• Rules

    • Anti-Money Laundering and Sanctions Rules and Guidance (AML) [VER06.310321]

      • AML 1. AML 1. Introduction

        • AML 1.1 AML 1.1 Jurisdiction

          • AML 1.1.1

            (1) The AML Rulebook is made in recognition of the application in the Abu Dhabi Global Market ("ADGM") of the Federal AML Legislation.
            (2) Nothing in the AML Rulebook affects the operation of Federal AML Legislation.
            Amended on (15 April, 2019).

        • AML 1.2 AML 1.2 Application

          • AML 1.2.1 AML 1.2.1

            (1) Subject to (2), the AML Rulebook applies to:
            (a) every Relevant Person in respect of all its activities carried out in or from the ADGM; and
            (b) the Persons specified in Rule 1.3.3 as being responsible for a Relevant Person's compliance with the AML Rulebook.
            (2) In respect of a Relevant Person that is:
            (a) an Authorised Person (other than a Credit Rating Agency) and a Recognised Body, only the requirements of Chapters 1 to 14 of the AML Rulebook apply;
            (b) a Representative Office only the requirements of Chapters 1 to 6 and 11 to 14 of the AML Rulebook apply;
            (c) a DNFBP, only the requirements of Chapters 1 to 9 and 11 to 15 of the AML Rulebook apply; and
            (d) an NPO only the requirements of Chapter 16 of the AML Rulebook apply.
            Amended on (15 April, 2019).

            • Guidance

              1. Chapters 7 to 9 of the AML Rulebook deal with customers. As a Representative Office does not have customer these chapters do not apply.
              2. Chapter 10 of the AML Rulebook deals with correspondent banking, electronic transfer of funds and audits.
              3. Relevant Persons should consider these Chapters and determine which provisions apply. To assist Relevant Persons the following table sets out the application of the AML Rulebook to each of the different types of Relevant Persons specified in Rule 1.2.1(1). This table is for guidance purposes only.

              Application table

              Relevant Person Applicable Chapter(s)
              Authorised Person (other than a credit Rating Agency) or Recognised Body 114
              Representative Office 16 1114
              DNFBP 19 1115
              NPO 16

              Added on (15 April, 2019).

          • AML 1.2.2 [Deleted]

            Deleted on (15 April, 2019).

          • AML 1.2.3 [Deleted]

            Deleted on (15 April, 2019).

        • AML 1.3 AML 1.3 Responsibility for compliance with the AML Rulebook

          • AML 1.3.1

            A Relevant Person's Governing Body is responsible for establishing, maintaining and monitoring the Relevant Person's AML policies, procedures, systems and controls and compliance with applicable AML legislation.

          • AML 1.3.2

            A Relevant Person's Governing Body must ensure the policies, procedures, systems and controls referred to in Rule 1.3.1 are effective to meet the obligations of the Relevant Person.

          • AML 1.3.3

            (1) Responsibility for a Relevant Person's compliance with the AML Rulebook lies with every member of the Governing Body and its Senior Management.
            (2) In carrying out their responsibilities under the AML Rulebook every member of a Relevant Person's Governing Body, its Senior Management and MLRO (as the case may be) must exercise due skill, care and diligence.
            (3) Nothing in this Rule precludes the Regulator from taking enforcement action against any Person, including any one or more of the following Persons, in respect of a breach of any Rule in the AML Rulebook:
            (a) a Relevant Person;
            (b) members of a Relevant Person's Senior Management; or
            (c) an Employee of a Relevant Person.
            Amended on (15 April, 2019).

        • AML 1.4 AML 1.4 Application table [Deleted]

          Deleted on (15 April, 2019).

          • Guidance [Deleted]

            Deleted on (15 April, 2019).

      • AML 2. AML 2. Overview And Purpose Of The AML Rulebook

        • Guidance

          1. Under Section 15A of the Financial Services and Markets Regulations 2015 ("FSMR"), the Regulator has jurisdiction for the regulation of AML in ADGM. The AML Rulebook sets out the requirements imposed by the Regulator. The U.A.E. criminal law applies in the ADGM and, therefore, Persons in the ADGM must be aware of their obligations in respect of the criminal law as well as these Rules. Relevant U.A.E. criminal laws include Federal AML Legislation and Federal Law No. 3 of 1987 (the Penal Code of the United Arab Emirates). The Rules in the AML Rulebook should not be relied upon to interpret or determine the application of the criminal laws of the U.A.E.
          2. The AML Rulebook has been designed to provide a single reference point for all Relevant Persons who are supervised by the Regulator for Anti-Money Laundering and Sanctions compliance in accordance with the scope of application outlined in Rule 1.2.1. Accordingly it applies to Relevant Persons, but in different degrees as provided in Rule 1.2.2(2). The AML Rulebook takes into consideration the fact that Relevant Persons have differing AML risk profiles. A Relevant Person should familiarise itself with the AML Rulebook, and assess the extent to which the Chapters and sections apply to it.
          3. The AML Rulebook is not intended to be read in isolation from other UAE relevant legislation or developments in international policy and best practice and, to the extent applicable, Relevant Persons need to be aware of, and take into account, how these aforementioned matters may impact on the Relevant Person's day to day operations. This is particularly relevant when considering the list of terrorist organisations or persons issued under Article 63 of Federal Law No.7 of 2014 on Combatting Terrorism and the United Nations Security Council ("UNSC") Resolutions which apply in the ADGM, and Sanctions imposed by other jurisdictions which may apply to a Relevant Person depending on the Relevant Person's jurisdiction of origin, its business and/or customer base.
          4. Chapter 1 specifies who is ultimately responsible for a Relevant Person's compliance with AML. The Regulator expects the Governing Body and Senior Management of a Relevant Person to establish a robust and effective AML and Sanctions compliance culture for the business.
          5. Chapter 2 provides an overview of the AML Rulebook and Chapter 3 sets out the key definitions in the AML Rulebook.
          6. Chapter 4 outlines the general compliance requirements including Group polices, notifications, record keeping requirements and the annual AML Return.
          7. Chapter 5 explains the meaning of the risk-based approach ("RBA"), which should be applied when complying with the AML Rulebook. The RBA requires a risk-based assessment of a Relevant Person's business (in Chapter 6) and its customers (in Chapter 7). A risk-based assessment should be a dynamic process involving regular review, and the use of these reviews to establish the appropriate processes to match the levels of risk. No two Relevant Persons will have the same approach, and implementation of the RBA and the AML Rulebook permits a Relevant Person to design and implement systems and controls that should be appropriate to their business and customers, with the obvious caveat being that such systems should be reasonable and proportionate in light of the AML risks. The Regulator expects the RBA to determine the breadth and depth of the Customer Due Diligence ("CDD") which is undertaken for a particular customer under Chapter 8, though the Regulator understands that there is an inevitable overlap between the risk-based assessment of the Customer in Chapter 7 and CDD in Chapter 8. This overlap may occur at the initial stages of on-boarding of customers but may also occur when undertaking on-going CDD.
          8. Chapter 9 sets out where a Relevant Person may rely on a third party to undertake all or some of its CDD obligations. Reliance on third-party CDD reduces the need to duplicate CDD already performed for a customer. Alternatively, a Relevant Person may outsource some or all of its CDD obligations to a service provider.
          9. Chapter 10 sets out certain obligations in relation to correspondent banking, wire transfers and other matters which are limited to Authorised Persons (other than a Credit Rating Agency) and Recognised Bodies and, in particular, to banks.
          10. Chapter 11 sets out a Relevant Person's obligations in relation to UNSC Resolutions and Sanctions, and government, regulatory and international findings (in relation to AML, terrorist financing and the financing of weapons of mass destruction).
          11. Chapter 12 sets out the obligation for a Relevant Person to appoint an MLRO and the responsibilities of such a Person.
          12. Chapter 13 sets out the requirements for AML training and awareness. A Relevant Person should adopt the RBA when complying with Chapter 13, so as to make its training and awareness proportionate to the AML risks of the business and the Employee role.
          13. Chapter 14 contains the obligations applying to all Relevant Persons concerning Suspicious Activity Reports, which are required to be made under Federal AML Legislation.
          14. Chapter 15 sets out additional obligations applying to DNFBPs, including registration and notification requirements.
          15. Chapter 16 sets out the obligations applying to Relevant Persons that are NPOs.
          Amended on (3 February, 2020).

        • The U.A.E. criminal law

          16. Under Article 3 of Federal Decree By Law No. 20 of 2018, a Relevant Person may be criminally liable for the offence of money laundering if such an activity is intentionally committed in its name or for its account. Relevant Persons are also reminded that:
          a. the failure to report suspicions of money laundering;
          b. "tipping off"; and
          c. assisting in the commission of money laundering,
          may each constitute a criminal offence that is punishable under the laws of the U.A.E.
          Amended on (15 April, 2019).

        • Financial Action Task Force Standards

          17. The Financial Action Task Force (the "FATF") is an inter-governmental body whose purpose is the development and promotion of international standards to combat money laundering and terrorist financing.
          18. The Regulator has had regard to the FATF Recommendations in making these Rules and has determined to closely align these Rules with the FATF Recommendations, where that is deemed to be necessary and appropriate. A Relevant Person may wish to refer to the FATF Recommendations and Interpretive Notes to assist it in complying with these rules. However, in the event that an FATF Recommendation or Interpretive Note conflicts with a Rule in the AML Rulebook, the relevant Rule takes precedence.
          19. A Relevant Person may also wish to refer to the FATF typology reports which may assist in identifying new money laundering threats and which provide information on money laundering and terrorist financing methods. The FATF typology reports cover many pertinent topics for Relevant Persons, including corruption, new payment methods, money laundering using trusts and Company Service Providers, and vulnerabilities of free trade zones. These typology reports can be found on the FATF website www.fatf-gafi.org.
          Amended on (3 February, 2020).

        • Basel Committee Standards

          20. The Basel Committee on Banking Supervision has published a set of guidelines for banks (Sound Management of Risks related to Money Laundering and Financing of Terrorism, January 2014) which are intended to supplement FATF Recommendations. Banks operating in ADGM should read the Basel Committee guidelines in conjunction with FATF Recommendations and in complying with these Rules.
          21. In the event that any of the Basel Committee guidelines conflict with a Rule in the AML Rulebook, the relevant Rule takes precedence.
          Amended on (15 April, 2019).

        • Wolfsberg Group

          22. The Wolfsberg Group is an association of thirteen global banks that has published guidance aimed at assisting financial institutions in managing money laundering risks (Wolfsberg Statement Guidance on a Risk Based Approach for Managing Money Laundering Risks, March 2006) and in preventing terrorist financing (Wolfsberg Statement on the Suppression of the Financing of Terrorism, January 2002). Banks operating in ADGM should be familiar with relevant Wolfberg Group published guidance in conjunction with the FATF Recommendations and in complying with these Rules.
          23. In the event that any part of the Wolfsberg Group published guidance conflicts with a Rule in the AML Rulebook, the relevant Rule takes precedence.
          Amended on (3 February, 2020).

        • Sanctions

          24. The U.A.E, as a member of the United Nations, is required to comply with all Sanctions issued and passed by the UNSC. The U.A.E periodically publicises its imposition of Sanctions. These UNSC obligations apply in the ADGM and their importance is emphasised by specific obligations contained in the AML Rulebook requiring Relevant Persons to establish and maintain effective systems and controls to make appropriate use of UNSC Sanctions and Resolutions (see Chapter 11).
          25. The FATF has issued guidance on a number of specific UNSC Sanctions and Resolutions regarding the countering of the proliferation of weapons of mass destruction. Such guidance has been issued to assist in implementing the targeted financial Sanctions and activity based financial prohibitions. This guidance can be found on the FATF website (at www.fatf-gafi.org).
          26. In relation to unilateral Sanctions imposed in specific jurisdictions such as the European Union, the U.K. ("HM Treasury") and the U.S. (by the Office of Foreign Assets Control ("OFAC")) and any other Sanctions that may apply to the Relevant Person's business partners and customers, the Regulator expects a Relevant Person to consider and take positive steps to ensure compliance where required or appropriate.
          Amended on (3 February, 2020).

      • AML 3. AML 3. Interpretation And Terminology

        • AML 3.1 AML 3.1 Interpretation

          • AML 3.1.1

            A reference in the AML Rulebook to "money laundering" in lower case includes a reference to terrorist financing, the financing of unlawful organisations and sanctions non-compliance unless the context provides or implies otherwise.

            Amended on (15 April, 2019).

        • AML 3.2 AML 3.2 Glossary for AML

          • Guidance on the term "customer"

            1. The point at which a Person becomes a customer will vary from business to business. However, the Regulator considers that it would usually occur at or prior to the business relationship being formalised, for example, by the signing of a client agreement or the acceptance by the customer of terms of business.
            2. The Regulator does not consider that a Person would be a customer of a Relevant Person merely because such Person receives marketing information from a Relevant Person or where a Relevant Person refers a Person who is not a customer to a third party (including a Group member).
            3. The Regulator considers that a Counterparty would generally be a customer for the purposes of the AML Rulebook and would therefore require a Relevant Person to undertake CDD on such a Person. However, this would not include a counterparty in a Transaction undertaken on a Regulated Exchange. Nor would it include suppliers of ancillary business services for consumption by the Relevant Person such as cleaning, catering, stationery, IT or other similar services.
            4. A Representative Office should not have any customers in relation to its ADGM operations.
            Amended on (15 April, 2019).

          • AML 3.2.1

            The following terms and abbreviations bear the following meanings for the purposes of these Rules.

            ADGM Means the Abu Dhabi Global Market.
            ADGM Entity Means a Legal Person which is incorporated or registered in the ADGM (excluding a registered Branch).
            AML or AML Rulebook Means the Anti-Money Laundering and Sanctions Rules and Guidance.
            AML Return Means the return which is required to be completed by Relevant Persons in accordance with AML 4.6.
            Authorised Person Means a Person, other than a Recognised Body, who is authorised under the FSMR.
            Beneficial Owners Means, in relation to a customer, a natural person who ultimately owns or controls the customer or a natural person on whose behalf a transaction is conducted or a business relationship is established and includes:
            (a) in relation to a body corporate, a person referred to in Rule 8.3.3(2);
            (b) in relation to a Partnership, a person referred to in Rule 8.3.4(2);
            (c) in relation to a trust or other similar Legal Arrangement, a person referred to in Rule 8.3.5 (2); and
            (d) in relation to a foundation, a person referred to in Rule 8.3.6(2).
            Body Corporate Means any body corporate, including limited liability partnership and a body corporate constituted under the law of a country or territory outside of the ADGM.
            Client Means a Retail Client, Professional Client or Market Counterparty as defined in COBS 2.
            Client Agreement Means an agreement between an Authorised Person and a Client which is made or entered into in accordance with COBS 3.3.
            Client Money Means money of any currency which an Authorised Person holds on behalf of a Client (including any receivables of the Authorised Person in respect of bank accounts or clearing or brokerage accounts) or which an Authorised Person treats as Client Money, subject to the exclusions in COBS 14.2.6.
            COBS Means the Conduct of Business Rulebook.
            Company Includes:
            (a) any Body Corporate (wherever incorporated); and
            (b) any unincorporated body constituted under the law of a country, territory or jurisdiction outside the ADGM.
            Company Service Provider Means a Person that, carries out the following services on behalf of a customer:
            (a) acting as a formation agent of Legal Persons;
            (b) acting as (or arranging for another Person to act as) a director or secretary of a company, a partner of a partnership or a similar position in relation to other Legal Persons or Legal Arrangements;
            (c) providing a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other Legal Person or Legal Arrangement;
            (d) acting as (or arranging for another Person to act as) a trustee of an express trust or performing the equivalent function for another form of Legal Arrangement; or
            (e) acting as (or arranging for another Person to act as) a nominee shareholder for another Person.
            Contract of Insurance Has the meaning given in Part 4 of Schedule 1 of FSMR.
            Contravention Means a contravention of any Regulations or Rules made by the ADGM Board and the Regulator, as the case may be.
            Correspondent Account Means an account opened on behalf of a Correspondent Banking Client to receive deposits from, to make payments on behalf of or to otherwise handle financial transactions for or on behalf of the Correspondent Banking Client.
            Correspondent Bank Means a bank in a jurisdiction other than the ADGM where an Authorised Person opens a Correspondent Account.
            Correspondent Banking Client Means a Client of an Authorised Person which uses the firm's correspondent banking services account to clear transactions for its own customer base.
            Counterparty Means any Person with or for whom an Authorised Person carries on, or intends to carry on, any regulated business or associated business. In this context, a Counterparty includes an individual, unincorporated association, Company, government, local authority or other public body.
            Credit Rating Agency Means a Person carrying on in or from the ADGM the Regulated Activity of Operating a Credit Rating Agency for which it has an authorisation under its Financial Services Permission.
            Customer Due Diligence (CDD) Has the meaning given in AML 8.3.
            Designated Non-Financial Business or Profession (DNFBP) Means the following class of Persons who carries out the following businesses in the ADGM:
            (a) a real estate agency which carries out transactions with other Persons that involve the acquiring or disposing of real property;
            (b) a dealer in precious metals or precious stones;
            (c) a dealer in any saleable item of a price equal to or greater than USD15,000;
            (d) an accounting firm, audit firm, insolvency firm or taxation consulting firm;
            (e) a law firm, notary firm or other independent legal business; or
            (f) a Company Service Provider.
            Director Means:
            (a) In relation to an Undertaking established under the ADGM Companies Regulations 2015, a Person who appears on the Register of Directors maintained by the ADGM Registrar of Companies;
            (b) In relation to all other Undertakings, a Person who has been admitted to a register which has a corresponding meaning to the Register of Directors or performs the function of acting in the capacity of a Director, by whatever name called;
            (c) who is employed or appointed by a Person in connection with that Person's business, whether under a contract of service or for services or otherwise; or
            (d) whose services, under an arrangement between that Person and a third party, are placed at the disposal and under the control of that Person.
            Employee Means an individual:
            (a) who is employed or appointed by a Person in connection with that Person's business, whether under a contract of service or for services or otherwise; or
            (b) whose services, under an arrangement between that Person and a third party, are placed at the disposal and under the control of that Person.
            Enhanced Customer Due Diligence Means undertaking Customer Due Diligence and the enhanced measures under AML 8.4.
            FATF Recommendations Means the publication entitled the "International Standards on Combatting Money Laundering and the Financing of Terrorism & Proliferation", as published and amended from time to time by the Financial Action Task Force (FATF).
            Federal AML Legislation Means the legislation described in section 258 of FSMR.
            Federal Decree by law No. 20 of 2018 Means U.A.E Federal Decree by Law No. 20 of 2018 On Anti Money Laundering, Combating the Financing of Terrorism and Financing of Illegal Organisations.
            Federal Law No. 1 of 2004 Means U.A.E Federal Law No. 1 of 2004 regarding Combatting Terrorism Offences.
            Federal Law No. 4 of 2002 Means U.A.E Federal Law No. 4 of 2002 regarding the Criminalisation of Money Laundering.
            Federal Law No. 7 of 2014 Means Federal Law No. 7 of 2014 regarding Combatting Terrorist Crimes.
            FIU Means the Financial Intelligence Unit of the U.A.E.
            Financial Institution Means:
            (a) (i) an Authorised Person; or
            (ii) any Person that carries out as its principal business an activity which would be a Regulated Activity if carried out in ADGM; and
            (b) that is not one of the following:
            (i) a governmental organisation, including the Central Bank of any State; or
            (ii) a multilateral development bank.
            Financial Services Permission Means a permission given, or having effect as if so given, by the Regulator in accordance with Part 4 of FSMR.
            Financial Services Regulator Means a regulator of financial services activities established in a jurisdiction other than the ADGM.
            FSMR Means the Financial Services and Markets Regulations 2015.
            Governing Body Means the board of directors, partners, committee of management or other governing body of an Undertaking.
            Group Has the meaning given in section 258 of FSMR.
            Guidance Has the meaning given in section 15(2) of FSMR.
            International Organisation Means an organisation established by formal political agreement between member countries, where the agreement has the status of an international treaty, and the organisation is recognised in the law of countries which are members.
            Investment Means Specified Investments set out in Part 3 of Schedule 1 of FSMR, unless otherwise specified.
            Legal Arrangement Means express trusts or other similar legal arrangements.
            Legal Person Means any entity other than a Natural Person that can establish a customer relationship with a Relevant Person or otherwise own property. This can include companies, Bodies Corporate or unincorporate, trusts, foundations, partnerships, associations, states and governments and other relevantly similar entities.
            Listed Body Corporate Means, for the purposes of Rule 8.3.3(4), a Body Corporate listed on a stock exchange recognised by the Regulator.
            Money Laundering Reporting Officer (MLRO) Means, for the purposes of an Authorised Person other than a Credit Rating Agency, the Recognised Function described in GEN 5.4.8.
            Natural Person Means an individual.
            Non-Profit Organisation (NPO) Means a Legal Person or arrangement or organisation that primarily engages in raising or disbursing funds for purposes such as charitable, religious, cultural, educational, social or fraternal purposes or for other charitable purpose.
            Parent Means a Holding Company as defined in section 1015 of the Companies Regulations 2015.
            Partner Means, in relation to an Undertaking which is a Partnership, a Person occupying the position of a partner, by whatever name called.
            Partnership Means any partnership, including a partnership constituted under the law of a country, jurisdiction or territory outside the ADGM, but not including a Limited Liability Partnership.
            Person Means any Natural Person, Body Corporate or body unincorporated, including a Legal Person, company, Partnership, unincorporated association, government or state.
            Politically Exposed Person (PEP) Means a Natural Person (and includes, where relevant, a family member or close associate) who is or has been entrusted with a prominent public function, including but not limited to, a head of state or of government, senior officials and functionaries of an international or supranational organisation, senior politician, senior government, judicial or military official, ambassador, senior executive of a state owned corporation, or an important political party official, but not middle ranking or more junior individuals in these categories.
            Recognised Body Means a Recognised Investment Exchange or a Recognised Clearing House.
            Regulated Activity Has the meaning given in section 19 of FSMR.
            Regulated Financial Institution A person who does not hold a FSP but who is authorised in a jurisdiction other than the ADGM to carry on any financial service by another Financial Services Regulator.
            Regulator Means the ADGM Financial Services Regulatory Authority.
            Relevant Person Has the meaning given in section 258 of FSMR.
            Representative Office Means the business operations of Person authorised to carry on the Regulated Activity of Operating a Representative Office in the ADGM and which actually carries on the Regulated Activity of Operating a Representative Office.
            Restricted Scope Company Has the meaning given in section 3(4) of the Companies Regulations 2015.
            Rule Means any rule made by the Regulator or the ADGM Board, as applicable, in accordance with the procedures in Part 2 of FSMR.
            Sanctions Means any law executing foreign policy, security, sanction, trade embargo, or anti-terrorism objectives or similar restrictions imposed, administered or enforced from time to time by:
            (a) the U.A.E.;
            (b) the United Nations Security Council;
            (c) the European Union;
            (d) H.M. Treasury of the United Kingdom;
            (e) the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury;
            (f) any other relevant governmental authority; or
            (g) any of their successors.
            Sanctions List Means any official list of Persons or entities targeted by Sanctions from time to time.
            Senior Management Means in relation to a Relevant Person every member of the Relevant Person's executive management and includes:
            (i) for an ADGM Entity, every member of the Relevant Person's Governing Body;
            (ii) for a Branch, the Person or Persons who control the day to day operations of the Relevant Person in the ADGM; or
            (iii) for an auditor, every member of the Relevant Person's executive management in the U.A.E.
            Shareholder Means a Natural Person or legal entity governed by private or public law, who holds, directly or indirectly:
            (a) Shares of the Issuer in its own name and on its own account;
            (b) Shares of the Issuer in its own name, but on behalf of another natural person or legal entity; or
            (c) depository receipts, in which case the holder of the depository receipt shall be considered as the shareholder of the underlying Shares represented by the depository receipts.
            Shell Bank A bank that has no physical presence in the country in which it is incorporated or licensed and which is not affiliated with a regulated financial Group that is subject to effective consolidated supervision.
            Simplified Customer Due Diligence Means Customer Due Diligence as modified under AML 8.5.
            Source of Funds Means the origin of customer's funds which relate to a Transaction or service and includes how such funds are connected to a customer's Source of Wealth.
            Source of Wealth Means how the customer's global wealth or net worth is or was acquired or accumulated.
            Suspicious Activity Report (SAR) Means a report in the prescribed format regarding suspicious activity (including a suspicious Transaction) made to the FIU.
            Transaction Means any transaction undertaken by a Relevant Person for or on behalf of a customer in the course of carrying on a business in or from the ADGM.
            U.A.E. Means the United Arab Emirates.
            Undertaking Means:
            (a) a Body Corporate or Partnership; or
            (b) an unincorporated association carrying on a trade or business, with or without a view to profit.
            Unlawful Organisation An organisation, the establishment or activities of which have been declared to be criminal under Federal AML Legislation.
            Waiver Means in relation to GEN 8.2 written notice provided under FSMR.

