Pursuant to the combined application of articles 63 letter k) and 66 letter a) it is correct that a clause – also included in the rules governing the issue of subordinated loans – according to which an issuer is obliged to repurchase a specified amount of subordinated loans does not prevent from classifying such financial instruments as Tier 2 instruments if, in compliance with article 66 letter a), the percentage of subordinated loans that shall be repurchased by the issuer is deducted from Tier 2 items? In other words, a subordinated loans can be classified as Tier 2 instruments if the provisions governing their issue contemplate the undertaking of the issuer to repurchase a specified percentage of the issued subordinated loans provided that - in compliance with article 66 letter a) of CRR - such percentage is deducted from Tier 2 items? The undertaking of the issuer to repurchase part of subordinated loans deriving from the rules governing the issue of such subordinated loans can be considered as a repurchase “contractual obligation” and as a consequence may it fall within one of the cases contemplated under the provisions of article 66 letter a) of CRR?
Pursuant to article 63 letter k) of CRR subordinated loans are eligible to be qualified as Tier 2 instruments if, among others, the issuer is not bound - neither from the rules governing the subordinated loans nor from any other provisions - to repurchase them. However, article 66 letter a) of CRR provides the obligation to deduct from Tier 2 instruments “direct, indirect and synthetic holdings by an institution of its own Tier 2 instruments, including its own Tier 2 instruments that an institution could be obliged to purchase as a result of existing contractual obligations”. The rules governing a subordinated loan contemplate the undertaking of the issuer to repurchase a specified percentage (10%) of the issue.
A subordinated loan whose provisions contain an obligation on the borrower to repurchase any portion of the loan amount breaches the criteria contained in Article 63(i) & (k) of Regulation (EU) No 575/2013 (CRR) and renders the full amount of the loan ineligible for Tier 2 (cf. Article 65 lit. a CRR).
The reference to "existing contractual obligations" in CRR Article 66(a) means contractual obligations other than those deriving from the terms and conditions of Tier 2 subordinated loans.
Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.