4.5 Triggers

In accordance with Article 47(1) of Regulation (EU) 2023/1114, the implementation of the redemption plan is triggered by the competent authority’s decision that the issuer is ‘ unable or likely to be unable to fulfil its obligations ’ .

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In addition to the situations expressly mentioned in Article 47(1) of Regulation (EU) 2023/1114, namely the issuer’s (i) insolvency, (ii) resolution (where applicable) or (iii) withdrawal of authorisation, these Guidelines further specify the elements for the competent authority’s assessment as to whether the issuer is ‘ unable or likely to be unable to fulfil its obligations’ under Regulation (EU) 2023/1114 .

In the case of commencement of crisis prevention measures or crisis management measures as defined in Article 2(1), points (101) and (102), of Directive 2014/59/EU or a resolution action as defined in Article 2, point (11), of Regulation (EU) 2021/23, the competent authority should not trigger the redemption plan without prior consultation and coordination with the relevant prudential or resolution competent authorities under Directive 2013/36/EU¹⁴ , Directive 2014/59/EU or Regulation (EU) 2021/23 if the issuer is subject to these Directives and this Regulation.

For purposes of assessing whether the issuer is ‘ unable or likely to be unable to fulfil its obligations’ under Regulation (EU) 2023/1114, the competent authority should have regard, inter alia , to the aspects listed in points (i) to (iii) of paragraph 84, exclusively relating to the requirements set out in Title III or Title IV, as applicable, of Regulation (EU) 2023/1114 and within the scope of supervision of the competent authority.

The aspects that the competent authority should inter alia have regard to when assessing whether the issuer is ‘unable or likely to be unable to fulfil its obligations’ under Regulation (EU) 2023/1114 are the following:

• i. capital position of the issuer: infringement of the requirements under Article 35(1) to (5) and Article 45(5) of Regulation (EU) 2023/1114;
• ii. liquidity position of the issuer under applicable requirements set out in Regulation (EU) 2023/1114 and/or of the reserve of assets:
• o infringement of the liquidity requirements, or, if subject to a requirement to hold a reserve of assets, of the requirements relating to the level and composition of the reserve of assets set out in Chapters 3 and 5 of Title III of Regulation (EU) 2023/1114, including any specification in accordance with Articles 36(4), 38(5) and 45(7)(b) of that Regulation, once the relevant delegated regulations apply, in a way that would justify the withdrawal of the issuer’s authorisation by the competent authority;
• o being unable to pay debts and liabilities as they fall due; and
• o having the reserve of assets lower than liabilities;

14 Directive of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions

and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338). 28

• iii. with respect to issuers of ARTs authorised in accordance with Article 21 of Regulation (EU) 2023/1114, other requirements for continuing authorisation:
• o in relation to governance arrangements: accumulation of material weaknesses or deficiencies in key areas of the governance arrangements or internal control functions, including risk management and ICT risk management, which alone or together have a material negative prudential impact on the issuer and/or its operational resilience; or any other elements considered relevant by the competent authority;
• o material deficiencies which in combination can have a material negative prudential impact on the issuer, such as major reputational depreciation arising from a lack of transparency in the conduct of business and operations or incomplete/inaccurate disclosure of information.

When assessing the issuer’s inability or likely inability in the near future to comply with the applicable requirements as determined also by the factors above, the competent authority should base its determination also on elements including among other things:

• i. significant adverse developments in the macroeconomic environment that are likely to threaten the issuer’s position as regards own funds, liquidity requirement and/or assets backing the redemption rights of the token holders, including relevant developments in interest rates, market freeze or economic growth; such developments should significantly adversely affect the issuer’s business model, the outlook for its profitability, its liquidity position, its viability and its reserve of assets;
• ii. significant deterioration of market perception of an issuer, for instance due to obstacles to prompt access to the assets backing the redemption rights of token holders, such as deterioration in the solvency profile of the credit institution holding the issuer’s deposits or providing custodial services, or negative volatility of the highly liquid financial instruments in the reserve of assets or the high-quality liquid assets composing the liquidity coverage ratio (LCR) requirement;
• iii. significant deterioration of the market conditions, likely leading to a run on the ART or EMT by the token holders, due to, among other things, any large and/or persistent negative divergence between the market value of the token and the market value of the assets referenced, idiosyncratic shock relating to specific assets referred to by the ART or EMT, increasing and high instability of the crypto market, interconnectedness between the financial system and the crypto activities in issuers that might act as a contagion channel for the crisis (idiosyncratic or market wide), or loss of confidence of the token holders.

The factors and elements listed in these Guidelines, respectively in paragraphs 84 and 85, should be carefully analysed on a comprehensive basis and justified. The determination that an issuer is unable or likely to be unable to fulfil its obligations should remain subject to an expert judgement

29 and should not be automatically derived from any of the elements described herein. This is especially true as regards the interpretation of the elements which may be affected by factors not directly related to the situation of the issuer.

When determining the issuer ’s inability or likely inability in the near future to fulfil its obligations under Regulation (EU) 2023/1114, the competent authority should base its decision, inter alia , on the assessment of the elements described in this section and taking into account, where relevant, the failure of the prior activation of recovery options envisaged in the recovery plan developed by the issuer in accordance with Article 46 of Regulation (EU) 2023/1114 or the failure of the recovery options to remedy the distressed situation. Nevertheless, the prior activation of the recovery plan should not be a necessary condition for the activation of the redemption plan.

In most cases it is expected that several factors, rather than merely one, set out in this section would inform the competent authority’s determination that an issuer is unable or likely to be unable to fulfil its obligations. Nevertheless, there might be situations where meeting just one condition, depending on its severity and prudential impact, would be sufficient to support the competent auth ority’s decis ion to trigger the redemption plan.

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