Is buying back parts of an issued Tier 1 instrument that do not meet the requirements of Article 53 in Regulation (EU) No 575/2013 (CRR) but are eligible for grandfathering possible, or would it make the remaining outstanding amount disqualified for grandfathering? This question is similar to Question 2013_18, but keeps the contract of the instrument unchanged.
For instance, where an institution buys back increasing parts of outstanding Tier 1 capital to make the remaining outstanding amount fully eligible for grandfathering as AT1 under CRR is similar to the situation in Question 2013_18. In Question 2013_18 the institution adjusts the terms and conditions of the nominal amount not eligible for grandfathering each year in order to make it fully eligible as AT1. The terms and conditions of the remaining capital are kept unchanged, only the nominal amount is adjusted. This is considered as the issuance of a new instrument, and would disqualify the instrument from grandfathering since the change (reduction) in the nominal amount in the new contract is concluded after the cut-off date mentioned in Article 484 of CRR. What would the implication for grandfathering be if the contract was unchanged, but the instrument was bought back in increasing amounts each year to avoid paying interests on the part of the instrument not eligible for grandfathering? The formal arrangements of the Tier 1 capital would be unchanged, but this would represent an adoption to the new requirements in line with the situation described in Question 2013_18. This would clearly impede with the intention of the grandfathering arrangement to phase out the old instruments not in line with article 52 in the CRR. Would the remaining outstanding amount of the instrument still be eligible for grandfathering?
Where an institution buys back increasing parts of an issued Tier 1 instrument that does not meet the requirements of Article 52 of Regulation (EU) No 575/2013 (CRR), but which is eligible for grandfathering under Article 484, the purchase does not affect the computability of such an instrument in qualifying as part of an institution's own funds if no changes to the terms and conditions have occurred. (See further Q&A 2013_18).
Accordingly, in this case, the remaining outstanding amount resulting from the buy back is not disqualified from grandfathering, and it is subject to all relevant provisions set out in the CRR, including the provisions set out in Articles 77 and 78, and the applicable percentages referred to in Article 486(5), which shall apply to the nominal amount of the instrument among other eligible items, due to the fact that the nominal amount is unchanged by the buy back.
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.