             

            Amended on (3 February, 2020).

      • AML 4. AML 4. General Compliance Requirements

        Chapter 4 in this version of AML is a combination of Chapter 4 and Chapter 15 (General Obligations) from the previous version.

        • AML 4.1 AML 4.1 General requirements

          • AML 4.1.1

            (1) A Relevant Person must establish and maintain effective Anti-Money Laundering policies, procedures, systems and controls to prevent opportunities for money laundering, in relation to the Relevant Person and its activities.
            (2) A Relevant Person's Anti-Money Laundering policies, procedures, systems and controls must:
            (a) ensure compliance with Federal AML Legislation;
            (b) enable suspicious Persons and Transactions to be detected and reported;
            (c) ensure the Relevant Person is able to provide an appropriate audit trail of a Transaction; and
            (d) ensure compliance with any other obligation in these Rules.
            (3) A Relevant Person must take reasonable steps to ensure that its Employees comply with the relevant requirements of its Anti-Money Laundering policies, procedures, systems and controls.
            (4) A Relevant Person must review the effectiveness of its Anti-Money Laundering policies, procedures, systems and controls at least annually.
            (5) The review process may be undertaken:
            (a) internally by its internal audit or compliance function; or
            (b) by a competent firm of independent auditors or compliance professionals.
            (6) The review process required under Rule 4.1.1(4) must cover at least the following:
            (a) a sample testing of customer documentation relevant to an assessment of the adequacy of the customer risk assessment or CDD performed by the Relevant Person;
            (b) an analysis of all Suspicious Activity Reports to highlight any area where procedures or training may need to be enhanced; and
            (c) a review of the adequacy of the level of responsibility and oversight of the Relevant Person's Governing Body and Senior Management in ensuring the Relevant Person has implemented and maintained adequate controls.
            Amended on (15 April, 2019).

          • AML 4.1.2 [ Deleted]

            Amended on (3 February, 2020).

          • AML 4.1.2

            If another jurisdiction's laws or regulations prevent or inhibit a Relevant Person from complying with the Federal AML Legislation or with these Rules, the Relevant Person must immediately inform the Regulator in writing.

            Amended on (3 February, 2020).

        • AML 4.2 AML 4.2 Groups, branches and subsidiaries

          • AML 4.2.1 AML 4.2.1

            (1) A Relevant Person which is an ADGM Entity must ensure that its policies, procedures, systems and controls required by Rule 4.1.1 apply to:
            (a) all of its branches or subsidiaries; and
            (b) all of its Group entities in the ADGM.
            (2) The requirement in (1) does not apply if the Relevant Person can satisfy the Regulator that the relevant branch, subsidiary or Group entity is subject to regulation, including Anti-Money Laundering, by a Financial Services Regulator or other competent authority in a country or jurisdiction with Anti-Money Laundering regulations which are equivalent to the standards set out in the FATF Recommendations and is supervised for compliance with such regulations.
            (3) Where the regulator in another jurisdiction does not permit the implementation of policies, procedures, systems and controls consistent with these Rules, the Relevant Person must:
            (a) inform the Regulator in writing immediately; and
            (b) apply appropriate additional measures to manage the money laundering risks posed by the relevant branch or subsidiary.
            Added on (15 April, 2019).

            • Guidance

              A Relevant Person that is an ADGM Entity should conduct a periodic review to verify that any branch or subsidiary operating in another jurisdiction is in compliance with the obligations imposed under these Rules.

              Added on (15 April, 2019).

          • AML 4.2.2 AML 4.2.2

            A Relevant Person must:

            (a) communicate the policies and procedures that it establishes and maintains in accordance with these Rules to its Group entities, branches and subsidiaries; and
            (b) document the basis for its satisfaction that the requirement in Rule 4.2.1(1) is met.
            Added on (15 April, 2019).

            • Guidance

              In relation to an Authorised Person, if the Regulator is not satisfied in respect of the Anti-Money Laundering compliance of its branches and subsidiaries in another jurisdiction, it may take action, including making it a condition of the Authorised Person's Financial Services Permission that it must not operate a branch or subsidiary in that jurisdiction.

              Added on (15 April, 2019).

        • AML 4.3 AML 4.3 Group policies

          • AML 4.3.1

            A Relevant Person which is part of a Group must ensure that it:

            (a) has developed and implemented policies and procedures for the sharing of information between Group entities , including the sharing of information relating to CDD and money laundering risks;
            (b) has in place adequate safeguards on the confidentiality and use of information exchanged between Group entities, including consideration of relevant data protection legislation;
            (c) remains aware of the money laundering risks of the Group as a whole and of its exposure to the Group and takes active steps to mitigate such risks;
            (d) contributes to a Group-wide risk assessment to identify and assess money laundering risks for the Group; and
            (e) provides its Group-wide compliance, audit and Anti-Money Laundering functions with customer account and Transaction information from its Branches and Subsidiaries when necessary for Anti-Money Laundering purposes.
            Added on (15 April, 2019).

        • AML 4.4 AML 4.4 Notifications

          • AML 4.4.1

            A Relevant Person must inform the Regulator in writing immediately if, in the course of its activities carried on in or from the ADGM or in relation to any of its Branches or Subsidiaries, it:

            (a) receives a request for information from a regulator or agency in another jurisdiction responsible for Anti-Money Laundering or Sanctions regarding enquiries into potential money laundering or terrorist financing or Sanctions breaches;
            (b) becomes aware, or has reasonable grounds to believe, that the following has or may have occurred in or through its business:
            (i) money laundering, contrary to relevant Federal AML Legislations
            (ii) a breach of Sanctions; or
            (iii) acts amounting to bribery under the Organisation for Economic Co-operation and Development (“OECD”) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions;
            (c) becomes aware of any money laundering or Sanctions matter in relation to the Relevant Person or a member of its Group which could result in adverse reputational consequences to the Relevant Person; or
            (d) becomes aware of any a significant breach of a Rule in the AML Rulebook or breach of relevant Federal AML Legislations
            Added on (15 April, 2019).

          • AML 4.4.2

            A Relevant Person must inform the Regulator in writing as soon as possible if, in the course of its activities carried on in or from the ADGM, it suspects or becomes aware that another Person outside of its business is engaged in:

            (a) money laundering, contrary to relevant Federal AML Legislations
            (b) a breach of Sanctions; or
            (c) acts amounting to bribery under the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

            This requirement does not apply to information or documents that are legally privileged or in the public domain.

            Added on (15 April, 2019).

        • AML 4.5 AML 4.5 Record keeping

          • AML 4.5.1

            A Relevant Person must, where relevant, maintain the following records:

            (a) a copy of all documents and information obtained in undertaking initial and on-going CDD or due diligence on business partners;
            (b) records, consisting of the original documents or certified copies, in respect of the customer business relationship, including:
            (i) business correspondence and other information relating to a customer's account;
            (ii) sufficient records of transactions to enable individual transactions to be reconstructed; and
            (iii) internal findings and analysis relating to a transaction or any business, if the transaction or business appears unusual or suspicious, whether or not it results in a Suspicious Activity Report;
            (c) Internal Suspicious Activity Report notifications made under Rule 14.2.2;
            (d) Suspicious Activity Reports and any relevant supporting documents and information, including internal findings and analysis;
            (e) any relevant communications with the FIU;
            (f) the documents in Rule 4.6.1; and
            (g) any other matter that the Relevant Person is expressly required to record under these Rules,
            for at least six years from the date on which the notification or report was made, the business relationship ends or the Transaction is completed, whichever occurs last.
            Amended on (3 February, 2020).

          • AML 4.5.2 AML 4.5.2

            A Relevant Person must immediately provide to the Regulator, upon request, or a law enforcement agency, pursuant to a valid and enforceable request or requirement, a copy of the record referred to in Rule 4.6.1.

            Added on (15 April, 2019).

            • Guidance

              The Regulator expects that a Relevant Person will be able to ordinarily provide the records within one day of a request from the Regulator.

              Added on (15 April, 2019).

          • AML 4.5.3

            A Relevant Person must document, and provide to the Regulator immediately upon request, any of the following:

            (a) the risk assessment of its business as required by Rule 6.1.1;
            (b) how the assessment in (a) was used for the purposes of complying with Rule 7.2.1(1);
            (c) the risk assessment of the customer undertaken under Rule 7.1.1(a); and
            (d) the determination made under Rule 7.1.1(b).
            Added on (15 April, 2019).

          • AML 4.5.4 AML 4.5.4

            The records maintained by a Relevant Person must be kept in such a manner that:

            (a) the Regulator or another competent third party is able to assess the Relevant Person's compliance with legislation applicable in ADGM;
            (b) any Transaction which was processed by or through the Relevant Person on behalf of a customer or other third party can be reconstructed;
            (c) any customer or third party can be identified;
            (d) all internal and external Suspicious Activity Reports can be identified; and
            (e) the Relevant Person can satisfy, within an appropriate time, any regulatory enquiry or court order to disclose information.
            Added on (15 April, 2019).

            • Guidance

              1. The records required to be kept under Rule 4.6.1 may be kept in electronic format, provided that such records are readily accessible and available to respond promptly to any requests from the Regulator for information.
              2. If the date on which the business relationship with a customer ended is unclear, it may be taken to have ended on the date of the completion of the last Transaction.
              Added on (15 April, 2019).

          • AML 4.5.5

            Where the records referred to in Rule 4.6.1 are kept by a Relevant Person outside ADGM, a Relevant Person must:

            (a) take reasonable steps to ensure that the records are held in a manner consistent with these Rules;
            (b) ensure that the records are easily accessible to the Relevant Person; and
            (c) upon request by the Regulator, ensure that the records are immediately available for inspection.
            Added on (15 April, 2019).

          • AML 4.5.6

            A Relevant Person must:

            (a) identify where there is secrecy or data protection legislation that might restrict access without delay to the records referred to in Rule 4.6.1 by the Relevant Person, the Regulator or the law enforcement agencies of the U.A.E.; and
            (b) where such legislation exists, obtain without delay certified copies of the relevant records and keep such copies in a jurisdiction which allows access by those persons in (a).
            Added on (15 April, 2019).

          • AML 4.5.7 AML 4.5.7

            A Relevant Person must be able to demonstrate that it has complied with the training and awareness requirements in Chapter 13 through appropriate measures, including the maintenance of relevant training records.

            Added on (15 April, 2019).

            • Guidance

              The Regulator considers that "appropriate measures" in Rule 4.5.7 may include the maintenance of a training log setting out details of:

              (a) the dates when the training was given;
              (b) the nature of the training; and
              (c) the names of Employees who received the training.
              Added on (15 April, 2019).

        • AML 4.6 AML 4.6 Annual AML Return

          • AML 4.6.1 AML 4.6.1

            A Relevant Person must complete the prescribed AML Return form and submit it to the Regulator by the end of April each year. The AML Return must cover the period from 1 January to 31 December of the preceding year.

            Added on (15 April, 2019).

            • Guidance [Deleted]

              Amended on (3 February, 2020).

        • AML 4.7 AML 4.7 Co-operation with the Regulators

          Amended on (15 April, 2019).

          • AML 4.7.1

            A Relevant Person must:

            (a) be open and cooperative in all its dealings with the Regulator; and
            (b) ensure that any communication with the Regulator is conducted in the English language.
            Amended on (15 April, 2019).

        • AML 4.8 AML 4.8 Employee disclosures

          • AML 4.8.1 AML 4.8.1

            A Relevant Person must ensure that it does not prejudice an Employee who discloses any information regarding money laundering to the Regulator or to any other relevant body involved in the prevention of money laundering.

            Added on (15 April, 2019).

            • Guidance

              The Regulator considers that "relevant body" in Rule 4.8.1 would include the FIU, any other financial intelligence unit, the police, or an Abu Dhabi or Federal ministry.

              Amended on (3 February, 2020).

      • AML 5. AML 5. Applying A Risk-Based Approach To AML

        • AML 5.1 AML 5.1 The risk-based approach

          • AML 5.1.1 AML 5.1.1

            A Relevant Person must:

            (a) assess and address its Anti-Money Laundering risks under the AML Rulebook by reviewing the risks to which the Relevant Person is exposed as a result of the nature of its business, customers, products, services and any other matters which are relevant in the context of money laundering; and
            (b) ensure that any risk-based assessment for the purposes of complying with a requirement in the AML Rulebook is:
            (i) objective and proportionate to the risks;
            (ii) based on reasonable grounds;
            (iii) properly documented; and
            (iv) updated at appropriate intervals.
            Amended on (15 April, 2019).

            • Guidance

              1. Rule 5.1.1 requires a Relevant Person to adopt an approach to Anti-Money Laundering which is proportionate to the risks. This is called the "risk-based approach" ("RBA"). The Regulator expects the RBA to be a key part of the Relevant Person's anti-money laundering compliance culture and to cascade down from the Senior Management to the rest of the organisation. Embedding the RBA within its business allows a Relevant Person to make decisions and allocate Anti-Money Laundering resources in the most efficient and effective way.
              2. In implementing the RBA, a Relevant Person is expected to have in place processes to identify, assess, monitor, manage and mitigate money laundering risks. The general principle is that where there are assessed to be higher risks of money laundering, a Relevant Person is required to take enhanced measures to manage and mitigate those risks, and that, correspondingly, when the risks are assessed to be lower, simplified measures are permitted. Simplified measures are not permitted where there is any suspicion of money laundering.
              3. The RBA should not be seen as a "tick-box" approach to Anti-Money Laundering. Instead a Relevant Person is required to assess relevant money laundering risks and adopt a proportionate response to such risks; however, even where a customer is assessed through the RBA as being low risk a minimum of simplified CDD must be undertaken in relation to that customer.
              4. The Rules regarding record-keeping for the purposes of the AML Rulebook are in Rule 4.5 and 4.7. These Rules apply in relation to Rule 5.1.1(b)(iii).
              Amended on (15 April, 2019).

