Question ID: 2318
Regulation Reference: Guidelines on reporting and public disclosure
Topic: Other
Article: Directive 2014/65/EU(Annex VI)
Status: Revised
Date of submission: 27 Jul 2021
Question
Please confirm the correct classification of bonds linked to inflation indices – shall they be reported as structured notes: “5x” or bonds: ”2x”? Back in 2020 we have confirmed (via email) that inflation linked bonds (bonds with principal adjusted by inflation indices) should be reported as structured notes rather than bonds. We have a client who challenges this classification and believes that these assets lean towards bonds and provided the following rationales supporting their opinion: 1. There has been no change in regulatory guidance or the risk profile of inflation linked assets (which are aligned with bonds) 2. Inflation-linked bonds do not conform to the definition of structured notes where they are generally considered to be hybrid securities that are made up of a bond with a derivative component linked to an underlying asset such as equities and commodities 3. The EIOPA CIC Annex does not identify inflation-linked or variable rate securities as typical examples of structured note, instead it references much more complex asset types such as Credit Default Swaps, Credit Default Options or Constant Maturity Swaps. The new classification for these inflation-linked bonds is “59”, however normally when the second digit of the CIC is quoted as “9” it suggests that the asset type is difficult to define. Their placement within the Structured notes classification implies that this is a hybrid security that is somewhat difficult to define; yet the above examples which are more complex have been quoted. Please confirm correct classification of bonds linked to inflation indices?
EIOPA answer
The definition for CIC 21 defines corporate bonds as bonds issued by corporations, with simple characteristics, usually covering the ones referred to as 'plain vanilla'. The inflation linkage is not covered in the description in the CIC subcategories 22 to 28.
As clarified in the ITS, structured notes "combine a fixed income with a series of derivative components" and "have embedded one or a combination of categories of derivatives". It is therefore enough if the bond has one derivative component, like to link to inflation, to be classified as structure note (in this case: CIC 59).