OSFI Does Not Grandfather Extant Tier 1 Capital

OSFI has released an Advisory titled Treatment of non-qualifying capital instruments:

This Advisory does not apply to regulated life insurance companies, insurance holding companies, federally regulated property and casualty insurance companies or cooperative credit associations. OSFI will, after consultation, determine how and to what extent the Basel III rule changes will be applied to these federally regulated institutions and additional guidance will be released in due course.

Beginning on January 1, 2013, DTIs would be expected to comply with the applicable cap on the first fiscal quarterly reporting date of each year (refer to Appendix A for a description of the applicable percentages) and for subsequent reporting periods until a new cap applies.
The rules to be applied to govern the phase-out of non-qualifying capital are as follows:
  • 1. Capital instruments issued prior to September 12, 2010 that previously qualified as regulatory capital but do not meet the Basel III criteria for regulatory capital will be considered non-qualifying capital instruments and subject to the phase-out described in this Advisory.
  • 5. The cap will apply separately to Additional Tier 1 and Tier 2 capital. As the Basel III cap refers to the total amount of non-qualifying instruments outstanding within each tier of capital, some instruments in a tier may continue to fully qualify as capital while others may need to be excluded to comply with the cap.
  • 6. OSFI expects DTIs to comply with the Basel III requirements concerning the phase-out of non-qualifying capital instruments, while maximizing the amount of available regulatory capital and, to the maximum extent practicable, giving effect to the legitimate expectations of the parties to such capital instruments (as evidenced by the terms of such instruments). Accordingly, a DTI should prioritize redeeming capital in a way that will give effect to the following priorities:
    • (a) Maximize the amount of non-qualifying capital instruments outstanding during the Basel III transition period (based on the assumption that all capital will be redeemed at the earliest regular9 par redemption date); and
    • (b) Minimize the amount of capital that would be subject to a regulatory event.

Asinine. OSFI’s contempt for the capital markets shines through their pious muttering about “the legitimate expectations of the parties to such capital instruments”. They would much rather that the markets are a casino.

For more on the Basel rules, see BIS Finalizes Tier 1 Loss Absorbancy Rules.

Look for a big, big market pop in PerpetualDiscount prices on Monday.

Update, 2011-2-5: Josh Greenwood, Financial Post, Hybrid capital gets staged phase out.

Update, 2011-2-5: Doug Alexander and Frederic Tomesco, Bloomberg, Canada Banks Urged by Regulator to Limit Early Redemptions on Hybrid Bonds:

Prices for the securities have plunged on concern that the regulator may allow the banks to redeem the notes early at par, or as much as 30 percent below current prices.

TD Capital Trust’s 10 percent notes due in June 2108 sold by Toronto-Dominion fell 15.6 percent to 129.78 cents on the dollar in the six months through yesterday, while Scotiabank Tier 1 Trust’s 7.8 percent notes due in June 2108 dropped 5.8 percent. Declines in the period average 7.5 percent, according to Bloomberg data.

Update, 2011-2-8 .John Greenwood, Financial Post:

According to Bloomberg, $450-million of TD notes with annual interest of 10% and a call date of 2039 shot up to $136 from $127 on Monday, the most recent period for which prices are available. A similar issue of $300-million of 10.25% hybrids sold by CIBC callable in 2039 rose to $140 from $131.

Bank of Nova Scotia’s 7.8% notes with a call date of 2019 rose to $117 from $114.

The price moves come after a statement by the Office of the Superintendent of Financial Institutions on Friday telling banks not to take advantage of prospectus wording allowing issuers to redeem hybrids at par value if a regulatory event had taken place.

The majority of issues had call dates between 2019 and 2021, but at least two were callable in 2039.

Because of the high coupons, the bonds trade significantly above par value. For instance, the TD notes were changing hands in August at nearly $160 before slumping to $130 by mid-November amid concern about whether or not the new Basel rules constituted a regulatory event.

Similarly, the CIBC notes were fetching as much as $155 in August but by mid-November they declined to 127%.

61 Responses to “OSFI Does Not Grandfather Extant Tier 1 Capital”

  1. […] two advisories have been discussed in the posts OSFI Does Not Grandfather Extant Tier 1 Capital and OSFI Releases Contingent Capital Draft […]

  2. […] decision by OSFI to eliminate, rather than grandfathering, extant Tier 1 Capital means Monday will be chaotic. Brace […]

  3. […] OSFI advisory on extant issues was discussed in OSFI Does Not Grandfather Extant Tier 1 Capital. The probable new rules for Tier 1 are discussed at OSFI Releases Contingent Capital Draft […]

  4. Valueye says:

    I presume all the Fixed Reset Preferred shares will not be grandfathered also. Since they have very high dividends, do you think the banks will want to redeem them at par first?

  5. jiHymas says:

    Welcome to the blog!

    You are correct – and I regard the announcement with respect to almost all FixedReset issues to be a non-issue.

    In the first place, most of them do not have “regulatory event” clauses; the first preferred share issue with such a clause (as far as I know) is BNS.PR.Z, which has been issued and posted on the TMX but has yet to trade.

    Secondly, the high dividends on (most!) FixedResets has made a par call at the first opportunity to be highly likely irregardless of their pending loss of Tier 1 status.

  6. […] was a certain amount of excitement on the Canadian preferred share market today as OSFI’s refusal to grandfather extant Tier 1 Capital reverberated through the market. PerpetualDiscounts were up 30bp, FixedReset lost 13bp and […]

  7. […] is grossly abbreviated. My apologies, but since the OSFI announcement on extant Tier 1 Capital, time has been at a […]

  8. […] is grossly abbreviated. My apologies, but since the OSFI announcement on extant Tier 1 Capital, time has been at a […]

  9. […] is grossly abbreviated. My apologies, but since the OSFI announcement on extant Tier 1 Capital, time has been at a […]

  10. […] February edition will contain an appendix discussing the OSFI Advisory on extant Bank Tier 1 Capital and the analytical implications going […]

  11. […] yields to par call, holders should tender. The Issuer Bid is clearly related to the issues’ eventual loss of Tier 1 status. But questions remain: what’s the rush? and what about their straight perpetuals, NA.PR.K, […]

  12. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital and the January & February, 2011, editions of PrefLetter for the rationale behind this […]

  13. […] dramatically in March, to about 17%. Now that the portfolio has repositioned itself to account for OSFI’s refusal to grandfather extant Tier 1 Capital, we are back to the slow trading of positions based on changes in relative […]

  14. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital and the January & February, 2011, editions of PrefLetter for the rationale behind this […]

  15. […] dramatically in April, to about 4%. Now that the portfolio has repositioned itself to account for OSFI’s refusal to grandfather extant Tier 1 Capital, we are back to the slow trading of positions based on changes in relative […]

  16. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital and the January & February, 2011, editions of PrefLetter for the rationale behind this […]

  17. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February and March, 2011, editions […]

  18. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  19. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  20. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  21. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  22. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  23. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  24. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  25. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  26. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, […]

  27. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, […]

  28. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  29. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, […]

  30. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  31. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  32. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  33. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, […]

  34. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  35. […] in July, to a very low 2%. There is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relative homogeneous Straight Perpetual class of […]

  36. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  37. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relative homogeneous Straight Perpetual class of […]

  38. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  39. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  40. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  41. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  42. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  43. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  44. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  45. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  46. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  47. […] to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  48. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  49. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  50. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  51. […] and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  52. […] and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  53. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  54. […] and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  55. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  56. […] and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  57. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  58. […] and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

  59. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  60. […] is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of […]

  61. […] and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, […]

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