Effective absence of set-off or netting arrangements

If a statutory set-off or netting right exists and cannot be contractually excluded, would an AT1, T2 or eligible liabilities instrument be automatically considered ineligible pursuant to, respectively, Article 52(1)(r), Article 63(p) or Article 72b(2)(f) of Regulation (EU) No. 575/2013 (CRR) or would the instrument be eligible as long as the conditions for such statutory set-off or netting are not fulfilled, in particular in cases where a counterclaim to be used for set-off or netting does not exist? If a statutory set-off or netting right exists, can be contractually excluded, but has not been excluded, would the instrument be automatically considered ineligible or would the instrument be eligible as long as the conditions for such statutory set-off or netting are not fulfilled, in particular in cases where a counterclaim to be used for set-off or netting does not exist?

In accordance with Articles 52(1)(r) and 63(p) of Regulation (EU) No. 575/2013 (CRR), capital instruments shall qualify as AT1 or Tier 2 instruments when they are “not subject to set-off or netting arrangements that would undermine their capacity to absorb losses”. In addition, Article 72b(2)(f) CRR establishes the same provision for eligible liabilities by providing the following: “liabilities are not subject to set-off or netting arrangements that would undermine their capacity to absorb losses”. Recital 26 CRR2 and EBA Q&A 2020_5146 clarify that “the absence of a clause to this end [i.e. excluding netting and set-off] does not – by itself – lead to the instruments having to be grandfathered and ultimately disqualified as AT1/T2 capital or eligible liabilities. The instrument concerned remains eligible, provided that it meets all eligibility criteria set out in Article 52, Article 63 or Article 72b CRR2, including the effective absence of set-off or netting arrangements that would undermine their capacity to absorb losses in resolution, as applicable”. In this regard, it is noted that certain national laws provide under certain conditions statutory set-off or netting rights to the holder of the AT1, T2 or eligible liabilities instruments that would result into the instruments being subject to an effective set-off or netting arrangements that would undermine their capacity to absorb losses thereby leading to non-compliance with the eligibility criteria set out in Article 53(1)(r), Article 63(p) and Article 72b(2)(f) CRR2. However, it should also be noted that certain jurisdictions allow the inclusion of contractual clauses in the terms and conditions (T&Cs) governing the instruments that effectively waive the application of any statutory set-off or netting right of the holder which would protect the loss-absorbing capacity of the bank in practice.