• PRU 3.12 PRU 3.12 Tier 2 capital

    • PRU 3.12.1 PRU 3.12.1

      Tier 2 Capital (referred to in these Rules as T2 Capital) constitutes the sum of the elements in Rule 3.12.2 subject to the deductions stipulated later in this Section.

      • Guidance

        Tier 2 capital refers to "gone concern" capital which helps to ensure that depositors and senior creditors can be repaid if an Authorised Person fails. Tier 2 capital allows an Authorised Person to continue its activities and prevent insolvency of the Authorised Person.

    • PRU 3.12.2

      T2 Capital consists of the sum of the following elements:

      (a) capital instruments which meet the eligibility criteria laid down in Rule 3.12.3; and
      (b) the Share premium accounts related to the instruments referred to in (a).

    • PRU 3.12.3 PRU 3.12.3

      (1) For the purpose of Rule 3.12.2(a), a capital instrument is eligible for inclusion in T2 Capital where all the following conditions are met:
      (a) the instruments are issued and fully paid-up;
      (b) the instruments are not purchased by any of the following:
      (i) the Authorised Person or its Subsidiaries;
      (ii) an Undertaking in which the Authorised Person has participation in the form of ownership, direct or by way of control, of 20% or more of the voting rights or capital of that Undertaking;
      (c) the purchase of the instruments is not funded directly or indirectly by the Authorised Person;
      (d) the claim on the principal amount of the instruments under the provisions governing the instruments is wholly subordinated to claims of all non-subordinated creditors;
      (e) the instruments are not secured, or guaranteed by any of the following:
      (i) the Authorised Person or its Subsidiaries;
      (ii) any Parent of the Authorised Person or their Subsidiaries;
      (iii) any member of the Financial Group to which the Authorised Person belongs; or
      (iv) any Undertaking that has Close Links with entities referred to in (i) to (iii);
      (f) the instruments are not subject to any arrangement that otherwise enhances the seniority of the claim under the instruments;
      (g) the instruments have an Original Maturity of at least five years;
      (h) the provisions governing the instruments do not include any incentive for them to be redeemed by the Authorised Person;
      (i) where the instruments include one or more call Options, the Options are exercisable at the sole discretion of the Issuer;
      (j) the instruments may be called, redeemed or repurchased only where the Authorised Person has notified the Regulator of its intention to call, redeem or repurchase the instruments in writing and well in advance, and not before five years after the date of issuance of the respective instruments;
      (k) the provisions governing the instruments do not indicate or suggest that the instruments would or might be redeemed or repurchased other than at maturity and the Authorised Person does not otherwise provide such an indication or suggestion;
      (l) the provisions governing the instruments do not give the holder the right to accelerate the future scheduled payment of interest or principal, other than in the insolvency or liquidation of the Authorised Person;
      (m) the level of interest or dividend payments due on the instruments will not be modified based on the credit standing of the Authorised Person, its Parent or any member of its Financial Group;
      (n) the instruments are capable of absorbing losses at the point of nonviability through the contractual provisions governing the instruments meeting the requirements set out in Rule 3.12.3(3); and
      (o) where the instruments are not issued directly by the Authorised Person or by an operating entity within its Financial Group, or by its Parent, the proceeds are immediately available without limitation in a form that satisfies the conditions laid down in this Rule to any of the following:
      (i) the Authorised Person;
      (ii) an operating entity within its Financial Group; or
      (iii) any Parent of the Authorised Person.
      (2) The extent to which T2 Capital instruments can be considered as eligible for inclusion in T2 Capital during the final five years of maturity of those instruments is calculated by multiplying the result derived from the calculation in (a) by the amount referred to in (b):
      (a) the nominal amount of the instruments on the first day of the final five year period of their contractual maturity divided by the number of calendar days in that period;
      (b) the number of remaining calendar days of contractual maturity of the instruments.
      (3) For the purposes of (1)(n), the following provisions apply to T2 Capital instruments.
      (a) The provisions governing T2 Capital instruments must require such instruments to, at the option of the Regulator, either be partially or fully written down or converted into ordinary shares upon the occurrence of a trigger event.
      (b) For the purpose of this provision, a "trigger event" shall refer to a notification by the Regulator notifying the Authorised Person in writing, in accordance with any regulations of ADGM relating to recovery and resolution, that the Regulator has determined that unless a write down or conversion is conducted, the Authorised Person will no longer be viable.
      (c) Any compensation paid to the instrument holders as a result of a write down shall be paid immediately and in the form of ordinary shares of the Authorised Person, or the holding company of the Authorised Person if approved by the Regulator.
      (d) The Authorised Person shall maintain at all times all prior authorisation necessary to issue immediately the relevant number of ordinary shares should the trigger event occur and the T2 Capital instruments be converted into ordinary shares.
      (e) Where an Authorised Person intends to include the T2 Capital instruments issued by a Subsidiary in a non-ADGM jurisdiction in the consolidated T2 Capital, the Authorised Person may do so, to the extent permitted under these Rules, if the provisions governing the instrument specify a trigger event equivalent to the trigger specified in paragraph (b) above, or where the trigger event relates to the supervisor of the Subsidiary deciding to make a public sector injection of capital or equivalent support, without which the Authorised Person would no longer be viable. The Regulator will only activate such triggers in respect of such Subsidiary, after consultation with the supervisor of the Subsidiary, where:
      (i) if applicable, the Subsidiary is non-viable as determined by the supervisor of the Subsidiary in accordance with applicable laws of that jurisdiction on insolvency, resolution or recovery of financial institutions; and
      (ii) the Authorised Person is, or would be, non-viable, as determined by the Regulator, as a result of providing, or committing to provide, a capital injection or similar support to the Subsidiary.
      (f) For the purposes of paragraph (e) above, any ordinary shares paid as compensation to the holders of the capital instrument shall be ordinary shares of either the Subsidiary or of the Authorised Person.
      (4) The following must apply where, in the case of a T2 Capital instrument, the conditions laid down in this Rule cease to be met:
      (a) that instrument must cease to qualify as a T2 Capital instrument; and
      (b) the part of the Share premium accounts that relates to that instrument must cease to qualify as a T2 Capital element.

