• PRU PART 5 PRU PART 5 — Leverage

    • PRU 3.18 PRU 3.18 Countercyclical Capital Buffer

      • PRU 3.18.1 PRU 3.18.1

        This Section applies to an Authorised Person in Category 1, 2 or 5.

        • Guidance

          This Section is relevant to an Authorised Person that is required to report its Leverage Ratio to the Regulator under Chapter 2, or to disclose its Leverage Ratio under App 11.

          The purpose of the Leverage Ratio is to have a simple indicator that offers a safeguard against the risks associated with the risk models underpinning risk weighted assets (e.g. that the model is flawed or that data is measured incorrectly). The ultimate aim is also to constrain leverage and to bring institutions' assets more in line with their capital in order to help mitigate destabilising deleveraging processes in downturn situations.

      • PRU 3.18.2

        Where, pursuant to Section 3.4, the Risk Capital Requirement forms the Capital Requirement of an Authorised Person, then it is subject to a Countercyclical Capital Buffer requirement.

      • PRU 3.18.3 PRU 3.18.3

        (1) An Authorised Person must maintain the required buffer amount as CET1 Capital at all times, as calculated in accordance with Rule 3.18.4.
        (2) The Countercyclical Capital Buffer requirement applies on both a solo and a consolidated basis, for Authorised Persons forming part of Financial Groups.

        • Guidance

          1. The following Guidance is intended to illustrate how an Authorised Person should calculate its Leverage Ratio in accordance with this section.
          2. The Exposure Measure under Rule 3.18.3 should be calculated as the sum of:
          a. on-balance sheet items; and
          b. off-balance sheet items.
          3. In relation to on-balance sheet items:
          a. for SFTs, the Exposure value should be calculated in accordance with IFRS and the Netting requirements referred to in Rule 4.9.14;
          b. for Derivatives, including credit protection sold, the Exposure value should be calculated as the sum of the on-balance sheet value in accordance with IFRS and an add-on for potential future Exposure calculated in accordance with Rules A4.6.14 to A4.6.21 of App 4; and
          c. for other on-balance sheet items, the Exposure value should be calculated based on their balance sheet values in accordance with Rule 4.9.3.
          4. In relation to off-balance sheet items:
          a. for commitments that are unconditionally cancellable at any time by the Authorised Person without prior notice, the Exposure value should be the notional amount for the item multiplied by a CCF of 10%; and
          b. for other off-balance sheet items, including:
          i. direct credit substitutes;
          ii. certain transaction-related contingent items;
          iii. short-term self-liquidating trade-related contingent items and commitments to underwrite debt and equity Securities;
          iv. note issuance facilities and revolving Underwriting facilities;
          v. transactions, other than SFTs, involving the posting of Securities held by the Authorised Person as Collateral;
          vi. asset sales with recourse, where the Credit Risk remains with the Authorised Person;
          vii. other commitments with certain drawdown;
          viii. any other commitments; and
          ix. Unsettled Transactions,
          the Exposure value should be the notional amount for each of the items multiplied by a CCF of 100%.
          5. For an Islamic Financial Institution, assets corresponding to Unrestricted PSIAs will fall within the Exposure Measure and, therefore, are relevant to the Leverage Ratio calculation.

      • PRU 3.18.4

        An Authorised Person must calculate a Countercyclical Capital Buffer of CET1 Capital equal to its Total Risk Exposure Amount, calculated in accordance with Rule 3.5.7, multiplied by the weighted average of the Countercyclical Capital Buffer rates that apply to exposures in the jurisdictions where the Authorised Person's relevant credit exposures are located, calculated in accordance with Rules 3.18.5 to 3.18.8.

      • Relevant credit risk exposures

      • PRU 3.18.5

        Relevant credit risk exposures are those for which Credit RWAs have to be calculated in accordance with Chapter 4, other than those that fall into the following asset classes:

        (a) Central government and central bank.
        (b) Public sector enterprises.
        (c) Multilateral development bank (MDB).
        (d) International organisation.
        (e) Bank.

      • Guidance

        Exposures to banks with short-term credit assessments are not relevant credit risk exposures as they fall within the exempt asset class set out in Rule 3.18.5(e). However, exposures to non-bank entities with similar short-term credit assessments are relevant credit risk exposures for the purposes of Rule 3.18.5.

