The Office of the Superintendent of Financial Institutions has released a Draft Advisory titled Interim Treatment of Capital Instruments:
Generally, with regard to grandfathering, OSFI will consider compliant instruments issued after December 17, 2009 in a manner that is consistent with its treatment of instruments both issued on or prior to December 17, 2009 and qualifying under OSFI capital adequacy requirements existing on December 17, 2009, that is, compliant instruments will be eligible for grandfathering when the revised Basel II rules come into force (which is to be no later than the end of 2012).
FREs issuing non-compliant instruments after December 17, 2009 should do so with the expectation that these instruments will not be grandfathered when the revised Basel II rules come into force.
This guidance will apply in the following manner to innovative instruments, preferred shares and subordinated debt.
Innovative instruments: As currently structured in Canada, innovative instruments would clearly not be compliant. As such, it is very unlikely that innovative tier 1 instruments issued by FREs after December 17, 2009 will be grandfathered. If FREs issue innovative tier 1 instruments after December 17, 2009, they should do so with the expectation that these instruments will not be grandfathered under the new rules.
Preferred shares: Non-cumulative, perpetual preferred shares as currently structured in Canada would be compliant, provided they do not contain features which constitute an incentive to redeem. OSFI has determined that the so-called rate reset preferred shares, as they have been structured to date, do not contain such incentives to redeem and should therefore be compliant. If FREs issue compliant preferred shares after December 17, 2009, they should expect that these instruments will be eligible for grandfathering upon OSFI’s implementation of the new rules.
Subordinated debt: Subordinated debt issuances will not be compliant where they contain a step-up feature, other incentives to redeem, or provide for redemption in the first five years. FREs issuing non-compliant subordinated debt after December 17, 2009 should do so with the expectation that these instruments will not be grandfathered under the new rules. If FREs issue non-compliant subordinated debt which includes the right of redemption due to a regulatory change that affects its inclusion in regulatory capital, the potential risk of early redemption must be clearly disclosed to investors. If FREs issue compliant subordinated debt after December 17, 2009, they should expect that these instruments will be eligible for grandfathering upon OSFI’s implementation of the new rules.
For greater certainty, FREs are encouraged to seek a quality of capital confirmation from OSFI prior to issuance of capital instruments during the interim period.
The December 17, 2009, date is based on the BIS Consultative Document which has been discussed on PrefBlog.
Comments on the Draft Advisory are due May 21.
I have not yet received a response to my follow-up question regarding OSFI’s apparent selective disclosure of this – or, perhaps, merely equivalent – guidance.