EBA · 2016_2988 Final Q&A

Incentives to redeem of a hybrid instrument with a call for grandfathering purposes

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
489, para. 1
Topic
Own funds
Submitted by
Investment firm
Submitted
2016-11-11
Answered
2017-02-17
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Article 489 of Regulation (EU) No 575/2013 (CRR) provides for the grandfathering treatment of hybrid instruments with a call and an incentive to redeem. A bank has issued a bond with a fixed coupon before the first call date and a floating rate coupon after the first call date. The credit spread of the fixed coupon as of the issuance date is the same as the margin of the floating rate coupon after the first call date, so there is no immediate step-up there. However, the floating rate coupon is floored at the level of the fixed rate coupon. Does this constitute an incentive to redeem ?

Background

Some banks have issued such instruments and it is important to know the grandfathering treatment of these instruments.

Answer

Pursuant to Article 20(1) of Commission Delegated Regulation (EU) No 241/2014 an incentive to redeem shall mean all features that provide, at the date of issuance, an expectation that the capital instrument is likely to be redeemed. A floating rate coupon floored at the level of the initial fixed rate coupon, such as in the case described by the submitter, constitutes an incentive to redeem, as the new coupon after the first call date will always be equal or higher than the initial coupon.

Original source: European Banking Authority, Q&A ID 2016_2988

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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