Can you please confirm if Article 78(4) is meant to apply only to the redemption of T2 securities within 5 years of issuance (as specified in the terms and conditions of the instrument), or if it also prohibits the use of liability management exercises to repurchase (and cancellation) T2 notes at market levels within 5 years of the issuance.
Issuers may wish to actively manage their capital structure by means of Liability Management Exercises ("LME") targeting instruments that may not have been outstanding for a minimum of 5 years. The existing drafting in Article 63(j), which uses the language "redeemed or repurchased or repaid early" together with the reference only to "redeemed" in Article 78(4), and the original text of the Basel III proposals, suggests that "repurchase" and cancellation should be seen as distinct from redemption and that therefore LME is permitted under the CRR.
Article 63(j) of Regulation (EU) No 575/2013 (CRR) permits that Tier 2 instruments may be reduced/repaid, repurchased, called or redeemed early only where prior supervisory permission has been granted in accordance with Articles 77 and 78 and not before five years after the date of issuance. Article 78(4) of the CRR conditionally permits redemption of AT1 and Tier 2 instruments before five years from date of issuance where a significant/material tax or regulatory change is deemed by the competent authorities to have occurred. The CRR provides no other basis on which fully eligible Tier 2 instruments may be called, redeemed, repurchased or repaid/reduced before five years after the date of issuance or raising.
Instruments grandfathered under Article 484 of the CRR can be called, redeemed, repurchased or repaid/reduced before five years after the date of issuance. Fully eligible instruments may be exchanged against fully eligible instruments of a higher quality, in exceptional circumstances, and subject to the approval of the competent authority in accordance with Article 77.
Update 26.03.2021: This Q&A has been archived in light of the change(s) in Article 78(4) of Regulation (EU) No 575/2013 (CRR).