          • AML 5.1.2 [Deleted]

            Deleted on (15 April, 2019).

      • AML 6. AML 6. Business Risk Assessment

        • AML 6.1 AML 6.1 Assessing business AML risks

          • AML 6.1.1

            A Relevant Person must:

            (a) take appropriate steps to identify and assess money laundering risks to which its business is exposed, taking into consideration the nature, size and complexity of its activities;
            (b) when identifying and assessing the risks in (a), take into account, to the extent relevant, any vulnerabilities relating to:
            (i) its type of Customers and their activities;
            (ii) the countries or geographic areas in which it does business;
            (iii) its products, services and activity profiles;
            (iv) its distribution channels and business partners;
            (v) the complexity and volume of its Transactions;
            (vi) the development of new products and business practices, including new delivery mechanisms, channels and partners;
            (vii) the use of new or developing technologies for both new and pre-existing products and services; and
            (c) take appropriate measures to ensure that any risk identified as part of the assessment in (a) is taken into account in its day to day operations and is mitigated, including in relation to:
            (i) the development of new products, services, business practices and technologies;
            (ii) the taking on of new customers; and
            (iii) changes to its business profile.
            Amended on (15 April, 2019).

          • AML 6.1.2

            A Relevant Person must use the information obtained in undertaking its business risk assessment to:

            (a) develop and maintain its Anti-Money Laundering policies, procedures, systems and controls as required by Rule 6.2.1;
            (b) ensure that its Anti-Money Laundering policies, procedures, systems and controls adequately mitigate the risks identified as part of the assessment in Rule 6.1.1;
            (c) assess the effectiveness of its Anti-Money Laundering policies, procedures, systems and controls as required by Rule 6.2.1(c);
            (d) assist in the allocation and prioritisation of Anti-Money Laundering resources; and
            (e) assist in the carrying out of the customer risk assessment under Chapter 7.
            Amended on (15 April, 2019).

          • AML 6.1.3 AML 6.1.3

            Without limiting compliance with Rules 6.1.1 and 6.1.2 a Relevant Person must, prior to launching any new product, service, business practice or using a new or developing technology, take reasonable steps to ensure that it has:

            (a) assessed and identified the money laundering risks relating to the product, service, business practice or technology; and
            (b) taken appropriate steps to mitigate or eliminate the risks identified under (a).
            Added on (15 April, 2019).

            • Guidance

              1. Unless a Relevant Person understands the money laundering risks to which it is exposed, it cannot take appropriate steps to prevent its business being used for the purposes of money laundering. Money laundering risks vary from business to business depending on the nature of the business, the type of customers a business has, the nature of the products and services sold, and the geographical operations in which it operates.
              2. Using the RBA, a Relevant Person should assess its own vulnerabilities to money laundering and take all reasonable steps to eliminate or manage such risks. The results of this assessment will also feed into the Relevant Person's risk assessment of its Customers under Chapter 7.
              3. A Relevant Person should, prior to launching any new product, service, business practice pay specific attention to assessing the potential for risks associated with money laundering. This is especially important given the innovative nature of any such new offering as the Relevant Person may be less familiar with the functioning of the offering, compared to existing offerings.
              4. Similarly, in using a new or developing technology, such as those associated with the Regulated Activity of Developing Financial Technology Services within the RegLab, a Relevant Person should pay specific attention to assessing the potential for risks associated with money laundering that might arise as a result of implementing that innovative technology.
              Amended on (15 April, 2019).

        • AML 6.2 AML 6.2 Anti-Money Laundering systems and controls

          Amended on (15 April, 2019).

          • AML 6.2.1 AML 6.2.1

            A Relevant Person must:

            (a) establish and maintain effective policies, procedures, systems and controls to prevent opportunities for money laundering in relation to the Relevant Person and its activities;
            (b) ensure that its systems and controls in (a):
            (i) include the provision to the Relevant Person's Senior Management of regular management information on the operation and effectiveness of its Anti-Money Laundering systems and controls necessary to identify, measure, manage and control the Relevant Person's money laundering risks;
            (ii) enable it to determine whether a customer or a Beneficial Owners is a PEP;
            (iii) enable the Relevant Person to comply with these Rules and Federal AML Legislation; and
            (iv) the Penal Code of the United Arab Emirates; and
            (c) ensure that regular risk assessments are carried out on the adequacy of the Relevant Person's Anti-Money Laundering systems and controls to ensure that they continue to enable it to identify, assess, monitor and manage money laundering risk adequately, and are comprehensive and proportionate to the nature, scale and complexity of its activities.
            Amended on (15 April, 2019).

            • Guidance

              In Rule 6.2.1(c) the regularity of risk assessments will depend on the nature, size and complexity of the Relevant Person's business and also on when any material changes are made to its business.

              Amended on (15 April, 2019).

        • AML 6.3 [Deleted]

          Deleted on (15 April, 2019).

      • AML 7. AML 7. Customer Risk Assessment

        • Guidance

          1. This Chapter prescribes the risk-based assessment that must be undertaken by a Relevant Person on a customer and the proposed business relationship, Transaction or product. The outcome of this process is to produce a risk rating for a customer, which determines the level of CDD that must be undertaken in relation to that customer under Chapter 8. Chapter 8 prescribes the requirements of CDD and of Enhanced CDD for high-risk customers and, where appropriate, Simplified CDD for low-risk customers.
          2. CDD in the context of AML refers to the process of identifying a customer, verifying such identification and monitoring the customer's business and the potential for any money laundering risk on an on-going basis. CDD is required to be completed following a risk-based assessment of the customer and the proposed business relationship, Transaction or product.
          3. Relevant Persons should note that the on-going CDD requirements in Rule 8.6.1 require a Relevant Person to ensure that it reviews a customer's risk rating to ensure that it remains appropriate in light of the potential money laundering risks.
          4. The risk-based assessment of the customer and the proposed business relationship, Transaction or product required under this Chapter is required to be undertaken prior to the establishment of a business relationship with a customer. Because the risk rating assigned to a customer resulting from this assessment determines the level of CDD that must be undertaken for that customer, this process must be completed before the CDD is completed for the customer. The Regulator is aware that in practice there will often be some degree of overlap between the customer risk assessment and CDD. For example, a Relevant Person may undertake some aspects of CDD, such as identifying Beneficial Owners, when it performs a risk assessment of the customer. Conversely, a Relevant Person may also obtain relevant information as part of CDD which has an impact on its customer risk assessment. Where information obtained as part of CDD of a customer affects the risk rating of a customer, the change in risk rating should be reflected in the degree of CDD undertaken.
          Added on (15 April, 2019).

        • AML 7.1 AML 7.1 Customer risk-based assessment [Deleted]

          Deleted on (15 April, 2019).

          • AML 7.1.1 [Deleted]

            Deleted on (15 April, 2019).

          • AML 7.1.2 [Deleted]

            Deleted on (15 April, 2019).

          • AML 7.1.3 AML 7.1.3 [Deleted]

            Deleted on (15 April, 2019).

            • [Deleted]

              Deleted on (15 April, 2019).

        • AML 7.2 AML 7.2 Assessing Customer AML risks [Deleted]

          Deleted on (15 April, 2019).

          • AML 7.2.1 [Deleted]

            Deleted on (15 April, 2019).

          • AML 7.2.2 AML 7.2.2 [Deleted]

            Deleted on (15 April, 2019).

            • Guidance on the Customer risk assessment [Deleted]

              Deleted on (15 April, 2019).

            • Guidance on the term "Customer" [Deleted]

              Deleted on (15 April, 2019).

            • Guidance on Restricted Scope Companies [Deleted]

              Deleted on (15 April, 2019).

            • Guidance on high-risk Customers [Deleted]

              Deleted on (15 April, 2019).

        • AML 7.3 [Deleted]

          Deleted on (15 April, 2019).

        • AML 7.1 AML 7.1 Assessing customer Anti-Money Laundering risks

          • AML 7.1.1

            (1) A Relevant Person must:
            (a) undertake a risk-based assessment of every customer; and
            (b) assign the customer a risk rating proportionate to the assessed money laundering risks associated with the customer.
            (2) The customer risk assessment in (1) must be completed:
            (a) prior to establishing a business relationship with a customer;
            (b) on a periodic basis, in accordance with Rule 8.6.1(e); and
            (c) whenever it is otherwise appropriate for existing customers, including where the Relevant Person becomes aware of any change to the risk factors associated with the customer that might contribute to the potential for money laundering risk to increase materially.
            (3) When undertaking a risk-based assessment of a customer under (a), a Relevant Person must identify, assess and consider:
            (a) the customer and any Beneficial Owners;
            (b) the purpose and intended nature of the business relationship, and the nature of the customer's business;
            (c) the nature, ownership and control structure of the customer, its beneficial ownership (if any) and its business;
            (d) the customer's country of origin, residence, nationality, place of incorporation or place of business;
            (e) the relevant product, service or Transaction;
            (f) in relation to life insurance or other similar insurance policy, the beneficiary of the policy and Beneficial Owners of the beneficiary; and
            (g) the outcomes of the business risk assessment undertaken under Chapter 6.
            Added on (15 April, 2019).

          • AML 7.1.2

            (1) When undertaking a risk-based assessment of a customer and considering whether or not to assign a high risk rating under 7.1.1(1), a Relevant Person must take into account all relevant risk factors that would reasonably apply to the customer, including but not limited to:
            (a) customer risk factors, including whether the:
            (i) business relationship is conducted in unusual circumstances;
            (ii) customer is resident, established, registered or conducts business in a geographical area or jurisdiction of high risk (as set out in paragraph (c));
            (iii) customer is a Legal Person or a Legal Arrangement that is a vehicle for holding personal assets;
            (iv) customer is a company that has nominee shareholders or shares in bearer form;
            (v) customer is a business that is cash intensive, such as a business that receives a majority of its revenue in cash;
            (vi) corporate structure of the customer or any group to which it belongs is unusual or excessively complex given the nature of the business;
            (b) product, service, transaction or delivery channel risk factors, including whether:
            (i) the service involves private banking;
            (ii) the product, service or transaction is one that might allow for anonymity or obfuscation of the true identity of any of the parties involved in the transaction;
            (iii) the situation involves non face-to-face business relationships or transactions, or lacks appropriate safeguards, such as electronic signatures;
            (iv) payments will be received from unknown or unassociated third parties;
            (v) the service involves the provision of nominee directors, nominee shareholders or shadow directors, or the formation of companies in another country;
            (vi) new products and new business practices are involved, including new delivery mechanisms or the use of new or developing technologies for both new and pre-existing products; and
            (c) geographical or jurisdictional risk factors, including whether the relevant country or countries:
            (i) are identified by credible sources, as:
            (A) not having effective systems to counter money laundering; or
            (B) not implementing requirements to counter money laundering that are consistent with FATF Recommendations;
            (ii) are identified by credible sources as having significant levels of corruption or other criminal activity, such as terrorism, money laundering or the production and supply of illicit drugs;
            (iii) are subject to sanctions, embargos or similar measures issued by, for example, the United Nations or the State;
            (iv) are identified by credible sources as providing funding or support for terrorism;
            (v) have organisations operating within their territory that have been designated by the State, other countries or International Organisations as terrorist organisations.
            (2) For the purposes of 7.1.2(1)(c), a credible source includes, but is not limited to, mutual evaluations, detailed assessment reports or follow up reports issued by FATF, the International Monetary Fund ("IMF"), the World Bank, the OECD and other International Organisations.
            Amended on (3 February, 2020).

          • AML 7.1.3 AML 7.1.3

            (1) When undertaking a risk-based assessment of a customer and considering whether or not to assign a low risk rating under 7.1.1(1), a Relevant Person must take into account all relevant risk factors that would reasonably apply to the customer, including but not limited to:
            (a) customer risk factors, including whether the customer is:
            (i) a public body or a publicly owned enterprise;
            (ii) resident, established, registered or conducts business in a geographical area or jurisdiction of lower risk (as set out in paragraph (c));
            (iii) an Authorised Person;
            (iv) a Regulated Financial Institution that is subject to regulation and supervision, including Anti Money Laundering regulation and supervision, in a jurisdiction with Anti Money Laundering regulations that are equivalent to the standards set out in the FATF Recommendations;
            (v) a Subsidiary of a Regulated Financial Institution referred to in (iv), if the law that applies to the Parent ensures that the Subsidiary also observes the same Anti-Money Laundering standards as its Parent;
            (vi) a company whose Securities are listed by the Regulator, another Financial Services Regulator or a Regulated Exchange, which is subject to disclosure obligations broadly equivalent to those set out in the Market Rules;
            (vii) a law firm, notary firm or other legal business that carries on its business in ADGM;
            (viii) an accounting firm, insolvency firm, auditor or other audit firm that carries on its business in ADGM;
            (b) product, service, transaction or delivery channel risk factors, including whether the product or service is:
            (i) a Contract of Insurance which is non-life insurance;
            (ii) a Contract of Insurance which is a life insurance product with no investment return or redemption or surrender value;
            (iii) an insurance policy for a pension scheme that does not provide for an early surrender option, and cannot be used as collateral;
            (iv) a pension, superannuation or similar scheme that satisfies the following conditions:
            (A) the scheme provides retirement benefits to employees;
            (B) contributions to the scheme are made by way of deductions from wages; and
            (C) the scheme rules do not permit the assignment of a member's interest under the scheme;
            (v) a product where the risks of money laundering are adequately managed by other factors such as transaction limits or transparency of ownership; and
            (c) geographical and jurisdictional risk factors, including whether a country or countries:
            (i) are identified by credible sources as having effective systems to counter money laundering;
            (ii) are identified by credible sources as having a low level of corruption or other criminal activity, such as terrorism, money laundering, or the production and supply of illicit drugs;
            (iii) have been assessed by credible sources, as having::
            (A) requirements to counter money laundering that are consistent with the FATF Recommendations; and
            (B) effectively implement FATF Recommendations.
            (2) For the purposes of (1)(c), a credible source includes, but is not limited to, mutual evaluations, detailed assessment reports or follow up reports issued by FATF, the IMF, the World Bank, the OECD and other International Organisations.
            Added on (15 April, 2019).

            • Guidance on the customer risk assessment

              1. The risk assessment of a customer requires a Relevant Person to allocate an appropriate risk rating to the customer. Risk ratings should be either descriptive, such as "low", "medium" or "high", or a sliding, ordinal numeric scale such as 1 for the lowest risk to 10 for the highest, with at least three differentiated risk ratings. All the factors set out in both 7.1.2 and 7.1.3 should be considered in order to assess and allocate the appropriate risk rating to the customer.
              2. Depending on the outcome of a Relevant Person's assessment of its customer's money laundering risk, a Relevant Person should decide to what degree CDD will need to be performed. For a customer exhibiting significant potential risk for money laundering, the Relevant Person is required to carry out Enhanced CDD under Rule 8.4, in addition to the normal CDD required under Rule 8.3. For a customer rated low risk, the Relevant Person may be able to carry out Simplified CDD under Rule 8.5. For any other customer, the Relevant Person must undertake CDD under Rule 8.3.
              3. Using the RBA, a Relevant Person could, when assessing two customers with near identical risk profiles, consider that one is high-risk and the other low-risk. This may occur, for example, where both customers may be from the same high-risk country, but one customer may be a customer in relation to a low-risk product, or may be a long-standing customer of a Group company which has been introduced to the Relevant Person.
              Added on (15 April, 2019).

            • Guidance on high risk customers

              1. When assessing the risk factors referred to in 7.1.2(1), Relevant Persons must bear in mind that the presence of one or more risk factors may not always indicate a high risk of money laundering in a particular situation.
              2. An example of a business relationship conducted in unusual circumstances, for the purposes of Rule 7.1.2 (1)(a)(i), would include, but is not limited to a business relationship or proposed business relationship that involves, or would involve, significant unexplained geographic distance between the location of the Relevant Person and the customer or proposed customer.
              3. The highest risk products or services in respect of money laundering are those where unlimited third party funds can be freely received from or paid to third parties, without evidence of the identity of the third parties being obtained and the identity being verified.
              4. Money laundering risks are likely to be increased if a Person is able to hide behind corporate structures such as limited companies, trusts, special purpose vehicles and nominee arrangements. When devising its internal procedures, a Relevant Person should consider how its customers and operational systems impact upon the capacity of its staff to identify suspicious Transactions. Generally, the lowest risk products in respect of money laundering are those where funds can only be received from a named customer by way of payment from an account held in the customer's name, and similarly where the funds can only be remitted to a named customer.
              Added on (15 April, 2019).

            • Guidance on low risk customers

              When assessing the risk factors referred to in 7.1.3 (1), a Relevant Person must bear in mind that the presence or absence of one or more risk factors may not always indicate a high or low risk of money laundering respectively in a particular situation.

              Added on (15 April, 2019).

        • AML 7.2 AML 7.2 Prohibition on Establishing Business Relationships with Certain customers

          • AML 7.2.1

            A Relevant Person must not establish a business relationship with a prospective customer that is a Legal Person or Legal Arrangement if the ownership or control arrangements of the customer prevents the Relevant Person from identifying one or more of the customer's Beneficial Owners.

            Added on (15 April, 2019).

          • AML 7.2.2

            A Relevant Person must not establish or maintain a business relationship with a Shell Bank.

            Added on (15 April, 2019).

          • AML 7.2.3 AML 7.2.3

            A Relevant Person must not knowingly establish or maintain an anonymous account, an account in a fictitious name, or a nominee account which is held for the benefit of another person whose true identity has not been disclosed to the Relevant Person.

            Added on (15 April, 2019).

            • Guidance

              1. In Rules 7.2.1, ownership arrangements which may prevent the Relevant Person from identifying one or more Beneficial Owners include bearer shares and other negotiable instruments in which ownership is determined by possession.
              2. A Shell Bank is a bank that has no physical presence in the country in which it is incorporated and licensed, and which is unaffiliated with a regulated financial Group that is subject to effective consolidated supervision. The Regulator does not consider that the existence of a local agent or low-level staff constitutes physical presence.
              Added on (15 April, 2019).

          • AML 7.2.4 AML 7.2.4

            If a Relevant Person uses a numbered account with an abbreviated name, it must ensure that:

            (a) such an account is used only for internal purposes;
            (b) it has undertaken the same CDD procedures in relation to the account holder as are required for other account holders;
            (c) it maintains the same information in relation to the account and account holder as is required for other accounts and account holders; and
            (d) staff performing AML functions, including staff responsible for identifying and monitoring transactions for suspicious activity, and staff performing compliance and audit functions, have full access to information about the account and the account holder.
            Added on (15 April, 2019).

            • Guidance on anonymous accounts

              A Relevant Person should note that, in addition to the prohibition in Rule 7.2.3 against knowingly establishing anonymous accounts, accounts in a fictitious name or nominee accounts, the Federal AML legislation also prohibits the opening of accounts held under borrowed, mock or fake names or accounts designated solely with numbers and without the names of account holders.

              Added on (15 April, 2019).