      • Weighted average of the Countercyclical Capital Buffer rates

      • PRU 3.18.6

        The weighted average of the Countercyclical Capital Buffer rates shall be calculated by:

        (a) for each jurisdiction in which the Authorised Person has relevant credit risk exposures, dividing the Total Risk Exposure Amount that relates to the relevant credit risk exposures in that jurisdiction by the Total Risk Exposure Amount that relates to the Authorised Person's relevant credit risk exposures across all jurisdictions and multiplying it by the applicable Countercyclical Capital Buffer rate in that jurisdiction; and
        (b) summing those contributions across all jurisdictions.

      • Geographical location

      • PRU 3.18.7

        For the purposes of the calculation of the weighted average of the applicable Countercyclical Capital Buffer rates an Authorised Person must identify, to the best of its ability, the geographical location of its relevant credit risk exposures as the jurisdiction where the underlying credit risk ultimately originates.

      • Countercyclical Capital Buffer rates

      • PRU 3.18.8

        (1) For a relevant credit risk exposure located in ADGM or the UAE:
        (a) the Countercyclical Capital Buffer rate is the rate set by the Central Bank from time to time, subject to a maximum rate of 2.5%; and
        (b) any increase in the Countercyclical Capital Buffer rate specified by the Central Bank takes effect from the date specified by the Central Bank.
        (2) For a relevant credit risk exposure located in a third country:
        (a) the Countercyclical Capital Buffer rate is:
        (i) the rate set by the authority responsible for setting the Countercyclical Capital Buffer rate in that third country from time to time; or
        (ii) 2.5% where the rate set by the third country rate setting authority exceeds 2.5%; or
        (iii) the rate set by the Central Bank where it sets a rate for a relevant credit exposure in the third country that exceeds that set by the third-country rate-setting authority, up to a maximum of 2.5%; or
        (iv) zero where the third country rate setting authority has not set a Countercyclical Capital Buffer rate for that jurisdiction and the Central Bank does not specify such a rate; and
        (b) any increase in the applicable Countercyclical Capital Buffer rate shall take effect from the date specified by the third country rate setting authority or the Central Bank, as appropriate;
        (3) Subject to (2)(a)(ii) and (iii) above for a relevant credit exposure in a third country, where a Countercyclical Capital Buffer rate for a jurisdiction is reduced that reduction shall take effect immediately.

      • Guidance

        An example of the calculation of the Countercyclical Capital Buffer follows, for an Authorised Person with relevant credit risk exposures in countries A, B and C of 60, 25 and 15 respectively, and where the applicable Countercyclical Capital Buffer rates are 2.0%, 1.0% and 1.5% respectively.

          Rule(s) A B C Total
        Countercyclical Capital Buffer rate
        - applicable
        3.18.8 2.0% 1.0% 1.5%  
        Relevant credit risk exposures 3.18.5 and 3.18.7 60 25 15 100
        Countercyclical Capital Buffer rate
        - weighted
        3.18.6 1.20% 0.25% 0.225% 1.675%
        Total Risk Exposure Amount 3.5.7(i) 100 60 40 200
        Countercyclical Capital Buffer 3.18.4       3.35

      • PRU 3.18.9

        Countercyclical Capital Buffer rates shall apply from the date set by the Central Bank or the third country rate-setting authority.

    • PRU 3.19 Combined Buffer

    • PRU 3.19.1

      The Combined Buffer is the sum of the Capital Conservation Buffer and the Countercyclical Capital Buffer.

    • PRU 3.19.2

      An Authorised Person must not use CET1 Capital that is held to meet the Combined Buffer Requirement to meet:

      (a) its Capital Requirement;
      (b) any Individual Capital Requirement that may be imposed pursuant to Chapter 10; or
      (c) any other buffer, where applicable.

    • Guidance

      Where an Authorised Person does not hold sufficient dedicated CET1 Capital to meet the Combined Buffer Requirement it will be required to undertake remedial action in order to restore the level of CET1 Capital to the required level.

    • Restrictions on distributions

    • PRU 3.19.3

      Where an Authorised Person fails to meet the Combined Buffer Requirement, it must:

      (a) calculate the maximum distributable amount in accordance with Rule 3.19.6; and
      (b) ensure that it does not undertake any of the following actions until such time as it has calculated the maximum distributable amount and notified the Regulator under Rule 3.19.7:
      (i) make a distribution in connection with CET1 Capital, or create an obligation to pay variable remuneration or discretionary pension benefits, or pay variable remuneration if the obligation to pay was created at a time when the institution failed to meet its Combined Buffer Requirement; or
      (ii) make payments on AT1 and T2 Capital instruments.

