NVCC: “Minimum Reset Guarantee” = “Incentive to Redeem”?

I have long accepted that banks cannot offer minimum reset guarantees on their FixedResets because this is considered to be an incentive to redeem by the regulators. I’m almost certain that I saw an authoritative statement to this effect at one point and reported it here, but when I tried to find it my search was fruitless.

The OSFI Definition of Capital is quite emphatic about incentives:

The following is the minimum set of criteria for an instrument issued by the institution to meet or exceed in order for it to be included in Additional Tier 1 capital:

Is perpetual, i.e. there is no maturity date and there are no step-ups [Footnote15] or other incentives to redeem [Footnote16]

The footnotes read:

Footnote 15
A step-up is defined as a call option combined with a pre-set increase in the initial credit spread of the instrument at a future date over the initial dividend (or distribution) rate after taking into account any swap spread between the original reference index and the new reference index. Conversion from a fixed rate to a floating rate (or vice versa) in combination with a call option without any increase in credit spread would not constitute a step-up. [Basel Framework, CAP 10.11 FAQ4]

Footnote 16
Other incentives to redeem include a call option combined with a requirement or an investor option to convert the instrument into common shares if the call is not exercised. [Basel Framework, CAP 10.11 FAQ4]

… but I couldn’t find anything from (or attributed to) OSFI that stated that a Minimum Reset Guarantee constituted a step-up.

I did, however, find a notice from the European Banking Authority:

Article 489 of Regulation (EU) No 575/2013 (CRR) provides for the grandfathering treatment of hybrid instruments with a call and an incentive to redeem. A bank has issued a bond with a fixed coupon before the first call date and a floating rate coupon after the first call date. The credit spread of the fixed coupon as of the issuance date is the same as the margin of the floating rate coupon after the first call date, so there is no immediate step-up there. However, the floating rate coupon is floored at the level of the fixed rate coupon. Does this constitute an incentive to redeem ?

Final Answer:
Pursuant to Article 20(1) of Commission Delegated Regulation (EU) No 241/2014 an incentive to redeem shall mean all features that provide, at the date of issuance, an expectation that the capital instrument is likely to be redeemed. A floating rate coupon floored at the level of the initial fixed rate coupon, such as in the case described by the submitter, constitutes an incentive to redeem, as the new coupon after the first call date will always be equal or higher than the initial coupon.

So to some extent, this post is my bookmark for this little fact. But it is also a request that perhaps somebody with a better memory than mine find the reference I’m thinking of!

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