Article 36(1)(i) of the CRR determines that institutions shall deduct from CET1 items the applicable amount of direct, indirect and synthetic holdings by the institution of the CET1 instruments of FSEs where the institution has a significant investment in those entities. This is subject to the threshold exemptions from deduction from CET1 items contained in Article 48 of the CRR. According to Article 45 of the CRR, institutions may calculate direct, indirect and synthetic holdings of CET1 instruments of the FSEs on the basis of the net long position provided the maturity of the short position matches the maturity of the long position or has a residual maturity of at least one year.

Assume that an institution holds a participation of €4.75bn (goodwill excluded) in an FSE which qualifies as a significant investment. Assume also that the institution’s CET1 deduction in relation to this FSE investment amounts to €750m on a fully loaded basis (deduction threshold assumed to amount to € 4bn). To reduce its FSE exposure and the related deduction from CET1, the institution may consider entering into a transaction with a 3rd party non-bank. This 3rd party would provide cash collateralized protection to the institution for its holding in the FSE for a period of 4 years, which would limit the institution’s exposure to the downside below the agreed strike level of €500m. The institution would have the right to terminate the hedge at any time. The institution would retain full legal title to the FSE-shares.