The draft RTS introduces, also for eligible liabilities, the deduction of the whole authorized plafond from the moment the authorisation is granted.
In this regard, we would welcome a "deduction on usage" approach, i.e. that eligible liabilities subject to buy back or market making activities are deducted when such activities are effectively carried out.
The draft RTS envisages a limit – equal to 3% of the outstanding stock of eligible liabilities - to the amount of eligible liabilities which can be subject to market making and other secondary market activities. Such limit - which is not envisaged in the level 1 text (CRR2) and, as such, is set ex novo in the draft RTS – raises some fundamental issues, such as:
- Market making volumes for senior (plain vanilla or structured) bonds are much higher than own funds. The market making of eligible liabilities, in particular of senior vanilla or structured bonds sold to private investors, is featured by volumes that are not comparable with own funds. As such, the adoption of the same quantitative threshold in force for own funds (3%) in the case of eligible liabilities would be totally incompatible with the current market volumes of these instruments;
- Impact on retail investors. Contrarily to own funds and TLAC instruments, senior plain vanilla and structured bonds tend to be distributed by banks to retail investors with significant amounts. The imposed limit would reduce liquidity on many of the outstanding instruments and in extreme cases it would prevent retail investors from closing their positions;
- Unlevel playing field with non-EU banks. Non-EU banks do not have such a hard limit on market making. This would give them a strong competitive advantage both in funding cost terms (higher flexibility in increasing and decreasing their own liabilities) and in market making activities on European banks' issuances;
- Financial sustainability of funding costs. The 3% limit is expected to result in a negative funding cost impact for banks, given that an institution may be forced to refinance some instruments without the ability to call them.
We would therefore welcome the removal of the 3% limit.