    • PRU 3.19.4

      An Authorised Person must:

      (a) in subsequently taking any of the actions described in Rule 3.19.3(b)(i) and (ii), after having calculated the maximum distributable amount and notified the Regulator, ensure that it distributes no more than its calculated maximum distributable amount; and
      (b) prepare and submit a capital conservation plan pursuant to Rule 3.19.9.

    • PRU 3.19.5

      For the purposes of Rule 3.19.3(b)(i), a distribution in connection with CET1 Capital includes any of the following:

      (a) payment of cash dividends;
      (b) distribution of fully or partly paid bonus Shares or other capital instruments;
      (c) a redemption or purchase by an institution of its own Shares or other capital instruments;
      (d) a repayment of amounts paid up in connection with capital; or
      (e) a distribution of other items referred to in Section 3.10 as eligible for inclusion as CET1 Capital.

    • PRU 3.19.6

      (1) In this Section, a reference to a "maximum distributable amount" means the maximum amount that an Authorised Person may distribute in connection with CET1 Capital as specified in Rules 3.19.3 and 3.19.4.
      (2) Subject to sub-paragraph (4), an Authorised Person must determine the maximum distributable amount by multiplying the sum specified in (a) by the factor determined under (b):
      (a) the total of interim or year-end profits that were not included in CET1 Capital pursuant to Rule 3.10.2 and which have accrued after the most recent distribution of profits and after any of the actions referred to in Rules 3.19.3(b);
      (b) where the CET1 Capital of the Authorised Person (which is not used to meet the Capital Requirement, including any Individual Capital Requirement as may be imposed pursuant to Chapter 10) falls:
      (i) within the first quartile of the Combined Buffer Requirement, the factor shall be 0;
      (ii) within the second quartile of the Combined Buffer Requirement, the factor shall be 0.2;
      (iii) within the third quartile of the Combined Buffer Requirement, the factor shall be 0.4;
      (iv) within the fourth quartile of the Combined Buffer Requirement, the factor shall be 0.6.
      (3) An Authorised Person must calculate the lower and upper bounds of each quartile of the Comibined Buffer requirement as follows:
      Lower bound of quartile = (Combined Buffer Requirement / 4) x (Qn – 1);
      and
      Upper bound of quartile = (Combined Buffer Requirement / 4) x Qn,
      where Qn indicates the ordinal number of the quartile concerned.
      (4) If an Authorised Person undertakes any action under Rules 3.19.3(b), it must take that into account and reduce the maximum distributable amount accordingly.

    • Guidance

      The expression of both CET1 Capital and the Combined Buffer Requirement above is in absolute terms rather than as a percentage of the Total Risk Exposure Amount.

    • PRU 3.19.7

      For the purpose of Rule 3.19.3(b), where an Authorised Person intends to distribute any of its distributable profits or intends to undertake an action referred to in Rule 3.19.3(b)(i) or (ii), the Authorised Person must notify the Regulator and provide the following information:

      (a) the amount of capital maintained by the Authorised Person, subdivided as follows:
      (i) CET1 Capital;
      (ii) AT1 Capital; and
      (iii) T2 Capital;
      (b) the amount of its interim and year-end profits;
      (c) the maximum distributable amount calculated in accordance with Rule 3.19.6; and
      (d) the amount of distributable profits it intends to allocate between the following:
      (i) dividend payments;
      (ii) Share buybacks;
      (iii) payments on AT1 Capital instruments; and
      (iv) the payment of variable remuneration or discretionary pension benefits, whether by creation of a new obligation to pay, or by payment pursuant to an obligation to pay created at a time when the institution failed to meet its Combined Buffer Requirement.

    • Guidance

      Upon receiving a notification under this Rule, the Regulator will make an assessment of the firm's ability to meet and maintain its Capital Requirement on a sustainable basis going forward.

    • PRU 3.19.8

      An Authorised Person must maintain systems and processes to ensure that the amount of distributable profits and the maximum distributable amount are calculated accurately, and must be able to demonstrate the accuracy of the calculations to the Regulator on request.

