May a CET1 instrument rank pari passu in liquidation with a legacy Tier 1 instrument that is being grandfathered as Additional Tier 1 under Article 484, and otherwise qualifies as Tier 2 under the CRR?
Article 28(1)(j) specifies that CET1 "instruments rank below all other claims in the event of insolvency or liquidation of the institution". However this is clarified by a further paragraph that "The condition set out in point (j) of the first subparagraph shall be deemed to be met, notwithstanding the instruments are included in Additional Tier 1 or Tier 2 by virtue of Article 484 (3), provided that they rank pari passu." Article 484 Paragraph (3) deals with the grandfathering of instruments as CET1, and therefore I cannot see how any instrument can be included in Additional Tier 1 or Tier 2 by virtue of Article 484(3). I believe that the intention of Article 28 was to state that a CET1 instrument may rank pari passu with another instrument that is eligible to be grandfathered as CET1 under Article 484(3). If the intention was that a CET1 instrument can rank pari passu with another instrument that is being grandfathered as Additional Tier 1 or Tier 2 under Article 484, this would imply issuance of CET1 instruments ranking pari passu with more senior forms of legacy capital (i.e grandfathered AT1 and T2) is permitted, but ranking pari passu with more junior forms of legacy capital (i.e. grandfathered CET1) is not. Article 52 includes a similar clause and clarification on ranking "(d) the instruments rank below Tier 2 instruments in the event of the insolvency of the institution;" "The condition set out in point (d) of the first subparagraph shall be deemed to be met notwithstanding the fact that the instruments are included in Additional Tier 1 or Tier 2 by virtue of Article 484(3), provided that they rank pari passu." A consistent interpretation of the intention behind these clauses in Article 28 and Article 52 can only be that Common Equity Tier 1 and Additional Tier 1 instruments will be deemed to meet their obligations under Article 28(j) and Article 52(d) respectively, even if they rank pari passu with an instrument that does not qualify as the same quality of capital under Article 28 and Article 52 respectively, but is eligible for grandfathering as that level of capital under Article 484.
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.