      • Guidance

        Where the Regulator determines that certain conditions in relation to the viability of the institution are met, capital instruments eligible for inclusion in T2 Capital will be either partially or fully written down or converted into ordinary shares.

    • T2 regulatory deductions and exclusions T2 regulatory deductions and exclusions

      • PRU 3.12.4

        Subject to the following Rules in this Section, an Authorised Person must deduct the following from the calculation of its T2 Capital:

        (a) direct and indirect holdings by an Authorised Person of own T2 Capital instruments, including own T2 instruments that an Authorised Person could be obliged to purchase as a result of existing contractual obligations;
        (b) holdings of the T2 Capital instruments of Relevant Entities where those entities have a reciprocal cross holding with the Authorised Person which have the effect of artificially inflating the Capital Resources of the Authorised Person;
        (c) the amount of direct and indirect holdings by the Authorised Person of the T2 Capital instruments of Relevant Entities where the Authorised Person does not have a significant investment in those entities; and
        (d) direct and indirect holdings by the Authorised Person of the T2 Capital instruments of Relevant Entities where the Authorised Person has a PRU VER06.201218 84 significant investment in those entities, excluding Underwriting positions held for fewer than five working days.

    • T2 Deductions - holdings of own T2 Capital instruments T2 Deductions - holdings of own T2 Capital instruments

      • PRU 3.12.5

        For the purposes of Rule 3.12.4(a), an Authorised Person must calculate holdings of its own T2 Capital instruments on the basis of the gross long positions subject to the following exceptions:

        (a) an Authorised Person must calculate the amount of holdings in the Trading Book on the basis of the net long position provided the long and short positions are in the same underlying Exposure and the short positions involve no Counterparty Credit Risk;
        (b) an Authorised Person must determine the amount to be deducted for indirect holdings in the Trading Book of own T2 Capital instruments that take the form of holdings of index Securities by calculating the underlying Exposure to own T2 Capital instruments in the indices; and
        (c) an Authorised Person must net gross long positions in own T2 Capital instruments in the Trading Book resulting from holdings of index Securities against short positions in own T2 instruments resulting from short positions in the underlying indices, including where those short positions involve Counterparty Credit Risk.

    • T2 Deductions - investments in T2 Capital instruments of Relevant Entities T2 Deductions - investments in T2 Capital instruments of Relevant Entities

      • PRU 3.12.6

        For the purposes of Rules 3.12.4(b), (c) and (d), the amount of holdings of T2 Capital instruments and other capital instruments of Relevant Entities to be deducted must be calculated on the basis of the gross long positions.

      • PRU 3.12.7

        For the purposes of Rules 3.12.4(c) and (d), an Authorised Person must make the deductions in accordance with the following:

        (a) the holdings in the Trading Book of the capital instruments of Relevant Entities must be calculated on the basis of the net long position in the same underlying Exposure provided the maturity of the short position matches the maturity of the long position or has a residual maturity of at least one year; and
        (b) the amount to be deducted for indirect holdings in the Trading Book of the capital instruments of Relevant Entities that take the form of holdings of index Securities must be determined by calculating the underlying Exposure to the capital instruments of the Relevant Entities in the indices.

    • T2 deductions - insignificant investment in a Relevant Entity T2 deductions - insignificant investment in a Relevant Entity

      • PRU 3.12.8

        (1) For the purposes of Rule 3.12.4(c), an Authorised Person must calculate the applicable amount to be deducted by multiplying the amount referred to in (a) by the factor derived from the calculation referred to in (b):

        (a) the amount referred to in Rule 3.10.16(1)(a);
        (b) the amount of direct and indirect holdings by the Authorised Person of the T2 Capital instruments of Relevant Entities divided by the aggregate amount of all direct and indirect holdings by the Authorised Person of the CET1, AT1 and T2 Capital instruments of those Relevant Entities.

        (2) An Authorised Person must exclude Underwriting positions held for five working days or fewer from the amount referred to in Rule 3.10.16(1)(a) and from the calculation of the factor referred to in (1)(b).

        (3) An Authorised Person must determine the portion of holdings of T2 Capital instruments that is to be deducted by dividing the amount specified in (a) by the amount specified in (b):

        (a) the amount of holdings required to be deducted pursuant to (1)(a);
        (b) the aggregate amount of direct and indirect holdings by the Authorised Person of the capital instruments of Relevant Entities in which the Authorised Person does not have a significant investment.

    • T2 Exclusion - Managing a Profit Sharing Investment Account T2 Exclusion - Managing a Profit Sharing Investment Account

      • PRU 3.12.9

        An Authorised Person must exclude from T2 Capital any amount by which the total of the Profit Equalisation Reserve and the Investment Risk Reserve exceeds the Displaced Commercial Risk Capital Requirement calculated in accordance with the IFR rules