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EBA Draft RTS on Instruments for Variable Remuneration Summary

Core Content

The European Banking Authority (EBA) published a Consultation Paper (CP) on 29 July 2013, proposing draft Regulatory Technical Standards (RTS) on instruments for variable remuneration. The purpose of the draft RTS is to define the classes of instruments that can be used for variable remuneration, ensuring alignment between staff and stakeholders' interests and preventing excessive risk-taking. The EBA is mandated by Directive 2013/36/EU (CRD) to develop these standards and submit them to the European Commission (EU COM) by 31 March 2014.

Main Requirements of the Draft RTS

• Credit Quality Reflection: Instruments must reflect the credit quality of the institution as a going concern and be appropriate for variable remuneration.
• Trigger Events: Instruments must be fully written down or converted if certain trigger events occur, ensuring they do not circumvent remuneration requirements.
• Market Conditions: Instruments should be issued under market conditions, either through private or public issuance with at least 60% of the issuance placed with other investors, or through a cap on distributions based on the average EU inflation rate.
• Deferral and Retention: Instruments should accommodate deferral and retention periods, with a sufficient long maturity if not permanent. Deferral arrangements must be respected if instruments are called, redeemed, repurchased, or converted.
• No Seniority Enhancements: Instruments should not be subject to any guarantee that enhances the seniority of the claim.
• No Faster Payout: Instruments should not facilitate a faster payout of deferred remuneration.
• Conversion and Remuneration: Conversion of instruments should not lead to an increase in remuneration awarded.
• Annual Distributions: Distributions must be paid out at least annually, with no distribution allowed before instruments vest for deferred instruments.
• Valuation: Instruments should be valued according to applicable accounting standards at the time of award or conversion.

Classes of Instruments

• Additional Tier 1 (AT1) Instruments:
  • Must be written down or converted if the CET1 ratio falls below 7%.
• Tier 2 Instruments:
  • 50% write down if Tier1 capital falls below 8.5%.
  • Full write down if Tier1 capital falls below 8%.
• Other Instruments:
  • 50% write down or conversion if Total Capital falls below 10.5% (conversion rate or range defined ex ante).
  • Full write down if Total Capital falls below 10% and not already converted.

Rationale and Background

• The EBA aims to align staff interests with those of shareholders and creditors over the long term.
• Under CRD III, most institutions currently rely on shares and share-linked instruments.
• The legislator has broadened the scope to include AT1, Tier 2, and other instruments.
• Institutions are encouraged to use these additional instruments if possible, as they offer more flexibility and alignment with risk.

Next Steps

1. Comments on the draft RTS can be submitted to the EBA via its website by 29 October 2013.
2. The EBA will finalize the draft RTS, incorporating received comments, and publish it along with a feedback statement.
3. The finalized draft RTS will be submitted to the EU Commission for adoption by 31 March 2014.

Key Considerations

• The EBA is exploring whether a common threshold (e.g., 7% CET1) should apply to all instruments.
• The use of existing instruments is preferred to avoid unnecessary burdens on institutions.
• Instruments must be consistent with provisions for own funds instruments.
• Synthetic instruments linked to AT1 or Tier2 instruments, or equivalent instruments from third country parent institutions, can be used for remuneration purposes, provided the trigger events refer to the institution using the instrument.