AT1, T2 and MREL/TLAC instruments often have embedded call options exercisable at the issuer’s discretion. When should this call option be considered reducing the maturity of the instrument in cases where there is ‘arguably’ market expectations that institutions should redeem certain liabilities before their maturity (as per CRR Article 428j(2))? 

• CRR Article 428j(2) states that “For options exercisable at the discretion of the institution, the institution and the competent authorities shall take into account reputational factors that may limit an institution's ability not to exercise the option, in particular market expectations that institutions should redeem certain liabilities before their maturity”.
• As per CRR Article 77, institutions are not allowed to call instruments without obtaining the prior permission of the competent authority. As such these instruments can be considered ‘callable’ only after such approval has been received. It would be reasonable to expect that the moment when the institution is expected to redeem is when the supervisory approval is obtained, as a call in itself without the approval will rend the institution unable to redeem.
• the institution is not allowed to indicate explicitly or implicitly its intention to call AT1, T2 or MREL instruments if the permission to redeem was not obtained. Doing so would result in the non-compliance with CRR Articles 52(1)(i-k) for AT1, Article 63(j-k) for Tier 2, Article 72b(2)(j-k) for MREL/TLAC, and Regulation (EU) No 241/2014 Article 28(1) for AT1 and Tier 2, Article 32b(1) for MREL/TLAC.
• Furthermore, for redemptions with replacement issuances, the EBA indicated in Q&A 2023_6791 that instruments should only be removed once the new issuance taken place. This ensures continuity of own funds (own funds are not temporarily reduced and there is no double counting) and this is prudent because the issuance can only be redeemed on the condition of new issuance to replace.
• On the other hand, the ITS on institutions public disclosures Annex XIV instructs that in case of AT1 and T2 instruments with a call option, the residual maturity of the instrument is to be determined in relation to the date of the call option, irrespective of whether it was exercised or not.

The above excerpts could lead to cases where they contradict each other (e.g. the case where the instrument has been called but the approval to redeem is not granted yet) and a judgement call would need to be made for the purpose of supervisory reporting in terms of which takes precedence. Furthermore, issuers often request redemption on a condition that that the instruments will be replaced with a similar quality instrument. Reporting such instruments at 0% one year before the call date, will create a gap in funding, which cannot and therefore would never exist in practice.