Eligibility of convertible instruments as financial collateral

Do financial instruments that are not included in a main index and not traded on a recognised exchange, but which can be converted anytime at the discretion of the owner of the instrument into equities that are included in a main index or are traded on a recognised exchange qualify as eligible financial collateral?

The list of eligible financial collateral in Article 197(1)(f) CRR includes equities or convertible bonds included in a main index and Commission Implementing Regulation 2016/1646 provides in Annex I a list of equity and convertible bond indices that qualify as main index. The list of eligible financial collateral in Article 1981(a) CRR includes equities or convertible bonds not included in a main index but traded on a recognised exchange and Commission Implementing Regulation 2016/1646 provides in Annex II a list of recognized exchanges. There are financial instruments such as convertible bonds, convertible preferred shares or convertible share instruments that are not included in a main index but that can be converted anytime at the sole discretion of the owner of the financial instrument into equities included in a main index or traded on a recognized exchange. In our view Articles 197(1)(f) and 198 (1)(a) CRR should be interpreted such that financial instruments that may be immediately converted anytime at the sole discretion of the owner into equities included in a main index or traded on a recognised exchange qualify as eligible financial collateral. This interpretation of Articles 197(1)(f) and 198(1)(a) CRR is aligned to how the identical requirement of Directive 2006/48/EC (“equities or convertible bonds that are included in a main index”) was transposed into German legislation (the Solvabilitätsverordnung, SolvV) prior to the CRR becoming effective. When the SolvV was established the interpretation to allow for instruments that can be converted at the discretion of the owner into equities that are included in a main index was explicitly considered to be a clarification of the CRD requirement as opposed to a deviation from the CRD. This interpretation is also aligned to Recital (3) of Commission Implementing Regulation 2016/1646 that states that convertible bonds should be considered to be eligible financial collateral only if the bonds can be converted into liquid equities (“Convertible bond indices should be considered as main indices only where the constituent bonds can be converted into equities where at least 90 % of those equities have a free float of at least EUR 500 000 000 or, in the absence of information about free float, a market capitalisation of at least EUR 1 000 000 000.”)