BaFin Explanatory Note on PRIIPs Regulation

On 22 August 2019, the German Federal Financial Supervisory Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht - BaFin) published an Explanatory Note (Merkblatt) on the regulatory classification of certain characteristics of corporate bonds on the basis of the PRIIPs Regulation.

With its Explanatory Note, BaFin reacts to the still existing and continuing uncertainty about the applicability of Regulation (EU) No 1286/2014 on key information documents for packaged retail and insurance - based investment products (PRIIPs).

In its Explanatory Note BaFin describes its administrative practice with regard to the regulatory classification of certain features in corporate bonds in the context of the interpretation of the PRIIPs Regulation.

Unspecified maturity: An unspecified/"perpetual" maturity does not result in the corporate bond being classified as a PRIIP. The amount of the bond to be repaid, understood as interest and principal, is not subject to any fluctuations due to its unspecified maturity and, in particular, is not dependent on a reference value.

Subordination: Subordinated bonds are not classified as PRIIP. The amount of the bond to be repaid is not subject to fluctuations of reference assets due to its subordination. Even a "qualified subordination", ie deep subordination in accordance with section 39 of the German Insolvency Code does not lead to a classification as a PRIIP.

Fixed interest rate: Fixed - interest - bonds are not classified as PRIIP. The amount of the bond to be repaid is not subject to fluctuations due to its dependence on a reference value. This also applies if the corporate bond does not bear interest, ie has a "zero interest rate" and in the case of "step - up coupons".

Changes in the repayable amount (interest and principal amount) depending on a reference value: Any conditional or unconditional changes in interest rates that are specified in the terms and conditions of the bonds and are not linked to a reference asset do not generally qualify as PRIIP.

If, however, the repayable amount or the interest rate of a bond is linked to a reference asset, the nature of the reference asset needs to be taken into account to assess whether a bond qualifies as PRIIP. In cases where the interest rate is linked to reference rates like Euribor or Libor BaFin takes the view that the respective bond does not qualify as PRIIP. In cases where the reference assets are, however, indices, goods, securities or similar assets, a bond qualifies as PRIIP. The same applies in case of redemptions at a "make-whole amount", if such make-whole amount is calculated by referring to a reference asset.

Right of termination: Bonds with the option for the issuer to give notice (callable bonds) or the option for the bondholder to give notice (puttable bonds) are not classified as PRIIP solely on the basis of this right.

Conversion or subscription rights to other securities: Bonds with conversion or subscription rights to other securities are classified as PRIIP.