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EBA Standardised Templates for Additional Tier 1 Instruments - DRAFT Summary

Core Content

The European Banking Authority (EBA) has published a draft of standardised templates for Additional Tier 1 (AT1) instruments, aiming to enhance the quality and consistency of such instruments across the EU. These templates are not legally binding and are intended to be used on an opt-in basis by institutions. The EBA encourages their use to ensure compliance with regulatory requirements and to simplify the implementation of AT1 instruments.

Main Objectives

1. Increase standardisation to support the investor community and reduce complexity in AT1 instruments.
2. Facilitate the monitoring of AT1 instruments by the EBA and competent authorities.
3. Provide a framework for institutions to align their terms and conditions with the prudential requirements of the CRR, RTS, and Q&As.
4. Support smaller institutions by offering a simplified structure that reflects regulatory expectations.
5. Enable comparison of terms and conditions among institutions, aiding supervisors in assessing compliance.

Key Points

• The templates are based on existing market practices and regulatory texts, including the CRR, RTS, and Q&As.
• They are intended to cover only prudential aspects of AT1 instruments, such as definitions, status, loss absorption mechanisms, and distribution rules, but not tax, risk, or use of proceeds.
• The EBA will regularly update the templates to reflect new regulatory developments and market practices.
• Institutions may continue to use their own terms and conditions, provided they comply with regulatory requirements and reflect the EBA's guidance.
• The use of templates is optional and does not affect the compliance status of AT1 instruments.

Structure of the Templates

The EBA has structured the templates into two main categories:

1. Essential Provisions

These are mandatory or recommended clauses that must be included or adapted to ensure compliance with prudential regulations. They cover:

• Definitions and main terms of the Notes: Includes terms such as "Issue Date", "Issue Price", and "Maturity Date". These are left blank for institutions to fill in as they are specific to each case.
• Status of the Notes: Defines the ranking of the Notes in the capital structure, ensuring they are subordinated, unsecured, and rank junior to unsubordinated creditors.
• Cancellation of Distributions:
  • Discretionary cancellation: The Issuer may cancel distributions at its discretion.
  • Mandatory cancellation: If the distribution amount exceeds the Maximum Distributable Amount (MDA), or if it would cause Distributable Items to be exceeded, or if ordered by the Competent Authority, distributions must be cancelled.
  • Non-cumulative nature: Cancelled distributions are not payable or accumulative.
• Redemption:
  • AT1 instruments are generally perpetual and not redeemable at the holder’s option.
  • Redemption is subject to supervisory approval and regulatory conditions.

2. Optional Provisions

These are acceptable but not mandatory clauses that may be included if they align with the prudential intent of the templates. They include:

• Gross-up clauses: May be used to adjust for tax impacts.
• Substitution/variation clauses: Allow for changes to the terms of the instrument.
• Pre-emption rights: May be included to ensure fair treatment of investors.

Loss Absorption Mechanisms

The templates include three standard forms of loss absorption:

1. Full conversion – The instrument is converted into equity.
2. Partial temporary write-down – A temporary reduction in the principal amount.
3. Full permanent write-down – A permanent reduction in the principal amount.

The EBA has chosen these mechanisms based on market observations, though other combinations may be used if they are commonly observed.

Process and Consultation

• The EBA conducted targeted consultations with industry participants and law firms.
• The draft templates are published for public feedback, with a hearing scheduled for 26 July 2016.
• Comments for publication are included in the templates to explain the rationale behind the provisions.
• The EBA aims to finalize the templates by the end of 2016.

EBA Considerations

• The templates aim to balance simplicity and comprehensiveness, ensuring they are usable for both small and large institutions.
• The level of detail may need to be adjusted depending on the jurisdiction and legal framework.
• The intent of the clauses must be maintained, even if the wording is adapted to local laws.
• The EBA will continue its monitoring of AT1 instruments and update the templates and reports as needed to reflect regulatory and market changes.

Conclusion

The EBA’s standardised templates for AT1 instruments are designed to enhance clarity, consistency, and regulatory compliance. They are not legally binding and offer flexibility for institutions to adapt them to their local legal frameworks. The templates will be updated regularly to ensure they remain relevant and effective in the evolving regulatory and market environment.