            • Guidance on Restricted Scope Companies

              1. A Restricted Scope Company is a corporate vehicle offering a greater degree of confidentiality than other forms of corporate entity in ADGM. Restricted Scope Companies are not required to file accounts and are not required to have their accounts audited. Restricted Scope Companies must file an annual return, articles, and details of their registered offices, directors and secretary (if they have one) with the ADGM Registrar of Companies.
              2. Relevant Persons will know that Restricted Scope Companies are subject to less onerous corporate disclosure requirements than other forms of corporate entities due to the requirement to have "(Restricted)" in a company's name. Given that only the constitution and details of the registered office of a Restricted Scope Company will be available in a public register, a Relevant Person will be required to have a bilateral dialogue with the Restricted Scope Company, in accordance with the RBA, to obtain any other relevant information which it needs to assess the money laundering risks to which it is exposed.
              3. Restricted Scope Companies should be forthcoming with relevant information in response to requests by other Persons and entities for the purpose of the compliance of the latter with the requirements in the AML Rulebook. The fact that Restricted Scope Companies are not subject to strict standards of disclosure of corporate documentation to a public registry should not be interpreted by Restricted Scope Companies to limit or prohibit their providing of any relevant information to other Persons and entities for Anti-Money Laundering purposes.
              Added on (15 April, 2019).

      • AML 8. AML 8. Customer Due Diligence

        • AML 8.1 AML 8.1 Requirement to undertake Customer Due Diligence

          • AML 8.1.1

            (1) A Relevant Person that is an Authorised Person or a Recognised Body must undertake CDD under Rule 8.3.1 where the Relevant Person:
            (a) establishes a business relationship with a customer;
            (b) carries out an occasional Transaction for a customer that is of an amount of equal to or more than USD15,000; 
            (c) suspects a customer of, or a Transaction to be for the purposes of, money laundering; or
            (d) doubts the veracity or adequacy of any documents or information previously provided by, or obtained for, a customer in relation to (a), (b) or (c) above.
            (2) A Relevant Person that is a DNFBP must undertake CDD under Rule 8.3.1 where it:
            (a) is a real estate agency and it prepares for or is involved in a Transaction, or the provision of real estate agency services to a Person, that involves the buying and selling of real property;
            (b) is a dealer in precious metals or precious stones and it is involved in a Transaction in cash that amounts to USD15,000 or more, whether or not the Transaction is executed in a single operation or in several operations that are or appear to be linked;
            (c) is a dealer in any saleable item of a price equal to or greater than USD15,000 and it is involved in a Transaction in cash that amounts to USD15,000 or more, whether or not the Transaction is executed in a single operation or in several operations that are or appear to be linked;
            (d) is an accounting firm, audit firm, insolvency firm or taxation consulting firm and it prepares for or is involved in the provision of accounting, auditing, insolvency or taxation consulting services to a Person;
            (e) is a law firm, notary firm or other independent legal business and it prepares for or is involved in the provision of legal or notarial services to another Person participating in financial or real property Transactions concerning the following activities:
            (i) the buying and selling of real property;
            (ii) the managing of client money, securities or other assets;
            (iii) the management of bank, savings or securities accounts;
            (iv) the organisation of contributions for the creation, operation or management of companies; or
            (v) the creation, operation or management of legal persons or arrangements, and buying and selling of business entities; or
            (f) is a Company Service Provider and it prepares for or is involved in the provision of any of the following services to another Person:
            (i) acting as a formation agent of Legal Persons or Legal Arrangements;
            (ii) acting as (or arranging for another Person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other Legal Persons or Legal Arrangements;
            (iii) providing a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other Legal Person or Legal Arrangement;
            (iv) acting as (or arranging for another Person to act as) a trustee of an express trust or performing the equivalent function for another form of Legal Arrangement; or
            (v) acting as (or arranging for another Person to act as) a nominee shareholder for another Person.
            (3) In addition to undertaking CDD in accordance with Rule 8.3.1, a Relevant Person must undertake Enhanced CDD in accordance with Rule 8.4.1 for each of its customers assigned a high risk rating;
            (4) A Relevant Person may undertake Simplified CDD in accordance with Rule 8.5.1 by modifying the CDD undertaken in accordance with Rule 8.3.1 for any customer assigned a low risk rating.
            Amended on (3 Fenruary, 2020).

          • AML 8.1.2 AML 8.1.2

            (1) A Relevant Person must also apply CDD measures to each existing customer under Rules 8.3.1, 8.4.1 or 8.5.1 as applicable:
            (a) with a frequency appropriate to the outcome of the risk-based approach in relation to each customer; and
            (b) when the Relevant Person becomes aware that any of circumstances relevant to its risk assessment for a customer has changed.
            (2) For the purposes of 8.1.2(1), in determining when it is appropriate to apply CDD measures in relation to existing customers, a Relevant Person must take into account, amongst other things:
            (a) any indication that the identity of the customer, or the customer's Beneficial Owners, has changed;
            (b) any Transactions that are not reasonably consistent with the Relevant Person's knowledge of the customer;
            (c) any change in the purpose or intended nature of the Relevant Person's relationship with the customer; or
            (d) any other matter that might affect the Relevant Person's risk assessment of the customer.
            Amended on (15 April, 2019).

            • Guidance

              1. A Relevant Person should undertake appropriate CDD in a manner proportionate to the customer's money laundering risks. This means that all customers are subject to CDD under Rule 8.3.1. However, for high-risk customers, additional Enhanced Customer Due Diligence measures should also be undertaken under Rule 8.4.1. For customers having a low-risk rating, the requirements under Rule 8.3.1 may be modified according to the assessed risk, in accordance with Rule 8.5.1.
              2. The frequency for undertaking CDD for existing customers will be determined by the risk rating assigned to a particular customer. The Regulator expects that customers rated high risk for money laundering should be reviewed more frequently than customers rated lower risk for money laundering.
              Added on (15 April, 2019).

          • AML 8.1.3 AML 8.1.3

            (1) A Relevant Person must:
            (a) undertake periodic reviews to ensure that the information and documentation concerning a Customer's identity remains appropriate, accurate and up-to-date; and
            (b) conduct on-going due diligence on its business relationship with, and ongoing scrutiny of Transactions undertaken by, a Customer throughout the course of the relationship.
            (2) If, at any time, a Relevant Person becomes aware that it lacks sufficient information or documentation concerning a Customer's identification, or develops a concern about the accuracy of its current information or documentation, it must promptly obtain appropriate material to verify the Customer's identity.

            • Guidance

              1. A Relevant Person should undertake CDD in a manner proportionate to the Customer's money laundering risks identified under Rule 7.2.1(1). This means that all Customers are subject to CDD under Rule 8.3.1. However, for high-risk Customers, additional Enhanced Customer Due Diligence measures should also be undertaken under Rule 8.4.1. For low-risk Customers, Rule 8.3.1 may be modified according to the risks in accordance with Rule 8.5.1.
              2. Subject to the exception for Simplified Customer Due Diligence, in establishing and verifying a Customer's true identity, a Relevant Person must obtain sufficient and satisfactory evidence of that identity, having considered its risk assessment in respect of the Customer and a Relevant Person must update, as appropriate, any Customer identification policies, procedures, systems and controls.
              3. Subject to the exception for Simplified Customer Due Diligence, whenever a Relevant Person comes into contact with a Customer with or for whom it acts or proposes to act, it must establish whether the Customer is acting on his own behalf or on behalf of another Person, and a Relevant Person must establish and verify the identity of both the Customer and any other Person on whose behalf the Customer is acting, including that of the Beneficial Owner of the relevant funds, which may be the subject of a Transaction to be considered, and must obtain sufficient and satisfactory evidence of their identities. A Relevant Person should obtain a statement from a prospective Customer to the effect that he is, or is not, acting on his own behalf. In cases where the Customer is acting on behalf of third parties, it is recommended that the Relevant Person obtain a written statement, confirming the statement made by the Customer, from the parties, including the Beneficial Owner.
              4. An institution falls within Rule 8.1.1(2)(c) if it is:
              a. a Credit Institution or other Financial Institution whose entire operations are subject to regulation, including AML, by:
              i. a Non-ADGM Financial Services Regulator in a FATF country; or
              ii. another relevant authority in a FATF country; or
              iii. is publically listed in or outside of ADGM; or
              b. a Subsidiary of a Credit Institution or other Financial Institution referred to in a., provided that the Parent Credit Institution or other Financial Institution ensures that the Subsidiary also observes the same provisions.
              5. A Relevant Person must take reasonable steps to determine whether or not a Customer falls within the exceptions under Rule 8.1.2(3), and, if applicable, must keep records of the basis on which a Customer was considered to fall within an exception.
              6. A Relevant Person is required to be satisfied that a prospective Customer is who he claims to be and to obtain evidence to prove this. "Know Your Customer" and knowing the Persons with or for whom the Customer acts or proposes to act, consists of several aspects:
              a. personal details: a Relevant Person should obtain and verify details which include the true full name or names used and the current permanent address;
              b. the nature and level of business to be conducted: a Relevant Person should ensure that sufficient information is obtained regarding the nature of the business that the Customer expects to undertake, and any expected or predictable pattern of Transactions. This information should include the purpose and reason for opening the account or establishing the business relationship, the anticipated level and nature of the activity that is to be undertaken and the various relationships of signatories to the account and the underlying Beneficial Owners;
              c. the origin of funds: a Relevant Person should identify how all payments were made, from where and by whom. All payments should be recorded to provide an audit trail; and
              d. the Source of Wealth: a Relevant Person should establish a Source of Wealth or income, including how the funds were acquired, to assess whether the actual Transaction pattern is consistent with the expected Transaction pattern and whether this constitutes any grounds for suspicion of money laundering.
              7. It is important for a Relevant Person to obtain such information because this process should allow the risk of being exploited for the purpose of money laundering to be reduced to a minimum. It should also enable suspicious Transactions to be detected because they are incompatible with the information received.
              8. Any unusual facts of which a Relevant Person becomes aware during the identification process may be an indication of money laundering and should prompt the Relevant Person to request supplementary information and evidence.
              9. The Regulator expects a Relevant Person to establish the full identity of all relevant parties to the business relationship. Further, a Relevant Person should apply adequate measures to enable it to understand the relationship between the counterparties involved. The following list includes some identification checks for particular relationships:
              a. joint account holders and joint applicants: identification should be performed and evidence obtained for all applicants and account holders;
              b. pooled accounts which are managed by professional intermediaries such as mutual funds, pension funds, money funds, lawyers and stockbrokers on behalf of entities or other Persons: all Beneficial Owners of the account held by the intermediary should be identified;
              c. power of attorney: identification and evidence should be obtained for the applicants and account holders as well as for the holder of the power of attorney; and
              d. minors: an account for a minor should be opened by a family member or guardian whose identification evidence should be obtained in addition to the birth certificate or passport of the minor.

        • AML 8.2 AML 8.2 Timing of Customer Due Diligence

          • AML 8.2.1 AML 8.2.1

            (1) For a Relevant Person that is an Authorised Person or Recognised Body:
            (a) the appropriate CDD obligations must, subject to (1)(b), must be fulfilled before the Relevant Person undertakes any Transaction on behalf of the customer or when undertaking an occasional transaction under 8.1.1(1)(b).
            (b) the Relevant Person does not have to fulfil the verification of the identity of a customer and Beneficial Owners obligations under the AML Rules before undertaking a Transaction for a customer or occasional transaction where it has, on reasonable grounds, established that:
            (i) there is little risk of money laundering and that risk is effectively managed; and
            (ii) doing so would interrupt or delay the normal course of business in respect of effecting the Transaction.
            (2) (a) A Relevant Person that is a DNFBP must fulfil the appropriate CDD obligations before the Relevant Person prepares for or carries out a Transaction or provision of a service in Rule 8.1.1(2) (a), (d), (e) or (f).
            (b) A Relevant Person that is a DNFBP as a result of carrying on one or more of the business activities referred to in Rule 8.1.1(2) (b) or (c) must fulfil the appropriate CDD obligations before the Relevant Person prepares for or carries out a transaction in cash that amounts to USD 15,000 or more, whether in a single operation or several operations that are or appear to be linked.
            (3) The Relevant Person does not have to fulfil the verification of the identity of a customer and Beneficial Owners obligations under the AML Rules preparing for or carrying out a Transaction for its customer concerning those business activities referred to in Rule 8.1.1(2) where it has, on reasonable grounds, established that:
            (i) there is little risk of money laundering and that risk is effectively managed; and
            (ii) doing so would interrupt or delay the normal course of business in respect of effecting the Transaction.
            (4) A Relevant Person that has relied on Rule 8.2.1(1)(b) or 8.2.1(3) must fulfil its CDD obligations as soon as practicable after effecting the Transaction.
            (5) Where the Relevant Person, having relied on Rule 8.2.1(1)(b) or 8.2.1(3) is unable to complete the verification of the identity of a customer and any Beneficial Owners, within thirty days of effecting a Transaction or occasional transaction it must:
            (a) consider the circumstances and determine whether to make an internal Suspicious Activity Report to the MLRO;
            (b) where it has determined that it is unnecessary to make such a report, return to the customer any monies associated with the Transaction or occasional transaction, excluding any reasonable costs incurred by the Relevant Person;
            (c) where it has determined that it is necessary to make such a report, not return any monies or provide any Investments to the customer, unless instructed to do so by the MLRO and otherwise act in accordance with instructions issued by the MLRO; and
            (d) not establish any further business relationship with that customer until the verification process has been completed for that customer in accordance with these Rules.
            Amended on (15 April, 2019).

            • Guidance

              1. For the purposes of Rule 8.2.1(2)(a), examples of situations which might lead a Relevant Person to have doubts about the veracity or adequacy of documents, data or information previously obtained could be where there is a suspicion of money laundering in relation to that Customer, where there is a material change in the way that the Customer's account is operated which is not consistent with the Customer's business profile, or where it appears to the Relevant Person that a Person other than the Customer is the real Customer.
              2. In Rule 8.2.1(3)(a), situations that the Relevant Person may take into account include, for example, accepting subscription monies during a short offer period or executing a time critical Transaction which, if not executed immediately, would or may cause a Customer to incur a financial loss due to price movement or loss of opportunity or when a Customer seeks immediate insurance cover.
              3. When complying with Rule 8.2.1, a Relevant Person should also, where relevant, consider Rule 8.7.1 regarding failure to conduct or complete CDD and Chapter 14 regarding Suspicious Activity Reports and tipping off.
              4. For the purposes of Rule 8.2.1(3)(d), the Regulator considers that in most situations as soon as reasonably practicable would be within 30 days after the establishment of a business relationship. However, it will depend on the nature of the Customer business relationship.

          • AML 8.2.2 AML 8.2.2

            (1) A Relevant Person must ensure that its Anti-Money Laundering systems and controls referred to in Rule 6.2.1 include risk management policies and procedures concerning the conditions under which business relationships may be established with a customer before completing verification of the identity of a customer and Beneficial Owners.
            Added on (15 April, 2019).

            • Guidance

              1. Examples of situations that might lead a Relevant Person to have doubts about the veracity or adequacy of documents, data or information previously obtained might be where: there is a suspicion of money laundering in relation to that customer; there is a material change in the way that the customer's account is operated which is not consistent with the customer's business profile; or it appears to the Relevant Person that a Person other than the nominal customer is the real customer.
              2. Situations that the Relevant Person may take into account include, for example, accepting subscription monies during a short offer period or executing a time critical Transaction which, if not executed immediately, would or may cause a customer to incur a financial loss due to price movement or loss of opportunity or when a customer seeks immediate insurance cover.
              3. When complying with Rule 8.2.1, a Relevant Person should also, where relevant, consider Rule 8.7.1 regarding failure to conduct or complete CDD and Chapter 14 regarding Suspicious Activity Reports and tipping off.
              Added on (15 April, 2019).

        • AML 8.3 AML 8.3 Customer Due Diligence requirements

          • AML 8.3.1

            (1) In undertaking CDD a Relevant Person must:
            (a) identify the customer and verify the customer's identity including identification and verification of the identify of any Person purporting to act on behalf of the customer;
            (b) identify all the Beneficial Owners and take reasonable measures to verify the identity of the Beneficial Owners, such that the Relevant Person is satisfied that it knows who the Beneficial Owners are;
            (c) assess and understand and, as appropriate, obtain information on the purpose and intended nature of the business relationship; and
            (d) conduct on-going due diligence of the business relationship as required under Rule 8.6.1.
            (2) In addition to complying with (a), for life insurance or other similar policies a Relevant Person must:
            (a) record the names of any beneficiaries named in the policy;
            (b) verify the identity of all Persons in all classes of beneficiary when a payout of the policy is due;
            (c) undertake the measures referred to in (a) and (b) as soon as the beneficiary of the policy is identified or designated; and
            (d) verify the identity of beneficiaries and any Beneficial Owners of a beneficiary before it makes a payout under the policy.
            (3) A Relevant Person must have systems and controls in place and take reasonable measures to determine whether:
            (a) a customer,
            (b) any Beneficial Owners of the customer; or
            (c) for a life insurance or other similar policy, any beneficiary of the policy, or any Beneficial Owners of a beneficiary;
            is a PEP.
            (4) If a PEP is identified under (3), then the Relevant Person must, in addition to CDD under 8.3.1, undertake Enhanced CDD under 8.4.1.
            Amended on (15 April, 2019).

          • AML 8.3.2 AML 8.3.2

            (1) For the purposes of Rule 8.3.1(1)(a), a Relevant Person must identify a customer and verify the customer's identity in accordance with this Rule.
            (2) If a customer is a natural person, a Relevant Person must obtain and verify information about the person's:
            (a) full name (including any alias);
            (b) date of birth;
            (c) nationality;
            (d) legal domicile; and
            (e) current residential address (other than a post office box).
            (3) If a customer is a Body Corporate, the Relevant Person must obtain and verify:
            (a) the full name of the Body Corporate and any trading name;
            (b) the address of its registered office and, if different, its principal place of business;
            (c) the date and place of incorporation or registration;
            (d) relevant corporate documents of the customer; and
            (e) the full names of the members of its Governing Body and persons exercising a senior management position.
            (4) If a customer is a foundation, the Relevant Person must obtain and verify:
            (a) a certified copy of the charter and by-laws of the foundation or any other documents constituting the foundation; and
            (b) documentary evidence of the appointment of the guardian or any other person who may exercise powers in respect of the foundation.
            (5) If a customer is a trust or other similar Legal Arrangement, the Relevant Person must obtain and verify:
            (a) a certified copy of the trust deed or other documents that set out the nature, purpose and terms of the trust or arrangement; and
            (b) documentary evidence of the appointment of the trustee or any other person exercising powers under the trust or arrangement.
            Amended on (15 April, 2019).

            • Guidance on CDD

              1. The information required under 8.3.2(2)(a) and (b) should be obtained through a first-hand inspection of an original current, valid passport or, where a customer does not own a passport, an official identification document which includes a photograph.
              2. A Relevant Person should ensure that any documents used for the purpose of identification are original documents.
              3. Where personal identity documents, such as a passport, ID card or other identification documentation cannot be obtained in original form, for example because a Relevant Person has no physical contact with the Customer, the identification documentation provided should be certified as a true copy of the original document by any one of the following:
              a. a registered lawyer;
              b. a registered notary;
              c. a chartered accountant;
              d. a government ministry;
              e. a post office;
              f. a police officer; or
              g. an embassy or consulate.
              The individual or authority undertaking the certification should be contactable if necessary.
              Where a copy of an original identification document is made by a Relevant Person, the copy should be dated, signed and marked with 'original sighted'.
              Amended on (15 April, 2019).

