Taps on callable Eligible Liabilities

If a subsequent tap of a callable MREL-eligible instrument (Senior preferred or Senior non-preferred instrument) is priced at a spread higher than the secondary market (i.e., the investor buys the new tap below par) in order to align the tap spread to the initial credit spread and the reset spread (following the tightening of the spreads of the initial tranche in the secondary market), would the reset of the margin at the first call date to the initial spread of the original issue be considered an incentive to redeem as per Article 20 of EBA RTS for Own Funds and Eligible Liabilities requirements for institutions?   In case of the presence of an incentive to redeem, would this result in a shortening of maturity of eligible liabilities as per Article 72(c)(3) of the CRR for the tap only or for the full instrument (i.e., both the tap and the original instrument?).

Article 20(2)(a) of RTS for Own Funds requirements and eligible liabilities for institutions defines an incentive to redeem as “a call option combined with an increase in the credit spread of the instrument if the call is not exercised”.   A case where Article 20(2)(a) is applicable is when a bank issues a callable own fund instrument with a fixed credit spread not subject to any step-up at any time (the ‘Initial Credit Spread’), and a few months later, when the secondary spread of the initial tranche has tightened, issues a new tranche to be merged with the original instrument at a credit spread lower than the Initial Credit Spread (i.e. a tap). In this case, at the first call date, the reset mechanism would technically result in an increase in the credit spread for the tapped amount and in an incentive to redeem, as clarified in Q&A 2016_2848.   A particular case where Article 20(2)(a) may be applicable is the same as above but with the bank issuing MREL-eligible liabilities (i.e., Senior preferred and Senior-non preferred) instead of own funds. In such case, the bank could tap at a spread higher than the secondary market spread (by issuing at a lower price) in order to align the tap with the Initial Credit Spread and avoid the incentive to redeem.   Furthermore, as per Article 72(c)(3) of the CRR, an incentive to redeem combined with a call option causes a shortening of maturity of eligible liabilities. As per Q&A 2013_238, a tap issuance would be considered as a new issuance, at least in the context of own funds instruments and grandfathering rules.