Earlier today, the Italian Parliament approved the Italian Budget Law for the year 2018 (the 2018 Budget Law), which provides, inter alia, for amendments to Italian Legislative Decree no. 385 of 1 September 1993 (the Italian Banking Act) and to Italian Legislative Decree no. 58 of 24 February 1998 (the Italian Financial Services Act) aimed at permitting the issue by Italian banks of "non preferred" senior liabilities (Italian SNP), introducing a category of "second level unsecured debt instruments" ranking, in the insolvency or resolution of an Italian bank, directly below its senior unsubordinated liabilities, including senior unsubordinated notes but above all subordinated claims (including in respect of Tier 2 instruments and additional Tier 1 instruments) and shares.
By way of background, on 23 November 2016 the EU Commission published a comprehensive package of proposed amendments (hereafter, the Banking Reform Package), primarily centred around the CRD IV Directive and Regulation (Directive 2013/36/EU - the CRD) and Regulation 575/2013 (the CRR) and the Bank Recovery and Resolution Directive (Directive 2014/59/EU - the BRRD). The Banking Reform Package is part of the on-going upgrade of CRD IV from Basel III to what some in the industry are calling "Basel IV" and seeks to bring the EU’s existing minimum requirement for own funds and eligible liabilities (MREL) under the BRRD in line with the Financial Stability Board's (FSB) Total Loss-Absorbing Capacity (TLAC) standard for global systemically important institutions (G-SIIs).
In order to ensure investor certainty and uniformity of application, the proposal creates a new category of claim in bank insolvency hierarchy: "non-preferred" senior debt. In that context, the Commission intends to amend Article 108 of the BRRD to partially harmonise the bank insolvency creditor hierarchy relating to the priority ranking of holders of bank senior unsecured debt eligible to meet the BRRD rules and the TLAC standard on loss absorbency and recapitalisation capacity for banks, in particular the subordination requirement. The new provision maintains the existing class of senior debt while it creates a new class of "non-preferred" senior debt that should only be bailed-in in resolution after other capital instruments, but before other senior liabilities. Banks would remain free to issue debt in both classes while only the "non-preferred" senior class is eligible for the minimum TLAC requirement (subject to a de minimis exception) or any subordination requirement that could be imposed by resolution authorities for MREL purposes on a case-by-case basis.
Although the proposed amendments to Article 108 of the BRRD are still being finalised(1), the issue of "non preferred" senior liabilities has already been provided for by the laws of certain other EU jurisdictions(2), so the provisions contained in the 2018 Budget Law are aimed at levelling the playing field for Italian banks.
Characteristics of liabilities which may rank as SNP
According to the 2018 Budget Law, Italian SNP are debt instruments issued by a bank or a company belonging to a banking group having the following characteristics (the Conditions):
- the original maturity is at least twelve months;
- the instruments are not derivative financial instruments, as defined in Article 1, paragraph 3, of the Italian Financial Services Act (3), are not linked to derivative financial instruments, and do not include any specific characteristics of derivative financial instruments; and
- the contractual documents and, if relevant, the offering or listing prospectus indicate that the repayment of principal and payment of interest and any other amounts owed to the bondholders are regulated by the provisions of the new Article 91, paragraph 1-bis, sub-paragraph c-bis (New Article 91).
The Parliamentary Report which accompanied the 2018 Budget Law confirms that the intention underling the proposed amendments to Article 108 of the BRRD is that, in insolvency claims in respect of Italian SNP would be satisfied after all preferred claims and other unsubordinated claims but prior to all subordinated claims (including in respect of Tier 2 instruments and additional Tier 1 instruments) and shares.
The minimum denomination of Italian SNP must be at least EUR 250,000., and Italian SNP may only be placed with qualified investors(4) and may not be placed with retail investors.
Once issued, Italian SNP may not be modified in any way which impacts the Conditions. Any clause to the contrary is null and void. Please note that the application of the New Article 91 is subject to the Conditions.
Asset management companies indicated in Article 55-bis, paragraph 1, of the Italian Financial Services Act may issue Italian SNP.
Please also note that the new category of securities are included among the other instruments issued by the banks under article 12, paragraph 4-bis, of the Italian Banking Act, and are subject to the same rules(5).
The 2018 Budget Law will enter into force upon publication in the Italian Official Journal which will occur by the end of the year.
Note that, pursuant to Article 12-bis, the Bank of Italy "may" regulate the issuance and characteristics of Italian SNP. Therefore, although the Bank of Italy is not obligated to issue second-level rules it has the power to do so. In light of the impact of the Conditions on application of Article 91, it would be helpful for the Bank of Italy to issue rules addressing, inter alia, the types of instruments which will not be deemed to incorporate the characteristics of derivatives.