          • AML 8.3.3 AML 8.3.3

            (1) For the purposes of Rule 8.3.1(1)(b), and subject to (4), a Relevant Person must identify the Beneficial Owners of a Body Corporate in accordance with this Rule.
            (2) The Relevant Person must identify any natural person who:
            (a) owns or controls (in each case whether directly or indirectly) 25% or more of the shares or voting rights in the Body Corporate; or
            (b) controls the Body Corporate.
            (c) exercises ultimate control over the management of the Body Corporate.
            (3) For the purposes of (2)(b), a natural person controls a Body Corporate if such person:
            (a) holds, directly or indirectly:
            (i) 25% or more of the Body Corporate's shares;
            (ii) 25% or more of the voting rights in the Body Corporate; or
            (iii) the right to appoint or remove a majority of the board of directors of the Body Corporate; or
            (b) has the right to exercise, or actually exercises, significant influence or control over the Body Corporate.
            (4) A Relevant Person is not required to comply with Rule 8.3.1(1)(b) if the customer is:
            (a) a Listed Body Corporate; or
            (b) a Body Corporate that is wholly-owned by the Federal Government of the United Arab Emirates, or by any of the governments of the member Emirates of the United Arab Emirates; or
            (c) a Body Corporate created by Emiri decree within the United Arab Emirates.
            Amended on (15 April, 2019).

            • Individuals

              2. A Relevant Person should, in complying with Rule 8.3.1(1)(a), and adopting the RBA, obtain, verify and record, for every Customer who is a Natural Person, the following identification information in either documentary (hard copy) or electronic form:
              a. true full name (or names) used;
              b. date and place of birth;
              c. nationality;
              d. complete current permanent address, including all relevant details with regard to country of residence; and
              e. telephone and email address.
              3. Items 2a. to 2c. above should be obtained by sighting a current valid passport or, where a Customer does not own a passport, an official identification document which includes a photograph.
              4. The following additional information may be requested depending on the facts and the nature and size of the transaction or the business relationship:
              a. occupation or profession, name of employer and location of activity;
              b. information regarding the nature of the business to be conducted;
              c. information regarding the origin of the funds;
              d. legal domicile or fiscal residence; and
              e. information regarding the Source of Wealth or income.
              5. The concept of domicile referred to at item 4d. above generally refers to the place which a Person regards as his permanent home and with which he has the closest ties or which is his place of origin.
              6. The address of a prospective Customer should enable a Relevant Person to physically locate the Customer. If P.O. Box numbers are customary to a country, additional methods of physically locating the Customer should be applied.
              7. Documentary evidence of identity:
              a. current, signed passport;
              b. current, signed ID card; or
              c. other identification documentation that is customary in the country of residence, such as a driving licence, including a clear photograph of the prospective Customer.
              8. A Relevant Person should ensure that any documents used for the purpose of identification are original documents.
              9. Where personal identity documents, such as a passport, ID card or other identification documentation cannot be obtained in original form, for example because a Relevant Person has no physical contact with the Customer, the identification documentation provided should be certified as a true copy of the original document by any one of the following:
              a. a registered lawyer;
              b. a registered notary;
              c. a chartered accountant;
              d. a government ministry;
              e. a post office;
              f. a police officer; or
              g. an embassy or consulate.
              The individual or authority undertaking the certification should be contactable if necessary.

              Where a copy of an original identification document is made by a Relevant Person, the copy should be dated, signed and marked with 'original sighted'.
              10. Documentary evidence of address:
              a. record of home visit;
              b. confirmation from an electoral register search that a Person of such a name lives at that address;
              c. tenancy agreement;
              d. utility bill; or
              e. local authority tax bill.

            • Unincorporated businesses or partnerships

              11. Evidence to be obtained in either documentary or electronic form:
              a. true full name or names;
              b. complete current registered and trading address, including relevant details with regard to country of establishment;
              c. telephone number and email address;
              d. fiscal residence;
              e. business activity;
              f. information on the nature of the business to be conducted;
              g. trading licence, with renewal date;
              h. a list of authorised signatories of the business or partnership;
              i. regulatory body, if applicable;
              j. information regarding the origin of funds; and
              k. information regarding the Source of Wealth/income.
              12. Documentary evidence of identity:
              a. the latest annual report and accounts, audited where applicable; and
              b. a certified copy of the partnership deed, to ensure that it has a legitimate purpose and to ascertain the nature of the business or partnership.
              13. Evidence of the trading address of the business or partnership should be obtained and may be verified with a visit to the place of business.

            • Guidance on Restricted Scope Companies

              14. The Restricted Scope Company is a corporate vehicle offering a greater degree of confidentiality than other forms of corporate entity in ADGM. Restricted Scope Companies are not required to file accounts and are not required to audit their accounts. Restricted Scope Companies must file an annual return, articles, and details of their registered offices, directors and secretary (if they have one) with the Registrar.
              15. Relevant Persons will know that the Restricted Scope Company is subject to less onerous corporate disclosure requirements than other forms of corporate entity due to the requirement to have "(Restricted)" in the company's name. Given that only a Restricted Scope Company's constitution and details of its registered office will be available in a public register, Relevant Persons will be required to have a bilateral dialogue with the Restricted Scope Company in accordance with the RBA to obtain any other relevant information which is needed to assess the money laundering risks to which it is exposed.
              16. Evidence to be obtained in either documentary or electronic form:
              a. true full name or names;
              b. registered address;
              c. telephone number and email address;
              d. fiscal residence;
              e. business activity;
              f. information regarding the origin of funds;
              g. information regarding the Source of Wealth/income; and
              h. the latest annual report and accounts, audited where applicable.

            • Corporate entities including Financial Institutions or Credit Institutions that are not covered by an exemption, including Financial Institutions or Credit Institutions that are not regulated by the Regulator or regulated in a FATF country

              17. Evidence to be obtained in either documentary or electronic form:
              a. registered corporate name and any trading names used;
              b. complete current registered address and any separate principal trading addresses, including all relevant details with regard to country of residence;
              c. telephone number and email address;
              d. date and place of incorporation;
              e. corporate registration number;
              f. fiscal residence;
              g. business activity;
              h. regulatory body, if applicable;
              i. name and address of Group, if applicable;
              j. legal form;
              k. name of external auditor;
              l. information regarding the nature and level of the business to be conducted;
              m. information regarding the origin of the funds; and
              n. information regarding the Source of Wealth/income.
              18. Documentary evidence of identity:
              a. copy of the extract of the register of the regulator or exchange, or state law or edict creating the entity, in case of regulated, listed or state-owned companies;
              b. certified copy of the articles of association or statutes;
              c. certified copy of either the certificate of incorporation or the trade register entry and the trading licence, including the renewal date;
              d. latest annual report, audited and published if applicable;
              e. certified copies of the list of authorised signatories specifying who is authorised to act on behalf of the Customer account and of the board resolution authorising the signatories to operate the account;
              f. certified copies of the identification documentation of the authorised signatories;
              g. names, country of residence, nationality of Directors or partners and of the members of the Governing Body; and
              h. list of the main shareholders holding more than 5% of the issued capital.
              19. If the applying Customer is not obliged to publish an audited annual report, adequate information about the financial accounts should be obtained.
              20. A Relevant Person should verify that the applying Customer is active and has not been, or is not in the process of being dissolved, wound-up or terminated.

            • Trusts, nominees and fiduciaries

              21. In addition to the identification documentation listed under 'corporate entities' (Paragraphs 17 to 20 above), the following information and documentation should be obtained:
              a. identity of any settlor, the trustee and any principal controller who has the power to remove the trustee, as well as the identity of the Beneficial Owner;
              b. a certified copy of the trust deed, to ascertain the nature and purpose of the trust; and
              c. documentary evidence of the appointment of the current trustees.
              22. A Relevant Person should ensure that it is advised about any changes concerning the individuals who have control over the funds, and concerning the Beneficial Owners.
              23. Where a trustee, principal controller or Beneficial Owner who has been identified is about to be replaced, the identity of the new trustee, principal controller or Beneficial Owner should be verified before they are allowed to exercise control over the funds.

            • Authorised Persons and Recognised Bodies regulated by the Regulator or Financial Institutions or Credit Institutions regulated in a FATF country

              24. Pursuant to the exception under Simplified Customer Due Diligence, identification evidence is generally not required for Customers of a firm who are themselves Authorised Persons, Auditors, Recognised Clearing Houses or Recognised Investment Exchanges registered or regulated by the Regulator or are Financial Institutions or Credit Institutions regulated by any FATF country's relevant Non-ADGM Financial Services Regulator or other relevant regulatory authority or regulator.
              25. However, the confirmation of the existence of such a relevant firm or institution and its regulatory status, including the application of AML applying in the ADGM or equivalent AML provisions, should be verified by the Relevant Person prior to entering into a Customer relationship. Regular professional and commercial checks and due diligence investigations should still be performed. The Relevant Person should verify the regulatory status of the firm or institution by one of the following means:
              a. requesting confirmation from the relevant Non-ADGM Financial Services Regulator or other relevant regulatory authority, regulator, body, or home country Central Bank; or
              b. requesting a certified copy of a relevant licence or authorisation to conduct financial or banking business from the firm or institution.

            • Clubs, cooperative, charitable, social or professional societies

              26. A Relevant Person should take steps to satisfy itself as to the legitimate purpose of clubs and societies by, for example, obtaining a certified copy of the constitution of the organisation.
              27. The identity of the principal signatories and controllers should be verified in accordance with the requirements for private individuals. The capacity of the signatories to act on behalf of the club or society and the identity of Beneficial Owners of the funds should be established and verified.
              28. A Relevant Person should consider the following items while completing the Customer identification requirements for a Client which is a charitable society:
              a. whether the charity is licensed or permitted by a regulatory authority, regulator or government entity in its home country. (Note: charities in the U.A.E. are required to obtain from the U.A.E. Minister of Labour and Social Affairs a certificate which confirms their identity, permits them to open bank accounts and states whether they are permitted to collect donations and make financial transfers outside the U.A.E. through such bank accounts);
              b. the type and quality of regulation to which the charity is subject in its home state;
              c. the structure and overall character of management and trustees;
              d. whether the charity allows donors to specify beneficiaries. If yes, then it would be prudent to ensure that such charities are closely regulated;
              e. the pattern of beneficiaries: a small number of targeted beneficiaries could indicate potential risks;
              f. whether the charity and its functioning is dominated by a few large donors and the pattern of donors; and
              g. whether it is a private foundation as, if it is, it is more likely to be dominated by a single donor and linked to a small number of beneficiaries which will necessitate scrutiny of both the donor and the beneficiaries.
              29. The Regulator may, from time to time:
              a. review the relevant guidance in light of changing money laundering legislation issued by the U.A.E. Central Bank, money laundering trends and techniques and according to international standards, in order to keep the guidance current; and
              b. provide such other guidance as it deems appropriate regarding Customer identification obligations.
              30. The Regulator expects that a Relevant Person will take these changes into account by amending, as appropriate, its policies, procedures, systems and controls.
              31. Sound "Know Your Customer" arrangements have particular relevance to the safety and soundness of a Relevant Person, in that:
              a. they help to protect its reputation and the integrity of the ADGM by reducing the likelihood of Relevant Persons becoming a vehicle for, or a victim of, financial crime and suffering consequential reputational damage; and
              b. they constitute an essential part of sound risk management, for example by providing the basis for identifying, limiting and controlling risk exposures to assets and liabilities, including assets under management.

            • Risk-Based Approach

              32. Any inadequacy of "Know Your Customer" standards can expose Relevant Persons to serious business operation and control risks.
              33. In complying with Rule 8.3.1(1)(a), a Relevant Person should adopt an RBA for the Customer identification and verification process. Depending on the money laundering risk assessment regarding the Relevant Person's Customer, the Relevant Person should decide to what level of detail the Customer identification and verification process will need to be performed. The risk assessment regarding a Customer should be recorded in the Customer file.
              34. The RBA does not release a Relevant Person from its overall obligation to identify fully and obtain evidence of Customer identification to the Regulator's satisfaction.
              35. A Relevant Person is advised that in cases of doubt it should adopt a stricter rather than a moderate approach in its judgement concerning the risk level and the level of detail to which Customer identification is performed and evidence obtained.

            • No Original Documents

              36. In complying with Rule 8.3.1(1)(a), it may not always be possible to obtain original documents. Where identification documents cannot be obtained in original form, for example because a Relevant Person has no physical contact with the Customer, the Relevant Person should obtain a copy certified as a true copy by a Person of good standing such as a registered lawyer or notary, a chartered accountant, a bank manager, a police officer, an Employee of the Person's embassy or consulate, or other similar Person. The Regulator considers that downloading publicly-available information from an official source (such as a regulator's or other official government website) is sufficient to satisfy the requirements of Rule 8.3.1(1)(a). The Regulator also considers that CDD information and research obtained from a reputable company or information-reporting agency may also be acceptable as a reliable and independent source as would banking references and, on a risk-sensitive basis, information obtained from researching reliable and independent public information found on the internet or on commercial databases.
              37. For higher risk situations the Regulator would expect identification information to be independently verified, using both public and non-public sources. For lower risk situations, not all of the relevant identification information would need to be verified.
              38. In complying with Rule 8.3.1(1)(b) and (c), a Relevant Person is required to "understand" a Customer's Source of Funds and wealth. This would mean obtaining information from the Customer or from a publicly-available source on the Source of Funds and wealth. For a public company, this might be achieved by looking at their published accounts. For a natural or Legal Person, this might involve including a question on Source of Funds and wealth in an application form or Client questionnaire. Understanding a Customer's Source of Funds and wealth is also important for the purposes of undertaking on-going due diligence under Rule 8.3.1(1)(d).
              39. An insurance policy which is similar to a life policy would include life-related protection, or a pension, or investment product which pays out to the policy holder or beneficiary upon a particular event occurring or upon redemption.

            • Guidance on verification of Beneficial Owner

              40. In determining whether an individual meets the definition of a Beneficial Owner or controller, regard should be had to all the circumstances of the case, in particular the size of an individual's legal or beneficial ownership in a Transaction. The question of what is a "small" ownership interest for the purposes of the definition of a Beneficial Owner will depend on the individual circumstances of the Customer. The Regulator considers that the question of whether an ownership interest is small should be considered in the context of the Relevant Person's knowledge of the Customer and the Customer risk assessment and the risk of money laundering.
              41. When verifying Beneficial Owners under Rule 8.3.1(1)(a), a Relevant Person is expected to adopt a substantive (as opposed to form over substance) approach to CDD for Legal Persons. Adopting a substantive approach means focusing on the money laundering risks of the Customer and the product/service and avoiding an approach which focuses purely on the legal form of an arrangement or sets fixed percentages at which Beneficial Owners are identified (or not). It should take all reasonable steps to establish and understand a corporate Customer's legal ownership and control and to identify the Beneficial Owner. The Regulator does not set explicit ownership or control thresholds in defining the Beneficial Owner because the Regulator considers that the applicable threshold to adopt will ultimately depend on the risks associated with the Customer, and so the Regulator expects a Relevant Person to adopt the RBA and justify on reasonable grounds an approach which is proportionate to the risks identified. A Relevant Person should not set fixed thresholds for identifying the Beneficial Owner without objective and documented justification as required by Rule 5.1.1. An overly formal approach to defining the Beneficial Owner may result in a criminal "gaming" the system by always keeping his financial interest below the relevant threshold.
              42. The Regulator considers that in some circumstances no threshold should be used when identifying Beneficial Owners because it may be important to identify all underlying Beneficial Owners in order to ensure that they are not associated or connected in some way. This may be appropriate where there are a small number of investors in an account or fund, each with a significant financial holding and the Customer-specific risks are higher. However, where the Customer-specific risks are lower, a threshold can be appropriate. For example, for a low-risk corporate Customer combined with a lower-risk product or service, a percentage threshold may be appropriate for identifying "control" of the Legal Person for the purposes of the definition of a Beneficial Owner.
              43. For a retail investment fund which is widely-held and where the investors invest via pension contributions, the Regulator would not expect the manager of the fund to look through to any underlying investors where there are none with any material control or ownership levels in the fund. However, for a closely-held fund with a small number of investors, each with a large shareholding or other interest, the Regulator would expect a Relevant Person to identify and verify each of the Beneficial Owners, depending on the risks identified as part of its risk-based assessment of the Customer. For a corporate health policy with defined benefits, the Regulator would not expect a Relevant Person to identify the Beneficial Owners.
              44. Where a Relevant Person carries out identification and verification in respect of actual and potential Beneficial Owners of a trust, this should include the trustee, the settlor, the protector, the enforcer, the beneficiaries, other Persons with power to appoint or remove a trustee and any Person entitled to receive a distribution, whether or not such Person is a named beneficiary.

            • Guidance on Politically Exposed Persons and corruption

              45. Individuals who have, or have had, a high political profile, or hold, or have held, public office, can pose a higher money laundering risk to a Relevant Person as their position may make them vulnerable to corruption. This risk also extends to members of their families and to known close associates. PEP status itself does not, of course, incriminate individuals or entities. It does, however, put the Customer into a higher risk category.
              46. Generally, a foreign PEP presents a higher risk of money laundering because there is a greater risk that such Person, if he were committing money laundering, would attempt to place his money offshore where he is less likely to be recognised as a PEP and where it would be more difficult for law enforcement agencies in his home jurisdiction to confiscate or freeze his criminal property.
              47. Due diligence to uncover information about PEPs can be time consuming and difficult, requiring close fact checking of the names, dates of birth, photographs and identification numbers of individuals against reputable PEP lists. However, despite the development of such lists by certain vendors, as well as the United Nations' compilation of a list of heads of states which fall within the FATF definition of PEPs, there is no "official" centralised global PEP list. It is therefore left to each Relevant Person to determine whether they would like to internally develop their own database or list of PEPs as a due diligence tool.
              48. Where a Customer relationship is maintained with a PEP, detailed monitoring and due diligence procedures should include:
              a. analysis of any complex structures, for example involving trusts or multiple jurisdictions;
              b. appropriate measures to establish the Source of Wealth;
              c. development of a profile of expected activity for the business relationship in order to provide a basis for Transaction and account monitoring;
              d. initial screening and due diligence prior to the account opening;
              e. Senior Management approval for the account opening;
              f. regular oversight of the relationship with a PEP by Senior Management; and
              g. ongoing and periodical screening of accounts opened by PEPs.
              49. A Relevant Person is advised that Customer relationships with family members or close associates of PEPs involve similar risks to those with PEPs themselves.
              50. Corruption-related money laundering risk increases when a Relevant Person deals with a PEP. Corruption may involve serious crimes and has become the subject of increasing global concern. Corruption offences are predicate crimes under Federal Law No. 4 of 2002.
              51. The Regulator considers that after leaving office a PEP may remain a higher risk for money laundering if such Person continues to exert political influence or otherwise pose a risk of corruption.

            • Guidance on Insurers

              52. With regard to Insurers, the following "Know Your Customer" verification and identification set out in this section should be taken into account.
              53. An Insurer undertaking verification should establish to its satisfaction that every verification subject exists. All verification subjects of joining applicants for Insurance Business should normally be verified. In the case of arrangements such as trusts, nominee companies and front companies, verification should include an assessment of the substance of the arrangement, for example in relation to settlors, trustees and beneficiaries.
              54. An Insurer should carry out verification in respect of the parties entering into the Contract of Insurance. On some occasions there may be underlying principals and, if this is the case, the true nature of the relationship between principals and the policyholders should be established and appropriate enquiries performed about the former, especially if the policyholders are accustomed to acting on their instructions. 'Principal' should be understood in its widest sense to include, for example, Beneficial Owners, settlors, controlling shareholders, Directors and major beneficiaries.

