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%.