Italian Banking Act
- Article 12, paragraph 4-bis (amended)
- Article 12-bis (new)
- Article 91 paragraph 1-bis, sub-paragraph c-bis (new)
Italian Financial Services Act
- Article 60-bis.4-bis (new)
(1) On 7 December 2017, the Council of the European Union adopted the directive on the ranking of unsecured debt instruments in insolvency proceedings. This follows an agreement with the European Parliament on 25 October 2017. The Parliament approved the text at first reading on 30 November 2017.
(2) In France, the Sapin 2 Law, which introduces the category of senior non-preferred notes, was published in the Official Journal of the Republic of France on 10 December 2016 and took effect the next day.
In Spain, Royal Decree-Law 11/2017 of 23 June on urgent actions on financial matters was approved to amend Law 11/2015 (implementing BRRD in Spain) which establishes the hierarchy of claims in case of resolution and insolvency of a Spanish credit institution and the Securities Market Act. As amended, Law 11/2015 fires the starting gun for the issuance of mandatorily recognised senior "non-preferred" debt instruments by Spanish credit institutions. For more details, please click here.
In Germany, although there is no specific law similar to the French and Spanish ones mentioned above, in the end of 2016 a law was enacted which differentiates between senior liabilities (senior senior vs. sub senior debt instruments).
(3) Pursuant to Article 1, paragraph 3, of the Italian Financial Services Act, "derivatives" shall mean the following financial instruments:
- options, futures, swaps, futures contracts on interest rates and other derivative contracts linked to securities, currency, interest rates or returns, or other derivatives, financial indices or measures that may be settled by the physical delivery of the underlying asset or by cash payment of differentials;
- options, futures, swaps, interest rate swaps, and any other derivative contracts on commodities, settlement of which is by payment of the differentials in cash, or at the discretion of one of the parties, except in cases where such option is the result of default or other event leading to cancellation of the contract;
- options, futures, swaps and other derivative contracts on commodities, the settlement of which may be by physical delivery of the underlying asset and which are traded on a regulated market and/or multilateral trading systems;
- options, futures, swaps, forward contracts and other derivative contracts on commodities, the settlement of which may be by physical delivery of the underlying asset, other than those indicated in paragraph iii), that have no commercial purpose, and with the characteristics of other derivatives, taking into consideration, amongst other things, whether they are cleared and executed through recognised clearing houses or whether they are subject to regular margin calls;
- derivatives for the transfer of credit risk;
- differential financial contracts;
- options, futures, swaps, futures contracts, swaps, futures contracts on interest rates and other derivative contracts related to climatic variables, transport rates, emission levels, inflation rates or other official economic statistics, settled by cash payment of differentials or at the discretion of one of the parties, except in cases where such option is the result of default or other event leading to cancellation of the contract and other derivative contracts on assets, options, bonds, indices and measures other than those indicated in previous paragraphs, with the characteristics of other derivative financial instruments, taking into consideration, amongst other things, whether are traded on a regulated market or multilateral trading systems, whether they are cleared and executed through a recognised clearing house or whether they are subject to regular margin calls; and
- any other security usually involving cash settlement determined with reference to securities such as (a) company shares and other shares equivalent to shares of companies, partnerships or other persons and share deposit certificates, (b) bonds and other debt securities, including certificates of deposit relating to such securities; (c) any other security normally negotiated which permits the purchase or sale of securities; as well as to currency, interest rates, returns, commodities, indices or measures.
(4) Pursuant to the definition provided for by Article 34-ter, paragraph 1, let. b) of Consob Regulation 11971/1999 and Article 26, paragraph 1, let. d) of Consob Regulation 16190/2007, "Qualified Investors" (investitori qualificati) means (i) regulated financial institutions (e.g. banks, asset managers, investment firms, etc.), (ii) large corporates (who meet certain size thresholds), and (iii) other institutional investors (e.g. SPVs).
(5) In particular, paragraphs 3 and 4 of Article 12 of the Italian Banking Act will apply also to Italian SNP. Pursuant to:
- paragraph 3, the issue of non-convertible bonds and bonds convertible into securities of other companies shall be approved by resolution of the administrative body; certain provisions of the Italian Civil Code shall not apply.
- paragraph 4, where bonds are convertible into own shares the provisions of the Italian Civil Code shall apply, except for Article 2412 which imposes limits on the principal amount of bonds that may be issued by companies limited by shares (società per azioni or S.p.A’s) other than banks.