            • Guidance on electronic money

              55. The following factors will increase the risk of electronic money products being used for money laundering or terrorist financing:
              a. high, or no, Transaction or purse limits: the higher the value and frequency of Transactions, and the higher the purse limit, the greater the risk, particularly where Customers are permitted to hold multiple purses;
              b. frequent cross-border Transactions, unless within a single scheme, can give rise to difficulties with information sharing: dependence on counterparty systems increases the risk;
              c. funding of purses by unverified parties presents a higher risk of money laundering, whether it is the Customer who is unverified or a third party;
              d. funding of purses using cash offers little or no audit trail of the source of the funds and hence presents a higher risk of money laundering;
              e. funding of purses using electronic money products that have not been verified may present a higher risk of money laundering;
              f. the non-face-to-face nature of many products gives rise to increased risk;
              g. the ability of consumers to hold multiple purses (for example, open multiple accounts or purchase a number of cards) without verification of identity increases the risk;
              h. cash access, for example by way of ATMs, as well as an allowance for the payment of refunds in cash for purchases made using electronic money, will increase the risk;
              i. increased product functionality may, in some instances, give rise to a higher risk of money laundering (product functionality includes Person-to-business, Person-to-Person, and business-to-business transfers);
              j. products that feature multiple cards linked to the same account increase the utility provided to the user, but may also increase the risk of money laundering, particularly where the Customer is able to pass on linked 'partner' cards to anonymous third parties;
              k. segmentation of the business value chain, including use of multiple agents and outsourcing, in particular to overseas locations, may give rise to a higher risk; and
              l. the technology adopted by the product may give rise to specific risks that should be assessed.
              56. Electronic money issuers should address the risks that are inherent in payments in a similar manner to other retail products: by putting in place systems and controls that prevent money laundering and terrorist financing by detecting unusual Transactions and predetermined patterns of activity.
              57. The systems and controls electronic money issuers put in place must be commensurate with the money laundering and terrorist financing risk to which they are exposed. The detail of electronic money issuers' systems and controls will therefore vary. Examples include those that:
              a. place limits on purse storage values, cumulative turnover or amounts transacted;
              b. can detect money laundering Transaction patterns;
              c. will detect anomalies to normal Transaction patterns;
              d. can identify multiple purses held by a single individual or group of individuals, such as the holding of multiple accounts or the 'stockpiling' of pre-paid cards;
              e. can look for indicators of accounts being opened with different electronic money issuers as well as attempts to pool funds from different sources;
              f. can identify discrepancies between submitted and detected information, for example between country of origin submitted information and the electronically-detected IP address;
              g. deploy sufficient resources to address money laundering risks, including, where necessary, specialist expertise for the detection of suspicious activity;
              h. allow collaboration with merchants that accept electronic money to identify and prevent suspicious activity; and
              i. restrict funding of electronic money products to funds drawn on accounts held in the ADGM.

          • AML 8.3.4

            (1) For the purposes of Rule 8.3.1(1)(b), a Relevant Person must identify the Beneficial Owners of a Partnership in accordance with this Rule.
            (2) The Relevant Person must identify any natural person who:
            (a) ultimately is entitled to or controls (in each case whether directly or indirectly) a 25% or more share of the capital or profits of the Partnership or 25% or more of the voting rights in the Partnership; or
            (b) otherwise exercises ultimate control over the management of the Partnership.
            Added on (15 April, 2019).

          • AML 8.3.5

            (1) For the purposes of Rule 8.3.1(1)(b), a Relevant Person must identify the Beneficial Owners of a customer that is a trustee of a trust or an equivalent position in respect of a similar Legal Arrangement in accordance with this Rule.
            (2) The Relevant Person must identify:
            (a) the settlor of the trust;
            (b) any other trustee(s) aside from the customer;
            (c) each beneficiary of the trust;
            (d) where the persons (or some of the persons) benefiting from the trust have not been determined, the class of persons in whose main interest, in the opinion of the Registrar, the trust has been established or operates; and
            (e) any natural person who has control over the trust.
            (3) For the purposes of (2)(e),"control" means a power (whether exercisable alone, jointly with another person or with the consent of another person) under the trust instrument or by law to:
            (a) dispose of, advance, lend, invest, pay or apply trust property;
            (b) vary or terminate the trust;
            (c) add or remove a person as a beneficiary to or from a class of beneficiaries;
            (d) appoint or remove trustees or give another person control over the trust; and
            (e) direct, withhold consent to or veto the exercise of a power mentioned in sub-paragraphs (a) to (d).
            (4) Where any of the persons identified under (2)(a) to (e) are fulfilled by a Body Corporate or Partnership, the Relevant Person must identify the Beneficial Owners of Body Corporate or Partnership in accordance with Rule 8.3.3 and Rule 8.3.4.
            Added on (15 April, 2019).

          • AML 8.3.6 AML 8.3.6

            (1) For the purposes of Rule 8.3.1(1)(b), a Relevant Person must identify the Beneficial Owners of a customer that is a foundation or other Legal Arrangement similar to a foundation in accordance with this Rule.
            (2) The Relevant Person must identify:
            (a) the founder;
            (b) the foundation council members (or otherwise members of the governing body of the foundation);
            (c) the guardian, if any;
            (d) the beneficiaries (if names) or designee (if no beneficiaries are named) in whose main interest, in the opinion of the Relevant Person, the foundation or arrangement has been established or operates; and
            (e) any natural person who has control over the foundation or other Legal Arrangement.
            (3) For the purposes of (2)(e), a natural person shall have "control" over a foundation or a Legal Arrangement if such person:
            (a) holds, directly or indirectly, 25% or more of the voting rights in the conduct and management of the foundation or the Legal Arrangement; or
            (b) holds the right, directly or indirectly, to appoint or remove a majority of the officials of the foundation or the Legal Arrangement.
            (4) Where any of the persons identified under (2) (a) to (e) are a Body Corporate or Partnership, the Relevant Person must identify the Beneficial Owners of Body Corporate or Partnership in accordance with Rule 8.3.3 and Rule 8.3.4.
            Amended on (3 February, 2020).

            • Guidance on verification of the identity of Beneficial Owners

              1. In determining whether an individual meets the definition of Beneficial Owners regard should be had to all the circumstances of the case, in particular the size of an individual's legal engagement or beneficial ownership in a Transaction.
              2. For a retail investment fund that is widely-held and where the investors invest via pension contributions, the Regulator would not expect the manager of the fund to look through to any underlying investors where there are none with any material control or ownership of the fund. However, for a closely-held fund with a small number of investors, each having a large shareholding or other interest, the Regulator would expect a Relevant Person to identify and verify each of the Beneficial Owners, depending on the risks identified as part of its risk-based assessment of the customer. For a corporate health policy with defined benefits, however, the Regulator would not expect a Relevant Person to identify the Beneficial Owners.
              Added on (15 April, 2019).

            • Guidance on Politically Exposed Persons (PEPs) and corruption

              1. Individuals who have, or have had, a high political profile, or hold, or have held, public office, may pose a higher money laundering risk to a Relevant Person as their position may make them prone to corruption. This risk also extends to members of their families and to known close associates. Being a PEP does not, in itself, of course, incriminate individuals or entities.
              2. Generally, a foreign PEP presents a higher risk of money laundering because there is a greater risk that such a Person, if he were undertaking money laundering, would attempt to place his money offshore, away from his home jurisdiction, where he is less likely to be recognised as a PEP and where it would be more difficult for law enforcement agencies in his home jurisdiction to confiscate or freeze his criminal proceeds.
              3. A Relevant Person should be aware that customer relationships with family members or close associates of PEPs involve similar risks to those with PEPs themselves.
              4. The risk of corruption-related money laundering increases where a Relevant Person deals with a PEP. Corruption may involve serious crimes and has become the subject of increasing global concern. Corruption offences are predicate crimes under Federal AML Legislation.
              5. The Regulator considers that after leaving office a PEP may remain a higher risk for money laundering if such an individual continues to exert political influence or otherwise poses a risk of being involved in corruption.
              6. The fact that an individual is a PEP does not automatically mean that the individual must be assessed to be a high risk customer: however, Enhanced CDD still needs to be undertaken on PEPs. A Relevant Person will need to assess the particular circumstances relating to each PEP to determine what risk category is appropriate.
              Added on (15 April, 2019).

        • AML 8.4 AML 8.4 Enhanced Customer Due Diligence

          • AML 8.4.1 AML 8.4.1

            Where a Relevant Person is required to undertake Enhanced CDD, having assigned a customer a high risk rating or it or its Beneficial Owners is a PEP, then, in addition to CDD under Rule 8.3.1, it must:

            (a) obtain:
            (i) additional identification information on the customer and all Beneficial Owners;
            (ii) additional information on the intended nature of the business relationship;
            (iii) information on the reasons for a Transaction;
            (b) update the CDD information which it holds on the customer and any Beneficial Owners more regularly;
            (c) identify and verify:
            (i) the Source of Funds; and
            (ii) the Source of Wealth;
            of the customer and, if applicable, all Beneficial Owners;
            (d) conduct enhanced monitoring of the business relationship, by increasing the frequency and intensity of controls applied, and determining which groups of transactions need further examination;
            (e) obtain the approval of Senior Management to commence a business relationship with the customer; and
            (f) require the first payment to be carried out through an account in the customer's name with a financial institution that is subject to money laundering regulation and supervision in a jurisdiction that has standards equivalent to those set out in the FATF Recommendations.
            Amended on (15 April, 2019).

            • Guidance

              1. In Rule 8.4.1 Enhanced CDD measures are mandatory to the extent that they are applicable to the relevant customer or the circumstances of the business relationship and to the extent that the risks would reasonably require it. Therefore, the extent of additional measures to be conducted is a matter for the Relevant Person to determine on a case by case basis.
              2. In Rule 8.4.1(e), Senior Management approval may be given by an individual member of the Relevant Person's Senior Management or by a committee of senior managers appointed to consider high-risk customers. Such approval may also be outsourced within the Group, but only to a suitably qualified individual or committee.
              3. For high-risk customers, a Relevant Person should, in order to mitigate the perceived potential and actual risks, exercise a greater degree of diligence throughout the course of the customer relationship and should endeavour to understand the nature of the customer's business and consider whether it is consistent and reasonable.
              4. A Relevant Person should be satisfied that a customer's use of complex legal structures and/or the use of trust and private investment vehicles, has a genuine and legitimate purpose.
              5. For Enhanced CDD, where there are one or more Beneficial Owners, verification of the customer's Source of Funds and Wealth may require enquiring into the Beneficial Owners' Source of Funds and Wealth because the Source of Funds would normally be associated with the Beneficial Owners and not the customer.
              6. The Regulator considers that verification of Source of Funds includes obtaining independent corroborating evidence such as the proof of dividend payments connected to a shareholding, bank statements, salary/bonus certificates, loan documentation and proof of all Transactions which gave rise to payments into the account. A customer should be able to demonstrate and have documented how the relevant funds are connected to a particular event which gave rise to the payment into the account or to the source of the funds for a Transaction.
              7. The Regulator considers that verification of Source of Wealth includes obtaining independent corroborating evidence such as share certificates, publicly-available registers of ownership, bank or brokerage account statements, probate documents, audited accounts and financial statements, news items from a reputable source and other similar evidence.
              8. A Relevant Person may commission a report from a third party vendor to obtain further information on a customer or Transaction or to investigate a customer or Beneficial Owners in very high-risk cases. Such a report may be particularly useful where there is little or no publicly-available information on a Person or on a Legal Arrangement or where the Relevant Person has difficulty in obtaining and verifying information.
              9. For Rule 8.4.1, circumstances where it may be applicable to require the first payment made by a customer in order to open an account with a Relevant Person to be carried out through a bank account in the customer's name Customer include:
              (a) where, following the use of other Enhanced CDD measures, the Relevant Person is not satisfied with the results of due diligence; or
              (b) as an alternative measure, where one of the measures in Rule 8.4.1 (a) to (e) cannot be carried out.
              Amended on (3 February, 2020).

        • AML 8.5 AML 8.5 Simplified Customer Due Diligence

          • AML 8.5.1 AML 8.5.1

            (1) Where a Relevant Person is permitted to undertake Simplified CDD under Rule 8.1.1(2), modification of Rule 8.3.1 may include:
            (a) verifying the identity of the customer and any Beneficial Owners after the establishment of the business relationship;
            (b) deciding to reduce the frequency of, or as appropriate not undertake, customer identification updates;
            (c) deciding not to verify an identification document other than by requesting a copy;
            (d) reducing the degree of on-going monitoring of Transactions, based on a reasonable monetary threshold or on the nature of the Transaction; and
            (e) not collecting specific information or carrying out specific measures to understand the purpose and intended nature of the business relationship, but inferring such purpose and nature from the type of Transactions or business relationship established.
            (2) The modification undertaken under (1) must be proportionate to the customer's money laundering risks.
            Amended on (15 April, 2019).

            • Guidance

              1. Relevant Person should not use a "one size fits all" approach for all of its low-risk customers. Notwithstanding that the risks may be low for all such customers in that category, the extent of CDD undertaken needs to be proportionate to the specific risks identified on a case by case basis.
              2. A Relevant Person might reasonably reduce the frequency of or, as appropriate, eliminate customer identification updates where the money laundering risks are low and the service provided does not offer a realistic opportunity for money laundering.
              3. An example of where a Relevant Person might reasonably reduce the degree of on-going monitoring and scrutinising of Transactions, based on a reasonable monetary threshold or on the nature of the Transaction, would be where the Transaction is a recurring, fixed contribution to a savings scheme, investment portfolio or fund or where the monetary value of the Transaction is not material for money laundering purposes given the nature of the customer and the Transaction type.
              Amended on (15 April, 2019).

        • AML 8.6 AML 8.6 On-going Customer Due Diligence

          • AML 8.6.1

            When undertaking on-going CDD under Rule 8.3.1(d), a Relevant Person must:

            (a) monitor Transactions undertaken during the course of its customer relationship to ensure that the Transactions are consistent with the Relevant Person's knowledge of the customer, his business and risk rating;
            (b) pay particular attention to any complex or unusually large Transactions or unusual patterns of Transactions that have no apparent or visible economic or legitimate purpose;
            (c) enquire into the background and purpose of the Transactions in (b);
            (d) periodically review the adequacy of the CDD information it holds on customers and Beneficial Owners to ensure that the information is kept up to date, particularly for customers with a high-risk rating; and
            (e) periodically review each customer to ensure that the risk rating assigned to a customer under Rule 7.1.1(b) remains appropriate for the customer in light of the money laundering risks.
            Amended on (15 April, 2019).

          • AML 8.6.2 AML 8.6.2

            A Relevant Person should apply an intensified and on-going monitoring programme with respect to higher risk Transactions and customers.

            Amended on (15 April, 2019).

            • Guidance

              1. The customer identification process does not end at the time of establishing a business relationship with a customer or, where relevant, undertaking a specific transaction or business activity on behalf of a customer. Following the start of the customer relationship, a Relevant Person should ensure that all relevant evidence and information is kept up-to-date including, for example, the list of authorised signatories who can act on behalf of a corporate customer.
              2. In complying with Rule 8.6.1(d), a Relevant Person should undertake a periodic review to ensure that non-static customer identity documentation is accurate and up-to-date. A Relevant Person is expected to ensure that the information and the evidence obtained from a customer is valid and has not expired, for example when obtaining copies of identification documentation such as a passport or identification card. Examples of non-static identity documentation include passport number and residential/business address and, for a Legal Person, its share register or list of partners.
              3. A Relevant Person should undertake a review under Rule 8.6.1(d) and (e) particularly when:
              (a) the Relevant Person changes its CDD documentation requirements;
              (b) an unusual Transaction with the customer is expected to take place;
              (c) there is a material change in the business relationship with the customer; or
              (d) there is a material change in the nature or ownership of the customer.
              4. The degree of the on-going due diligence to be undertaken will depend on the customer risk assessment carried out under Rule 7.1.1.
              5. A Relevant Person's Transaction monitoring policies, procedures, systems and controls, which may be implemented by manual or automated systems, or a combination thereof, are one of the most important aspects of effective CDD. Whether a Relevant Person should undertake the monitoring by means of a manual or computerised system (or both) will depend on a number of factors, including:
              (a) the size and nature of the Relevant Person's business and customer base; and
              (b) the complexity and volume of customer Transactions.
              Amended on (15 April, 2019).

          • AML 8.6.3

            A Relevant Person must review its customers, their businesses, and Transactions, against Sanctions Lists when complying with Rule 8.6.1(d).

            Amended on (15 April, 2019).

        • AML 8.7 AML 8.7 Failure to conduct or complete Customer Due Diligence

          • AML 8.7.1 AML 8.7.1

            (1) Where, in relation to a customer, a Relevant Person is unable to conduct or complete the requisite CDD in accordance with Rule 8.1.1 it must, where appropriate:
            (a) not carry out a Transaction with or for the customer through a bank account or in cash;
            (b) not open an account or otherwise provide a service;
            (c) not otherwise establish a business relationship or carry out a Transaction;
            (d) terminate or suspend any existing business relationship with the customer;
            (e) return any monies or assets received from the customer; and
            (f) consider whether the inability to conduct or complete CDD necessitates the making of a Suspicious Activity Report under Rule 14.3.1(c).
            (2) A Relevant Person is not obliged to comply with (1)(a) to (e) if:
            (a) to do so would amount to "tipping off" the customer, in breach of Federal AML Legislation; or
            (b) the FIU directs the Relevant Person to act otherwise.
            Amended on (15 April, 2019).

            • Guidance

              1. In complying with Rule 8.7.1(1) a Relevant Person should apply one or more of the measures in (a) to (f) as appropriate in the circumstances. Where CDD cannot be completed to a significant degree, it may be appropriate not to carry out a Transaction pending completion of CDD. Where CDD cannot be conducted, including where a material part of the CDD such as identifying and verifying Beneficial Owners cannot be undertaken, a Relevant Person should not establish a business relationship with the customer.
              2. A Relevant Person should note that Rule 8.7.1 applies to both existing and prospective customers. For prospective customers it may be appropriate for a Relevant Person to terminate the business relationship before a product or service is provided. However, for existing customers, while termination of the business relationship should not be ruled out, suspension may be more appropriate depending on the circumstances, whilst further investigations are carried out. Whichever course of action is taken, the Relevant Person should be careful not to tip off the customer.
              3. A Relevant Person should adopt the RBA in order to inform the appropriate level of CDD to be undertaken for existing customers. For example, if a Relevant Person considers that any of its existing customers (which may include customers that it migrates into the ADGM) have not been subject to CDD of a standard equivalent to that required by the AML Rulebook, it should adopt the RBA and take remedial action in a manner proportionate to the risks and within a reasonable period of time whilst complying with Rule 8.7.1.
              Amended on (15 April, 2019).

        • AML 8.8 AML 8.8

          A diagram outlining the Customer due diligence process is contained in A1.4.

