What shall be considered a ‘hybrid contract’ for the purposes of reporting FINREP template F 08.01?
In FINREP template F 08.01, data is collected on ‘Hybrid contracts’. The definition of Hybrid contracts is provided in paragraph 98(d) of Annex V, Part 2 of Commission Implementing Regulation (EU) No 680/2014: ‘Hybrid contracts’ comprise contracts with embedded derivatives.
Does the EBA intend to capture:
a) Hybrid capital instruments that contain embedded derivatives (Additional Tier 1 instruments accounted for as financial liabilities in FINREP).
b) Debt securities issued in scope of FINREP template F 08.01 that contain an embedded derivative where the embedded derivative is required to be separated from the host contract (criteria of IAS 39.11 are met).
c) Debt securities issued that contain an embedded derivative that may or may not be required to be separated from the host contract (as defined in IAS 39.10, irrespective of whether the criteria of IAS 39.11 are met).
Please note that a broad definition of hybrid contracts (as per option b or c above) may require further guidance on the disaggregation of ‘Debt securities issued’ in type of products. For example if an ABS contains an embedded derivative should it be reported in row 380, 400 or both 380 and 400? This would likewise apply to other product types possibly containing embedded derivatives (e.g. covered bonds, convertible compound financial instruments under the Other debt securities issued product type).
FINREP template F 08.01 concerns the breakdown of financial liabilities by product and by counterparty sector. Paragraph 98, Annex V, Part 2 of Commission Implementing Regulation (EU) No 680/2014, as amended, specifies that the item “Debt securities issued” shall be disaggregated into the type of products: “Certificates of deposits” (row 370), “Asset backed securities” (row 380), “Covered bonds” (row 390), “Hybrid contracts” (row 400) and “Other debt securities issued” (row 410). In particular, “Hybrid contracts” shall comprise contracts with embedded derivatives as per paragraph 98(d).
The type of products listed in rows 370 to 410 are intended to be mutually exclusive, as established also by validation rule v2277_m. As such, the category “Hybrid contracts” shall comprise those contracts with embedded derivatives which are not otherwise classified as asset backed securities according to Article 4(1)(61) of Regulation (EU) No 575/2013 of the European Parliament and of the Council (“CRR”), or covered bonds according to Article 129(1) of CRR, or as convertible compound financial instruments under the item “Other debt securities issued”.
Instructions (Annex V of Regulation (EU) No 680/2014) will be amended to reflect this approach.