Question ID:
Legal Act:
Directive 2014/59/EU (BRRD)
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Disclose name of institution / entity:
Type of submitter:
Credit institution
Subject Matter:
Section 3(a)(2) guarantees - eligibility for MREL

Can debt securities issued under a Section 3(a)(2) bank note program where the guarantor is a branch of the issuer be deemed to meet the criteria of article 45 of the BRRD in order to be included in the amount of own funds and eligible liabilities?

Background on the question:

What is a Section 3(a)(2) bank note program?

A Section 3(a)(2) note program is a medium-term note (“MTN”) program that enables an issuing bank to offer debt securities in the US on a regular and/or continuous basis. The issuer (or a guarantor of the notes) must be a “bank,” as defined in Section 3(a)(2) of the Securities Act of 1933 (the “Securities Act”). Bank note programs are exempt from registration under the Securities Act.

What is Section 3(a)(2)?

Section 3(a)(2) exempts any security issued or guaranteed by a « bank » from registration under the Securities Act. This exemption is based on the principle that, whether chartered under state or federal law, banks are highly and relatively uniformly regulated, and as a result will typically provide adequate disclosure about their business and operations, even in the absence of federal securities registration requirements. In addition, banks are also subject to various capital requirements that may help increase the likelihood that holders of their debt securities will receive timely principal and interest payments.

What is a “bank”?

Section 3(a)(2) broadly defines a “bank” to mean any national bank, or any banking institution organized under the law of any State, territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the State or territorial banking commission or similar official. To qualify as a bank under Section 3(a)(2), the institution must meet two requirements:

(i) it must be a national bank or any institution supervised by a state banking commission or similar authority; and

(ii) its business must be substantially confined to banking.

For purposes of the exemption from registration provided by Section 3(a)(2), the Securities and Exchange Commission deems a branch or agency of a foreign bank located in the United States to be a “national bank,” or a “banking institution organized under the laws of any State, Territory, or the District of Columbia,” provided that the nature and extent of federal and/or state regulation and supervision of the particular branch or agency is substantially equivalent to that applicable to federal or state chartered domestic banks doing business in the same jurisdiction.

What does this mean for EU credit institutions?

EU credit institutions that wish to access the debt markets in the United States without registering under the Securities Act often establish a a Section 3(a)(2) program. 3(a)(2) debt securities issued under such program are typically issued under New York law and must benefit from a guarantee issued by the New York Branch of the issuer.

What are the implications with regards to MREL eligibility?

Under Article 45 of the Directive 2014/59/EC of the European Parliament and of the Council dated May 15, 2014 (the “BRRD”), institutions are required to maintain at all times a “minimum amount of own funds and eligible liabilities” or “MREL”. Under the BRRD, “eligible liabilities” are defined as “the liabilities and capital instruments that do not qualify as Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments […] or that are not excluded from the scope of the bail-in tool by virtue of Article 44(2)” and are only to be included in the MREL if they satisfy certain conditions, one of which is that “the liability is not owed to, secured by or guaranteed by the institution itself.” (Article 45 (4)(b))

Since the 3(a) Notes are guaranteed by the NY Branch, which is the same legal entity as the Issuer, it would be helpful to confirm that such Notes can indeed be considered as eligible liabilities.

Date of submission:
Published as Final Q&A:
Final Answer:

Branches of institutions are not separate legal entities. Therefore a guarantee provided by a branch of an institution is in essence issued by the institution or parent entity itself.

To qualify as an MREL eligible liability, liabilities shall only be included if they satisfy all the conditions set out in in Article 45(4)(b) of Directive 2014/59/EU (BRRD). In particular, pursuant to Article 45(4)(b) 72b(2)(e) of Regulation (EU) No 575/2013 (CRR) an eligible liability must be “neither secured, nor subject to a guarantee or any other arrangement that enhances the seniority of the claim by any of the following:

(i) the institution or its subsidiaries;
(ii) the parent undertaking of the institution or its subsidiaries;
(iii) any undertaking that has close links with entities referred to in points (i) and (ii);” 

“cannot be owed to, secured by or guaranteed by the institution itself.”

Therefore, debt securities guaranteed by a branch of an EU institution should not be considered eligible as MREL from the point of view of that institution.

It should be noted that agreements creating liabilities governed by the law of a third country are subject to the requirement laid down in Article 55 of the Directive 2014/59/EU (BRRD).

Final Q&A
Answer prepared by:
Answer prepared by the EBA.
Note to Q&A:

Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Directive 2014/59/EU (BRRD).