          • AML 8.8.1

            (1) A Relevant Person “A” that is an Authorised Person or a Recognised Body must provide another Relevant Person, “B”, that is an Authorised Person or a Recognised Body, at the request of B, with the Customer Due Diligence information for customers that has been collected by A under Rules 8.3 and 8.4, subject to:
            (a) those customers being customers of both A and B at the time that the request is made;
            (b) B obtaining the written consent of the customers to whom the request relates and providing A with that consent for the release of such information by A;
            (c) the request being made solely for the purposes of conducting Customer Due Diligence on the customers to whom the request relates; and
            (d) in the preceding twelve months B not having requested Customer Due Diligence information from A for the same customers to whom the request relates.
            (2) A must also provide B with any other information relevant to CDD that has been provided to it by those customers.

          • AML 8.8.2

            Following a request made under Rule 8.8.1, A must transfer to B without undue delay all Customer Due Diligence information in its possession for those customers.

          • AML 8.8.3

            A must not charge B a fee for the provision of Customer Due Diligence information provided under Rule 8.8.1.

      • AML 9. AML 9. ANTI-MONEY LAUNDERING COMPLIANCE AND THIRD-PARTIES

        • AML 9.1 AML 9.1 Reliance on a third party

          • AML 9.1.1

            (1) A Relevant Person may rely on the following third parties ("qualified professionals") to conduct one or more of the elements of CDD on its behalf:
            (a) an Authorised Person or Recognised Body;
            (b) a law firm, notary, or other independent legal business, accounting firm, audit firm or insolvency practitioner or an equivalent Person in another jurisdiction;
            (c) a Financial Institution;
            (d) a member of the Relevant Person's Group; or
            (e) other specialised utilities for the provision of outsourced Anti-Money Laundering services.
            (2) In (1), a Relevant Person may rely on the information previously obtained by a third party which covers one or more elements of CDD.
            (3) Where a Relevant Person seeks to rely on a Person in (1) it may only do so if and to the extent that:
            (a) it immediately obtains the necessary CDD information from the third party in (1);
            (b) it takes adequate steps to satisfy itself that certified copies of the documents used to undertake the relevant elements of CDD will be available from the third party on request without delay;
            (c) the Person in (1)(b) to (d) is subject to regulation, including AML, by a Non-ADGM Financial Services Regulator or other competent authority in a country with AML regulations which are equivalent to the standards set out in the FATF Recommendations and it is supervised for compliance with such regulations;
            (d) the Person in (1) has not relied on any exception from the requirement to conduct any relevant elements of CDD which the Relevant Person seeks to rely on; and
            (e) in relation to (2), the information is up to date.
            (4) Where a Relevant Person relies on a member of its Group to conduct one or more of the elements of CDD on its behalf, such Group member need not meet the condition in (3)(c) if:
            (a) the Group is subject to policies and requirements equivalent to FATF standards, either:
            (i) where the Group applies and implements a Group-wide policy on CDD and record keeping which is equivalent to the standards set by FATF; or
            (ii) where the effective implementation of those CDD and record keeping requirements and Anti-Money Laundering programmes are supervised at Group level by a Non-ADGM Financial Services Regulator or other competent authority in a jurisdiction with Anti-Money Laundering regulations that are equivalent to the standards set out in the FATF Recommendations;
            (b) no exception from identification obligations has been applied in the original identification process; and
            (c) a written statement is received from the introducing member of the Relevant Person's Group confirming that:
            (i) the customer has been identified in accordance with the relevant standards under (4)(a) and (b);
            (ii) any identification evidence can be accessed by the Relevant Person without delay; and
            (iii) the identification evidence will be kept for at least six years.
            (5) If a Relevant Person is not reasonably satisfied that a customer or Beneficial Owners has been identified and verified by a third party in a manner consistent with these Rules, the Relevant Person must immediately perform the CDD itself with respect to any deficiencies identified.
            (6) Notwithstanding the Relevant Person's reliance on a Person in 9.1.1(1), the Relevant Person remains responsible for compliance with, and liable for any failure to meet the CDD requirements in the AML Rulebook.
            Amended on (15 April, 2019).

          • AML 9.1.2 AML 9.1.2

            (1) When assessing under Rule 9.1.1(3) or (4) if Anti-Money Laundering regulations in another jurisdiction are equivalent to FATF standards, a Relevant Person must take into account factors including, but not limited to:
            (a) mutual evaluations, assessment reports or follow-up reports published by FATF, the IMF, the World Bank, the OECD or other International Organisations;
            (b) membership of FATF or other international or regional groups such as the MENAFATF or the Gulf Co-operation Council;
            (c) contextual factors such as political stability or the level of corruption in the jurisdiction;
            (d) evidence of recent criticism of the jurisdiction, including in:
            (i) FATF advisory notices;
            (ii) public assessments of the jurisdiction's Anti-Money Laundering regime by organisations referred to in (a); or
            (iii) reports by other relevant non-government organisations or specialist commercial organisations; and
            (e) whether adequate arrangements exist for co-operation between the Anti-Money Laundering regulator in that jurisdiction and the Regulator.
            (2) A Relevant Person making an assessment under (1) must rely only on sources of information that are reliable and up-to-date.
            (3) A Relevant Person must keep adequate records of how it made its assessment, including the sources and materials considered.
            Added on (15 April, 2019).

            • Guidance

              1. In complying with Rule 9.1.1(3)(a), "immediately obtaining the necessary CDD information" means obtaining all relevant CDD information, and not just basic information such as name and address. However, compliance can be achieved by having the information sent in an email or other appropriate means. For the avoidance of doubt, it does not necessarily require a Relevant Person to immediately obtain the underlying certified documents used by the third party to undertake its CDD because under Rule 9.1.1(3)(b), these need only be available on request without delay.
              2. The Regulator would expect a Relevant Person, in complying with Rule 9.1.1(5), to fill any gaps in the CDD process as soon as it becomes aware that a customer or Beneficial Owners has not been identified and verified by the third party in a manner consistent with these Rules.
              3. If a Relevant Person acquires another business, either in whole or in substantial part, the Regulator would permit the Relevant Person to rely on the CDD conducted by the business it is acquiring, but would expect the Relevant Person to have done the following:
              (a) as part of its due diligence for the acquisition, to have taken a reasonable sample of the prospective customers to assess the quality of the CDD undertaken; and
              (b) to have undertaken CDD on all the customers to cover any deficiencies identified in (a) as soon as possible following the acquisition, prioritising high-risk customers.
              4. Where the legislative framework of a jurisdiction (such as secrecy or data protection legislation) prevents a Relevant Person from having access to CDD information upon request without delay as referred to in Rule 9.1.1(3)(b), the Relevant Person should undertake the relevant CDD itself and should not seek to rely on the relevant third party.
              5. If a Relevant Person relies on a third party located in a foreign jurisdiction to conduct one or more elements of CDD on its behalf, the Relevant Person must ensure that the foreign jurisdiction has Anti-Money Laundering regulations which are equivalent to the standards in the FATF Recommendations (see Rule 9.1.1(3)(c)).
              Added on (15 April, 2019).

        • AML 9.2 AML 9.2 Business partner identification

          • AML 9.2.1 AML 9.2.1

            (1) Prior to establishing the business relationship, a Relevant Person must establish and verify its business partners' identities by obtaining sufficient and satisfactory evidence of the identity of any business partner it relies upon in carrying on its Regulated Activities.
            (a) A Relevant Person must maintain accurate and up-to-date information and conduct on-going due diligence on its business partners, throughout the course of the business relationship.
            (b) If at any time a Relevant Person becomes aware that it lacks sufficient information or documentation concerning a business partner's identification, or develops a concern about the accuracy of its current information or documentation, it must promptly obtain appropriate material to verify such business partner's identity.
            (2) In the context of this Rule, a 'business partner' includes:
            (a) a qualified professional as specified in Rule 9.1.1(1);
            (b) a member of the Relevant Person's Group;
            (c) a Correspondent Bank; or
            (d) any other service provider.
            (3) A Relevant Person that establishes, operates or maintains a Correspondent Account for a Correspondent Banking Client must ensure that it has arrangements to:
            (a) conduct due diligence in respect of the opening of a Correspondent Account for a Correspondent Banking Client, including measures to identify:
            (i) its ownership and management structure;
            (ii) its major business activities and customer base;
            (iii) its location; and
            (iv) the intended purpose of the Correspondent Account;
            (b) identify all third parties that will use the Correspondent Account; and
            (c) monitor Transactions processed through a Correspondent Account that has been opened by a Correspondent Banking Client, in order to detect and report any suspicion of Money Laundering.
            Amended on (15 April, 2019).

            • Guidance

              Under (2)(d), service providers include agents that facilitate directly the activities of Authorised Persons in servicing their clients, as distinct from other service providers that provide purely ancillary services, such as IT, facilities management etc. to an Authorised Person.

          • AML 9.2.2 AML 9.2.2

            A Relevant Person must not:

            (1) establish a correspondent banking relationship with a Shell Bank;
            (2) establish or keep anonymous accounts or accounts in false names; or
            (3) maintain a nominee account which is held in the name of one Person, but controlled by or held for the benefit of another Person whose identity has not been disclosed to the Relevant Person.

            • Guidance

              1. "Know your business partner" is as important as "Know Your Customer". A Relevant Person is therefore required to verify the identity of a prospective business partner and to obtain evidence of it. The same documentation that is used to identify customers should be obtained from the business partner prior to conducting any business.
              2. A Relevant Person should verify whether any secrecy or data protection law exists in the country of incorporation of the business partner that would prevent access to relevant data.
              3. The requirement to identify the business partner is meant to cover only those business partners who may pose any relevant money laundering risk to the Relevant Person. Hence, a Relevant Person would not be required to establish and verify the identity of, for example, its maintenance or cleaning service.
              4. The Regulator may take into account the identity of a Relevant Person's business partner and the nature of their relationship in considering the fitness and propriety of a Relevant Person.
              5. Before entering into a business relationship, a Relevant Person should conduct a due diligence investigation, which includes ensuring that the business partner is an existing Person authorised to conduct the kind of business in question and, if applicable, verifying that this Person is duly regulated by a Financial Services Regulator or other relevant regulatory authority or regulator. In accordance with "The Wolfsberg Anti-Money Laundering Principles for Correspondent Banking", the Relevant Person should take into account, and verify the nature of:
              (a) the business to be conducted and the major business activities of the business partner;
              (b) the jurisdiction where the business partner is located as well as that of its the parent; and
              (c) the transparency and the nature of the ownership and the management structure.
              6. A Relevant Person may also gather information about the reputation of the business partner, including whether it has been subject to investigation or regulatory action in relation to money laundering or terrorist financing.
              7. A Relevant Person should adopt a risk-based approach when verifying its business partners' identities. Depending on the money laundering risk assessment of the Relevant Person's business partner, the Relevant Person should decide the level of detail of the business partner identification and verification process.
              8. A Relevant Person should have in place specific arrangements to ensure that adequate due diligence and identification measures with regard to the business relationship are taken.
              9. The Relevant Person should conduct regular reviews of the relationship with its business partners.
              10. The Senior Management or Governing Body of a Relevant Person should give its approval before it establishes any new correspondent banking relationships.
              11. A Relevant Person should also have arrangements to guard against establishing a business relationship with business partners who permit their accounts to be used by Shell Banks; further details on the definition of Shell Banks are set out in Guidance 2 to Rule 10.2.2.
              Amended on (3 February, 2020).

        • AML 9.3 AML 9.3 Outsourcing and agents

          • AML 9.3.1 AML 9.3.1

            A Relevant Person which outsources any one or more elements of its CDD to a service provider (including those within its Group) remains responsible for compliance with, and liable for any failure to meet, such obligations.

            Amended on (15 April, 2019).

            • Guidance

              Prior to appointing an outsourced service provider to undertake CDD, a Relevant Person should undertake due diligence to assure itself of the suitability of the outsourced service provider and should ensure that the outsourced service provider's obligations are clearly documented in a binding agreement.

          • AML 9.3.2 AML 9.3.2 Authorised Persons Providing Money Services

            (1) An Authorised Person that is engaged in Providing Money Services must:
            (a) maintain a complete, current and accurate register of all agents and members of its Group it uses to conduct its operations and make that register available to the Regulator upon request;
            (b) include all agents and members of its Group identified in (a) as part of its AML compliance programme and monitor the compliance of such agents and members of its Group with the requirements of its AML programme;
            (c) comply with all AML requirements imposed in all jurisdictions within which it operates and ensure the compliance of its agents and members of its Group operating on its behalf with all AML requirements in the jurisdictions in which they are operating;
            (d) when executing a Payment Transaction, assess and consider all relevant information, including information about the Payer and the Payee, including any beneficiary as may be applicable, and require its agents and members of its Group, as appropriate, to determine whether a Suspicious Activity Report should be filed by it or its agents or a member of its Group; and
            (e) where appropriate, ensure that a Suspicious Activity Report is filed in all jurisdictions related to a suspicious Payment Transaction and make available to all authorities responsible for AML compliance all transaction information related to the Suspicious Activity Report.
            (2) An Authorised Person making an assessment under (1) must rely upon current sources of information when making such assessment and must keep adequate records concerning such assessments, including all sources and materials considered, for a period of at least six years.

            • Guidance

              Agents facilitate directly the activities of Authorised Persons in servicing their clients, as distinct from other service providers that provide purely ancillary services, such as IT, facilities management etc. to an Authorised Person.

        • AML 9.4 AML 9.4 Record Keeping and Data Protection

          • AML 9.4.1

            Where Customer identification records are kept by the Relevant Person or other Persons outside the ADGM, a Relevant Person must take reasonable steps to ensure that the records are held in a manner consistent with these Rules.

          • AML 9.4.2

            A Relevant Person must verify whether there is secrecy or data protection legislation that would restrict access without delay to such data by the Relevant Person, the Regulator or the law enforcement agencies of the U.A.E. Where such legislation exists, the Relevant Person must obtain without delay certified copies of the relevant identification evidence and keep these copies in a jurisdiction which allows access by all those Persons.

        • AML 9.5

          A diagram outlining the reliance and outsourcing of AML compliance requirements is contained in A1.5.

      • AML 10. AML 10. Correspondent Banking, Wire Transfers, Anonymous Accounts And Audit

        • AML 10.1 AML 10.1 Application

          • AML 10.1.1

            This Chapter applies to Recognised Bodies and all Authorised Persons, other than Credit Rating Agencies and Representative Offices.

            Amended on (3 February, 2020).

        • AML 10.2 AML 10.2 Correspondent banking

          • AML 10.2.1

            An Authorised Person proposing to have a correspondent banking relationship with a respondent bank must:

            (a) undertake CDD on the respondent bank;
            (b) as part of (a), gather sufficient information about the respondent bank to understand fully the nature of the business, including making appropriate enquiries as to its management, its major business activities and the countries or jurisdictions in which it operates;
            (c) determine from publicly-available information the reputation of the respondent bank and the quality of supervision that it is subject to, including whether it has been the subject of a money laundering or terrorist financing investigation or relevant regulatory action;
            (d) assess the respondent bank's Anti-Money Laundering controls and ascertain if they are adequate and effective in light of the FATF Recommendations;
            (e) ensure that prior approval of the Authorised Person's Senior Management is obtained before entering into a new correspondent banking relationship;
            (f) ensure that the respective responsibilities of the parties to the correspondent banking relationship are properly documented; and
            (g) be satisfied that, in respect of any customers of the respondent bank who have direct access to accounts of the Authorised Person, the respondent bank:
            (i) has undertaken CDD (including on-going CDD) at least equivalent to that in Rule 8.3.1 in respect of each Customer; and
            (ii) is able to provide the relevant CDD information in (i) to the Authorised Person upon request; and
            (h) document the basis for its satisfaction that the requirements in (a) to (g) are met.
            Amended on (15 April, 2019).

          • AML 10.2.2 AML 10.2.2

            An Authorised Person must:

            (a) not enter into a correspondent banking relationship with a Shell Bank; and
            (b) take appropriate measures to ensure that it does not enter into, or continue a corresponding banking relationship with, a bank which is known to permit its accounts to be used by Shell Banks.

            • Guidance

              1. The rules and guidance set out in Rule 9.2 above also applies to correspondent banking business partners. This Rule provides further details on specific requirements applicable to a correspondent banking business relationship.
              2. With regard to Correspondent Banking Clients and, if applicable, other qualified professionals, specific care should be taken to assess their Anti-Money Laundering arrangements regarding Customer identification, Transaction monitoring, terrorist financing and other relevant elements, and to verify that these business partners comply with the same or equivalent Anti-Money Laundering requirements as the Relevant Person. Information on applicable laws and regulations regarding the prevention of money laundering should be obtained.
              3. A Relevant Person should ensure that a Correspondent Banking Client does not use the Relevant Person's products and services to engage in business with Shell Banks. A Shell Bank would be a bank that has no physical presence in the country in which it is incorporated and licensed, and which is unaffiliated with a regulated financial Group that is subject to effective consolidated supervision. The Regulator does not consider that the existence of a local agent or low-level staff constitutes physical presence.
              4. If applicable, information on distribution networks and delegation of duties should be obtained.
              Amended on (15 April, 2019).

        • AML 10.3 AML 10.3 Wire transfers

          • AML 10.3.1

            In this section:

            (a) "beneficiary" means the natural or Legal Person or the Legal Arrangement that is identified by the originator as the receiver of the requested wire transfer;
            (b) "originator" means the account holder who instructs the wire transfer from the relevant account, or where there is no account, the Natural or Legal Person that places the order with the ordering Financial Institution to perform the wire transfer;
            (c) "wire transfer" includes any value transfer arrangement; and
            (d) "batch transfer" means a transfer comprised of a number of individual wire transfers that are bundled for transmission, whether or not the individual wire transfers are intended ultimately for one or more beneficiaries.
            Amended on (3 February, 2020).

          • AML 10.3.2 AML 10.3.2

            (1) An Authorised Person and Recognised Body must:
            (a) when it sends or receives funds by wire transfer on behalf of a customer, ensure that the wire transfer and any related messages contain accurate originator and beneficiary information;
            (b) ensure that, while the wire transfer is under its control, the information in (a) remains with the wire transfer and any related message throughout the payment chain;
            (c) monitor wire transfers for the purpose of detecting those wire transfers that do not contain both originator and beneficiary information and take appropriate measures to identify any money laundering risks; and
            (d) not effect wire transfers without the information required under (3) and (4).
            (2) The requirement in (1) does not apply to an Authorised Person or Recognised Body which:
            (a) provides Financial Institutions with messages or other support systems for transmitting funds; or
            (b) transfers funds to another Financial Institution where both the originator and the beneficiary are Financial Institutions acting on their own behalf.
            (3) An Authorised Person and Recognised Body must ensure that information accompanying all wire transfers contains at a minimum:
            (a) the name of the originator;
            (b) the originator account number where such an account is used to process the Transaction or unique Transaction reference number if no originator account number exists;
            (c) the originator's address, or national identity number, or Customer identification number, or date and place of birth;
            (d) the name of the beneficiary; and
            (e) the beneficiary account number where such an account is used to process the Transaction or unique Transaction reference number if no beneficiary account number exists.
            (4) An Authorised Person and Recognised Body must ensure that for batch transfers:
            (a) it has verified the originator information required under (3)(a) to (c); and
            (b) the batch file contains the beneficiary information required under (3)(d) and (e) for each beneficiary and that the information is fully traceable in the beneficiaries jurisdiction.
            Amended on (15 April, 2019).

