depicts which portfolios would be included and which excluded from the aggregated net short position.
source: ESMA Q&A