    • Capital conservation plan

    • PRU 3.19.9

      Where an Authorised Person fails to meet the Combined Buffer Requirement, it must prepare a capital conservation plan and submit it to the Regulator no later than five business days after it identified its failure to meet the Combined Buffer Requirement. The capital conservation plan must include the following:

      (a) estimates of income and expenditure and a forecast balance sheet;
      (b) measures to increase the CET1 Capital of the Authorised Person;
      (c) a plan and timeframe for the increase of CET1 Capital with the objective of restoring the Combined Buffer; and
      (d) any other information the Regulator might need in order to carry out its considerations referred to in Rule 3.19.10 effectively.

    • PRU 3.19.10

      (1) Following assessment, the Regulator will approve the capital conservation plan only if it considers that the plan, if implemented, would be reasonably likely to conserve or raise sufficient CET1 Capital to enable the Authorised Person to meet its Combined Buffer Requirement, within a period that the Regulator considers appropriate.
      (2) If the Regulator does not approve the capital conservation plan, the Regulator may require the Authorised Person to increase its CET1 Capital to meet the Combined Buffer Requirement, within a specified period of time. The Regulator may also impose more stringent restrictions on distributions than those imposed under Rule 3.19.3 where the capital conservation plan is not approved.

    • Guidance

      Where the Risk Capital Requirement forms the Capital Requirement of an Authorised Person in Category 1, 2, or 5 it should therefore hold sufficient total Capital Resources of the quality required to meet the following requirements:

      a. the capital ratios specified in Rule 3.16.2;
      b. any Individual Capital Requirement as may be imposed pursuant to Chapter 10;
      c. the Combined Buffer; and
      c. any other buffer, where applicable.

    • PRU 3.20 Adequate Capital Resources For Categories 3B, 3C and 4

    • PRU 3.20.1

      This Section applies to an Authorised Person in Category 3B, 3C or 4.

    • Guidance

      1. Pursuant to Section 3.6 an Authorised Person in Category 3B, 3C or 4 should hold sufficient total Capital Resources of the quality required to meet its Capital Requirement, whether that is the Base Capital Requirement or the Expenditure Based Capital Minimum.
      2. The Capital Resources should comprise a minimum of CET1 Capital equal to the relevant Base Capital Requirement for the Category to which the Authorised Person belongs.

    • Notifications to the Regulator

    • PRU 3.20.2

      An Authorised Person in Category 3B3C or 4 must notify the Regulator immediately and confirm in writing if its Capital Resources fall below 120% of its Capital Requirement.

    • PRU 3.21 The Leverage Ratio

    • PRU 3.21.1

      This Section applies to an Authorised Person in Category 1, 2 or 5.

    • Guidance

      1. This Section is relevant to an Authorised Person that is required to report its Leverage Ratio to the Regulator under Chapter 2, or to disclose its Leverage Ratio under Chapter 11.
      2. The purpose of the Leverage Ratio is to provide a simple, transparent, non-risk-based methodology to act as a supplementary measure of risk, alongside the risk-based capital requirements applicable in ADGM.
      3. "Leverage", in this context, means the relative size of (a) an institution's assets, off-balance sheet obligations and contingent obligations to pay or to deliver or to provide collateral, including obligations from received funding, made commitments, derivatives or repurchase agreements, but excluding obligations which can only be enforced during the liquidation of an institution; compared to (b) that institution's own funds.

    • PRU 3.21.2

      An Authorised Person must calculate its Leverage Ratio in accordance with the following methodology:

      Leverage Ratio = Capital Measure ÷ Exposure Measure

      where:

      (a) "Capital Measure" represents the Tier 1 Capital of the Authorised Person calculated in accordance with Rule 3.9.1; and
      (b) "Exposure Measure" represents the value of Exposures of the Authorised Person calculated in accordance with Rules 3.21.5 and 3.21.6.

    • PRU 3.21.3

      An Authorised Person must hold sufficient Tier 1 Capital to maintain, at all times, a minimum Leverage Ratio of 3% or as otherwise set by the Regulator.

    • PRU 3.21.4

      An Authorised Person must notify the Regulator immediately in writing if, at any time, it does not hold, or is likely not to hold, an amount and quality of capital that is necessary to comply with Rule 3.19.3.

    • Guidance

      Institutions shall calculate the Leverage Ratio as the simple arithmetic mean of the monthly leverage ratios over a quarter, or using a more frequent basis for the calculation if that is in line with their internal practices.

    • PRU 3.21.5

      For the purpose of determining the Exposure Measure, the value of Exposures of an Authorised Person must be calculated in accordance with the International Financial Reporting Standards (IFRS) subject to the following adjustments:

      (a) on-balance sheet, non-Derivative Exposures must be net of specific allowances and valuation adjustments (e.g. credit valuation adjustments);
      (b) physical or financial Collateral, guarantees or other credit risk mitigation techniques must not be used to reduce exposure values of assets; and
      (c) loans must not be netted with Deposits.

