Please note that the questions being asked do not relate to a situation where the CET 1 instruments repurchased will reduce the own funds of a credit entity on a permanent basis.

Article 29 of Regulation 241/2014 provides for 3 different options for repurchases (i.e., market making (3), acquisition for employees (4) and other reasons for a predetermined amount (5)).

The “discretionary trading activity over treasury shares” is a wide common activity carried out by listed companies to engage purchases and sales of their own shares on entirely discretionary basis (with no commitment from the listed company to carry out purchases or sales and no expectation from the market that such activity will occur at any given price or for a given volume). This activity is substantially different from the legal definition of market making set forth in Regulation (EU) No 236/2012 of the European Parliament and of the Council, and by the European Commission and in the EU draft legislative proposals for banking reform (see Proposal for a regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions).

Concretely, the “discretionary trading activity over treasury shares” lacks the essential requirements of the market making activity, namely: (i) the existence of a “commitment”; and (ii) to “provide market liquidity on a regular and on-going basis”. It is also different from other practices recognized over treasury shares (i.e. liquidity agreements). Therefore, in our view, any application for supervisory permission for repurchasing CET 1 instruments that may be carried out by a credit entity under its discretionary trading activity over treasury shares shall be subject to Article 29(5) and not to Article 29(3).

On the other hand, Article 28(2) lays down that credit institutions shall deduct the corresponding elements from their own funds to be repurchased before the effective repurchases occur if such “repurchases are expected to take place with sufficient certainty, and once the prior permission of the competent authority has been obtained. [...] Sufficient certainty is deemed to exist in particular when the institution has publicly announced its intention to repurchase an own funds instrument”.

 ”Sufficient certainty” requirement set forth by Article 28(2) cannot be met in the case of discretionary trading activity over treasury shares, as no unconditional commitment is assumed for posting firm orders for purchasing ordinary shares, as opposed, for example, to market making activity. On the contrary, credit entities have full discretion to post orders when executing their discretionary trading activity over treasury shares and there are times during which they may not post orders (such as in the period leading to a results announcement).

Additionally, no announcements are or will be made in relation to the intention of any credit entity to execute its discretionary trading activity over treasury shares, as the only public information related to the discretionary trading activity over treasury shares is the on-going reporting to the applicable authorities  on already executed transactions. Consequently, as the discretionary trading activity over treasury shares (i) does not correspond with market making activity; (ii) does not comply with the “sufficient certainty” requirement; and (iii) does not involve any public announcements in relation to the intention to its execution; we understand that deductions shall follow the standard deductions regime established by Article 36 of CRR according to which deductions on CET 1 capital shall occur whenever each specific repurchase order is carried out from time to time by a credit institution under its discretionary trading activity over treasury shares.