Overview
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:
GroupBy(OriginalPortfolioName)
.Having(Sum(PercentTotalSharesOutstandingSSRIncludingTreasuryShares) < 0)
.Sum(PercentTotalSharesOutstandingSSRIncludingTreasuryShares)
Throughout this article, the property PercentTotalSharesOutstandingSSRIncludingTreasuryShares will be referred to as PercentTSO for brevity.
Example 1
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.
Example 2
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
Strategy Property for Inter-portfolio Netting
The SSR requires that the net short position be calculated for each individual fund (regardless of its legal form) and for each managed portfolio (with further clarification in ESMA Q&A 6.2). No further netting of long and short positions is permitted. However, in rare instances, the fund or managed portfolio at which SSR netting should be performed to determine the net short position may encompass more than one FundApps portfolio. In such cases, the Strategy property should be populated to ensure that netting takes place across the relevant portfolios.
Two or more portfolios should only have the same Strategy value if all of the following apply:
the same non-fund entity has discretionary management authority over all of the portfolios (i.e. the portfolios have the same ManagementParentId)
the economic proceeds of the investments of the portfolios are shared in some sense, such that they can reasonably be considered a single fund or managed portfolio
the same investment strategy (per 6.2 of the aosphere memo, i.e. net short or net long with respect to each issuer) is being pursued across the portfolios
Two or more portfolios must not have the same Strategy value if:
different non-fund entities have discretionary management authority over the portfolios (even if those non-fund entities are part of the same corporate group)
the economic proceeds/beneficiaries of the assets in each portfolio are entirely segregated, even where there is some common legal structure or a similar investment strategy is being pursued
Examples of where the Strategy property may be used:
funds where the fund is structured across multiple legal entities, but the economic proceeds of the investments are shared in some sense
Examples of where the Strategy property should not be used:
distinct funds or managed portfolios that are managed by the same manager, even where similar investment strategies are pursued
funds with similar or identical beneficiaries but which are managed by different investment managers (or managed independently within the same investment manager)
most of the situations that we would expect our clients to encounter