    • PRU 3.21.6 PRU 3.21.6

      The Exposure Measure under Rule 3.21.2(b) must be calculated as the sum of:

      (a) on-balance sheet items; and
      (b) off-balance sheet items.
      (i) In relation to on-balance sheet items:
      a. for SFTs, the Exposure value should be calculated in accordance with IFRS and the Netting requirements referred to in Rule 4.9.14;
      b. for Derivatives, including written credit protection, the Exposure value should be calculated as the sum of the on-balance sheet value in accordance with IFRS and an add-on for potential future Exposure calculated in accordance with Rules A4.6.14 to A4.6.21 of App 4; and
      c. for other on-balance sheet items, the Exposure value should be calculated based on their balance sheet values in accordance with Rule 4.9.3.
      (ii) In relation to off-balance sheet items:
      a. for commitments that are unconditionally cancellable at any time by the Authorised Person without prior notice, the Exposure value should be the notional amount for the item multiplied by a CCF of 10%;
      b. for short-term self-liquidating trade letters of credit arising from the movement of goods (e.g. documentary credits collateralised by the underlying shipment), the Exposure value should be the notional amount for the item multiplied by a CCF of 20% in relation to both issuing and confirming banks;
      c. for certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties, and standby letters of credit related to particular transactions) the Exposure value should be the notional amount for the item multiplied by a CCF of 50%;
      d. for note issuance facilities and revolving underwriting facilities, the Exposure value should be the notional amount for the item multiplied by a CCF of 50%;
      e. for other off-balance sheet items, including:
      i. direct credit substitutes;
      ii. forward asset purchases, forward deposits and partly paid shares and securities which represent commitments with certain drawdown; and
      iii. transactions, other than SFTs, involving the posting of Securities held by the Authorised Person as Collateral;
      iv. the Exposure value should be the notional amount for each of the items multiplied by a CCF of 100%; and
      f. where an Authorised Person has an undertaking to provide a commitment on an off-balance sheet item, an Authorised Person should apply the lower of the two applicable CCFs.
      (iii) For an Islamic Financial Institution, assets corresponding to Unrestricted PSIAs will fall within the Exposure Measure and are therefore relevant to the Leverage Ratio calculation.

      • Guidance

        1. In relation to on-balance sheet items:
        a. for SFTs, the Exposure value should be calculated in accordance with IFRS and the Netting requirements referred to in Rule 4.9.14;
        b. for Derivatives, including written credit protection, the Exposure value should be calculated as the sum of the on-balance sheet value in accordance with IFRS and an add-on for potential future Exposure calculated in accordance with Rules A4.6.14 to A4.6.21 of App 4; and
        c. for other on-balance sheet items, the Exposure value should be calculated based on their balance sheet values in accordance with Rule 4.9.3.
        2. In relation to off-balance sheet items:
        a. for commitments that are unconditionally cancellable at any time by the Authorised Person without prior notice, the Exposure value should be the notional amount for the item multiplied by a CCF of 10%;
        b. for short-term self-liquidating trade letters of credit arising from the movement of goods (e.g. documentary credits collateralised by the underlying shipment), the Exposure value should be the notional amount for the item multiplied by a CCF of 20% in relation to both issuing and confirming banks;
        c. for certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties, and standby letters of credit related to particular transactions) the Exposure value should be the notional amount for the item multiplied by a CCF of 50%;
        d. for note issuance facilities and revolving underwriting facilities, the Exposure value should be the notional amount for the item multiplied by a CCF of 50%;
        e. for other off-balance sheet items, including:
        i. direct credit substitutes;
        ii. forward asset purchases, forward deposits and partly paid shares and securities which represent commitments with certain drawdown; and
        iii. transactions, other than SFTs, involving the posting of Securities held by the Authorised Person as Collateral, the Exposure value should be the notional amount for each of the items multiplied by a CCF of 100%; and
        f. where an Authorised Person has an undertaking to provide a commitment on an off-balance sheet item, an Authorised Person should apply the lower of the two applicable CCFs.
        3. For an Islamic Financial Institution, assets corresponding to Unrestricted PSIAs will fall within the Exposure Measure and are therefore relevant to the Leverage Ratio calculation.