            • Guidance

              1. 'FATF Recommendation Number 16' seeks to ensure that national or international electronic payment and message systems, including fund or wire transfer systems such as SWIFT, are not misused as a means to break the money laundering audit trail. Therefore, the information about a customer as the originator of the transfer of funds should remain with the payment instruction throughout the payment chain.
              2. Relevant Persons should monitor for, and conduct enhanced scrutiny of, suspicious activities, including incoming fund transfers that do not contain complete originator information, including name, address and account number or unique reference number.
              3. The Regulator considers that concealing or removing in a wire transfer any of the information required by Rule 10.3.2(3) would be a breach of the requirement to ensure that the wire transfer contains accurate originator and beneficiary information.
              Amended on (15 April, 2019).

        • AML 10.4 AML 10.4 Audit

          • AML 10.4.1 AML 10.4.1

            An Authorised Person or a Recognised Body must ensure that its internal audit function undertakes regular reviews and assessments of the effectiveness of the Authorised Person or Recognised Body's money laundering policies, procedures, systems and controls, and its compliance with its obligations in the AML Rulebook.

            Amended on (15 April, 2019).

            • Guidance

              1. The review and assessment undertaken for the purposes of Rule 10.4.1 may be undertaken:
              (a) internally by the Authorised Person or Recognised Body's internal audit function; or
              (b) by a competent firm of independent, external auditors or compliance professionals.
              2. The review and assessment undertaken for the purposes of Rule 10.4.1 should cover at least the following:
              (a) sample testing of compliance with the Authorised Person or the Recognised Body's CDD arrangements;
              (b) an analysis of all notifications made to the MLRO to highlight any area where procedures or training may need to be enhanced; and
              (c) a review of the nature and frequency of the dialogue between Senior Management and the MLRO.
              Amended on (15 April, 2019).

        • AML 10.5 AML 10.5 Anonymous and nominee accounts

          • AML 10.5.1

            An Authorised Person or a Recognised Body must not establish or maintain:

            (a) an anonymous account or an account in a fictitious name; or
            (b) a nominee account which is held in the name of one Person, but which is controlled by or held for the benefit of another Person whose identity has not been disclosed to the Authorised Person or the Recognised Body.
            Amended on (15 April, 2019).

      • AML 11. AML 11. Sanctions And Other International Obligations

        • AML 11.1 AML 11.1 Resolutions and Sanctions

          • AML 11.1.1 AML 11.1.1

            (1) A Relevant Person must establish and maintain effective systems and controls to ensure that on an ongoing basis it is properly informed as to, and takes reasonable measures to comply with, relevant resolutions or Sanctions which it is required to comply with, under the laws of ADGM or any other jurisdiction.
            (2) A Relevant Person must immediately notify the Regulator when it becomes aware that it is, for or on behalf of a Person:
            (a) carrying on or about to carry on an activity;
            (b) holding or about to hold money or other assets; or
            (c) undertaking or about to undertake any other business whether or not arising from or in connection with (a) or (b);
            where such carrying on, holding or undertaking constitutes or may constitute a contravention of any Sanctions which the Relevant Person is required to comply with, under the laws of ADGM or any other jurisdiction.
            (3) A Relevant Person must ensure that the notification stipulated in (2) above includes the following information:
            (a) a description of the relevant activity in (2)(a), (b) or (c); and
            (b) the action proposed to be taken or that has been taken by the Relevant Person with regard to the matters specified in the notification.
            Amended on (15 April, 2019).

            • Guidance

              1. In Rule 11.1.1(1), taking reasonable measures to comply with resolutions or Sanctions may include, for example, a Relevant Person not undertaking a transaction for or on behalf of a Person undertaking further due diligence in respect of a Person.
              2. Relevant resolutions or Sanctions mentioned in Rule 11.1.1 may, among other things, relate to money laundering, terrorist financing or the financing of weapons of mass destruction, or otherwise be relevant to the activities carried on by the Relevant Person. For example:
              (a) a Relevant Person should exercise due care to ensure that it does not provide services to, or otherwise conduct business with, a Person engaged in money laundering, terrorist financing or the financing of weapons of mass destruction; and
              (b) a Recognised Investment Exchange or Recognised Clearing House, as a Recognised Body, should additionally exercise due care to ensure that it does not facilitate fund raising activities or listings by Persons engaged in money laundering or terrorist financing or financing of weapons of mass destruction.
              3. A Relevant Person should be proactive in checking for, and taking measures to comply with, relevant resolutions or sanctions which the Relevant Person is required to comply with, under the laws of ADGM or any other jurisdiction. The Regulator expects Relevant Persons to perform checks on an ongoing basis against their customer databases and records for any names appearing in resolutions or sanctions which the Relevant Person is required to comply with as well as to monitor transactions accordingly.
              4. A Relevant Person may use a database maintained elsewhere for an up-to-date list of resolutions and sanctions, or to perform checks of customers or transactions against that list. For example, it may wish to use a database maintained by its head office or a Group member. However, the Relevant Person retains responsibility for ensuring that its systems and controls are effective to ensure compliance with this Rulebook.
              Amended on (3 February, 2020).

        • AML 11.2 AML 11.2 Government, regulatory and international findings

          • AML 11.2.1 AML 11.2.1

            (1) A Relevant Person must establish and maintain systems and controls to ensure that on an ongoing basis it is properly informed as to, and takes reasonable measures to comply with, any findings, recommendations, guidance, directives, resolutions, Sanctions, notices or other conclusions issued by:
            (a) the government of the U.A.E. or any government departments in the U.A.E.;
            (b) the Central Bank of the U.A.E. or the FIU;
            (c) U.A.E. enforcement agencies;
            (d) FATF;
            (e) the Basel Committee on Banking Supervision;
            (f) the Regulator; and
            (g) any other jurisdiction which promulgates Sanctions to which it is subject,
            concerning the matters in (2).
            (2) For the purposes of (1), the relevant matters are:
            (a) arrangements for preventing money laundering, terrorist financing or the financing of weapons of mass destruction in a particular country or jurisdiction, including any assessment of material deficiency against relevant countries in adopting international standards; and
            (b) the names of Persons, Groups, organisations or entities or any other body where suspicion of money laundering or terrorist financing or the financing of weapons of mass destruction exists.
            (3) For the purposes of (1), measures that a Relevant Person must undertake when taking reasonable measures to comply with findings, recommendations, guidance, directives, resolutions, Sanctions, notices or other conclusions, include, but are not limited to, measures:
            (a) requiring specific elements of enhanced CDD;
            (b) requiring enhanced reporting mechanisms or systematic reporting of financial transactions;
            (c) limiting business relationships or financial transactions with specified persons or persons in a specified jurisdiction;
            (d) prohibiting Relevant Persons from relying on third parties located in a specified jurisdiction to conduct CDD;
            (e) requiring the review and amendment, or if necessary termination, of correspondent relationships with banks in a specified jurisdiction;
            (f) prohibiting the execution of specified electronic fund transfers; or
            (g) requiring increased external audit requirements for financial groups with respect to any of their branches and subsidiaries located in a specified jurisdiction.
            (4) A Relevant Person must immediately notify the Regulator in writing if it becomes aware of non-compliance by a Person with a finding, recommendation, guidance, directive, resolution, Sanction, notice or other conclusion and provide the Regulator with sufficient details of the person concerned and the nature of the non-compliance.
            Amended on (15 April, 2019).

            • Guidance

              1. The purpose of this Rule is to ensure that a Relevant Person takes into consideration the broad range of tools used by competent authorities and international organisations to communicate Anti-Money Laundering risks to stakeholders.
              2. The Rule also permits the Regulator to require enhanced CDD or other specific countermeasures to address risks identified in a specific country or jurisdiction. The Regulator may impose such countermeasures either when called upon to do so by FATF or independently of any FATF request.
              3. Relevant Persons considering Transactions or business relationships with Persons located in countries or jurisdictions that have been identified as deficient, or against which the U.A.E. or the Regulator have outstanding advisories, should be aware of the background against which the assessments, or the specific recommendations have been made. These circumstances should be taken into account in respect of business introduced from such jurisdictions, and when receiving inward payments for existing customers or in respect of inter-bank Transactions.
              4. The Relevant Person's MLRO is not obliged to report all Transactions from these countries or jurisdictions to the FIU if they do not qualify as suspicious under Federal AML Legislation (see Chapter 14 on Suspicious Activity Reports).
              5. Transactions with counterparties located in countries or jurisdictions which are no longer identified as deficient or have been relieved from special scrutiny (for example, taken off sources mentioned in this Guidance) may nevertheless require attention which is higher than normal.
              6. In order to assist Relevant Persons, the Regulator may, from time to time, publish findings, guidance, directives or Sanctions from U.A.E. authorities, the FATF or other relevant bodies. However, the Regulator expects a Relevant Person to take its own steps in acquiring relevant information from various available sources. For example, a Relevant Person may obtain relevant information from consolidated lists of financial Sanctions published by the European Union, HM Treasury, and OFAC.
              7. In addition, the systems and controls mentioned in Rule 11.2.1 should be established and maintained by a Relevant Person taking into account its risk assessment under Chapters 6 and 7. In relation to the term "make appropriate use" in Rule 11.2.1, this may mean that a Relevant Person cannot undertake a Transaction for or on behalf of a Person or that it may need to undertake further due diligence in respect of such a Person.
              8. A Relevant Person should be proactive in obtaining and appropriately using available national and international information, for example, suspect lists or databases from credible public or private sources with regard to money laundering, including obtaining relevant information from sources mentioned in Guidance 6 above. The Regulator encourages Relevant Persons to perform checks against their customer databases and records for any names appearing on such lists and databases as well as to monitor Transactions accordingly.
              9. The risk of terrorists entering the financial system can be reduced if Relevant Persons apply effective Anti-Money Laundering strategies, particularly in respect of CDD. Relevant Persons should assess which countries carry the highest risks and should conduct an analysis of Transactions from countries or jurisdictions known to be a source of terrorist financing.
              10. The Regulator may require Relevant Persons to take any special measures it may prescribe with respect to certain types of Transactions or accounts where the Regulator reasonably believes that any of the above may pose a money laundering risk to the ADGM.
              Amended on (15 April, 2019).

      • AML 12. AML 12. Money Laundering Reporting Officer

        • AML 12.1 AML 12.1 Appointment of a MLRO

          • AML 12.1.1

            (1) A Relevant Person must appoint an individual as the MLRO who has an appropriate level of seniority, experience and independence to act in the role, with responsibility for implementation and oversight of its compliance with the Rules in the AML Rulebook. It must do so by completing and filing with the Regulator the appropriate form specified by the Regulator.
            (2) The MLRO in (1) and Rule 12.1.7 must be resident in the U.A.E.
            Amended on (15 April, 2019).

          • AML 12.1.2

            The individual appointed as the MLRO of a DNFBP that comprises as one officer, partner or principal can, with the prior approval of the Regulator be the same person as the officer, partner or principle of the DNFBP.

            Added on (15 April, 2019).

          • AML 12.1.3 AML 12.1.3

            The individual appointed as the MLRO of a Representative Office must be the same individual who holds the position of Principal Representative of that Representative Office.

            Amended on (15 April, 2019).

            • Guidance

              1. Authorised Persons are reminded that under GEN Rule 5.5.1 the MLRO function is a mandatory appointment. For the avoidance of doubt, the individual appointed as the MLRO of an Authorised Person, other than a Representative Office, is the same individual who holds the Recognised Function of MLRO of that Authorised Person. Authorised Persons are also reminded that the guidance under GEN Rule 5.5.2 sets out the grounds under which the Regulator will determine whether to grant a waiver from the residence requirements for an MLRO. The same guidance would apply by analogy to other Relevant Persons seeking a waiver from the MLRO residence requirements.
              2. The individual appointed as the MLRO of a Recognised Investment Exchange or Recognised Clearing House is the same individual who holds the position of MLRO of that Recognised Investment Exchange or Recognised Clearing House under the relevant MIR Rule.
              Amended on (15 April, 2019).

          • AML 12.1.4

            If the MLRO leaves the employment of the Relevant Person, the Relevant Person must immediately appoint a new MLRO or arrange temporary cover for the MLRO appointment.

            Amended on (15 April, 2019).

          • AML 12.1.5

            A Relevant Person, other than a Representative Office, must appoint an individual to act as a deputy MLRO of the Relevant Person to fulfil the role of the MLRO in his absence.

            Added on (15 April, 2019).

          • AML 12.1.6 AML 12.1.6

            A Relevant Person's MLRO and deputy MLRO must deal with the Regulator in an open and co-operative manner and must disclose appropriately any information of which the Regulator would reasonably be expected to be notified.

            Amended on (15 April, 2019).

            • Guidance

              1. The individual appointed as the deputy MLRO need not apply for the Regulator's approval.
              2. A Relevant Person should make adequate arrangements to ensure that it remains in compliance with the AML Rulebook in the event that its MLRO is absent. Adequate arrangements would include appointing a temporary MLRO for the period of the MLRO's absence or making sure that the Relevant Person's AML systems and controls allow it to continue to comply with these Rules when the MLRO is absent.
              Amended on (15 April, 2019).

          • AML 12.1.7 AML 12.1.7

            A Relevant Person may outsource the role of MLRO to an individual outside the Relevant Person provided that the individual under the outsourcing agreement is and remains suitable to perform the MLRO role.

            Amended on (15 April, 2019).

            • Guidance

              Where a Relevant Person outsources specific AML tasks of its MLRO to another individual or a third party provider, including the case where they are within it's corporate Group, the Relevant Person remains responsible for ensuring that the duties undertaken by the MLRO ensure its compliance with the requirements in the AML Rulebook. The Relevant Person should satisfy itself of the suitability of anyone who acts for it in the role of MLRO.

              Amended on (15 April, 2019).

        • AML 12.2 AML 12.2 Qualities of a MLRO

          • AML 12.2.1 AML 12.2.1

            A Relevant Person must ensure that its MLRO has:

            (a) direct access to the Governing Body and its Senior Management;
            (b) sufficient and up-to-date qualifications and experience to fulfil the role;
            (c) sufficient resources including, if necessary, an appropriate number of appropriately trained Employees to assist in the performance of his duties in an effective, objective and independent manner;
            (d) a level of seniority and independence within the Relevant Person to enable him to act on his own authority;
            (e) timely and unrestricted access to information the Relevant Person has about the financial and business circumstances of a customer or any Person on whose behalf the customer is or has been acting sufficient to enable him to carry out his responsibilities in accordance with Rule 12.3.1; and
            (f) unrestricted access to relevant information about the features of the Transaction which the Relevant Person has entered into or may have contemplated entering into with or for the customer or a Person on whose behalf a customer is or has been acting.
            Amended on (15 April, 2019).

            • Guidance

              The Regulator considers that a Relevant Person will need to consider this Rule most especially when appointing an outsourced MLRO. Any external MLRO that is appointed will need to have the actual or effective level of seniority that the role requires.

              Amended on (15 April, 2019).

        • AML 12.3 AML 12.3 Responsibilities of a MLRO

          • AML 12.3.1

            A Relevant Person must ensure that its MLRO implements and has oversight of and is responsible for the following matters:

            (a) the day-to-day operations for compliance by the Relevant Person with its Anti-Money Laundering policies, procedures, systems and controls;
            (b) acting as the point of contact to receive notifications from the Relevant Person's Employees under Rule 14.2.2;
            (c) taking appropriate action under Rule 14.3.1 following receipt of a notification from an Employee;
            (d) making, in accordance with Federal AML Legislation, Suspicious Activity Reports;
            (e) acting as the point of contact within the Relevant Person for competent U.A.E. authorities and the Regulator regarding money laundering issues;
            (f) responding promptly to any request for information made by competent U.A.E. authorities or the Regulator;
            (g) receiving and acting upon any relevant findings, recommendations, guidance, directives, resolutions, Sanctions, notices or other conclusions described in Chapter 11; and
            (h) establishing and maintaining an appropriate money laundering training programme and adequate awareness arrangements under Chapter 13.
            Amended on (15 April, 2019).

        • AML 12.4 AML 12.4 Reporting

          • AML 12.4.1

            The MLRO must report semi-annually to the Governing Body or Senior Management of the Relevant Person on the following matters:

            (a) the results of the review under Rule 4.1.1(4);
            (b) the Relevant Person's compliance with applicable Anti-Money Laundering laws including these Rules;
            (c) any relevant findings, recommendations, guidance, directives, resolutions, Sanctions, notices or other conclusions and how the Relevant Person has taken them into account; 
            (d) any internal Suspicious Activity Reports made by the Relevant Person's Employees, or its agents or members of its Group where acting on its behalf, and action taken in respect of those reports, including the grounds for all decisions;
            (e) any external Suspicious Activity Reports made by the Relevant Person, or its agents or members of its Group where acting on its behalf, and action taken in respect of those reports including the grounds for all decisions; and
            (f) any other relevant matters related to Anti-Money Laundering as it concerns the Relevant Person's business.
            Amended on (9 November, 2020)
            Amended on (3 February, 2020)

          • AML 12.4.2

            A Relevant Person must ensure that its Governing Body or Senior Management promptly:

            (a) assess the report provided under Rule 12.4.1;
            (b) take action, as required, subsequent to consideration of the findings of the report, in order to resolve any identified deficiencies; and
            (c) make a record of their assessment pursuant to paragraph (a) and the action taken pursuant to paragraph (b).
            Amended on (15 April, 2019).

          • AML 12.4.3

            The Relevant Person must provide to the Regulator a copy of:

            (a) The report provided under Rule 12.4.1; and
            (b) the record made under Rule 12.4.2(c).
            Amended on (3 February, 2020).

      • AML 13. AML 13. Anti-Money Laundering Training And Awareness

        • AML 13.1 AML 13.1 Training and awareness

          • AML 13.1.1

            A Relevant Person must:

            (a) provide Anti-Money Laundering training to all relevant Employees at appropriate and regular intervals;
            (b) ensure that its Anti-Money Laundering training enables its Employees to:
            (i) know the identity, and understand the responsibilities, of the Relevant Person's MLRO and his deputy;
            (ii) understand the relevant legislation relating to money laundering, including Federal AML Legislation;
            (iii) understand its policies, procedures, systems and controls related to money laundering and any changes to these;
            (iv) recognise and deal with Transactions, risks, trends, techniques and other activities which may be related to money laundering;
            (v) understand the types of activity that may constitute suspicious activity in the context of the business in which an Employee is engaged and that may warrant a notification to the MLRO under Rule 14.2.2;
            (vi) understand its arrangements regarding the making of a notification to the MLRO under Rule 14.2.2;
            (vii) be aware of the prevailing techniques, methods and trends in money laundering relevant to the business of the Relevant Person;
            (viii) understand the roles and responsibilities of Employees in combating money laundering; and
            (ix) understand the relevant findings, recommendations, guidance, directives, resolutions, Sanctions, notices or other conclusions described in Chapter 11;
            (c) ensure that its Anti-Money Laundering training:
            (i) is appropriately tailored to the Relevant Person's activities, including its products, services, customers, distribution channels, business partners and the level and complexity of its Transactions; and
            (ii) indicates the different levels of money laundering risk and vulnerabilities associated with the matters in (c)(i); and
            (d) ensure that its Anti-Money Laundering training is up-to-date with money laundering trends and techniques.
            Amended on (15 April, 2019).

        • AML 13.2 AML 13.2 Frequency

          • AML 13.2.1

            A Relevant Person must provide Anti-Money Laundering training for all Employees in accordance with Rule 13.1.1 at least annually.

            Amended on (15 April, 2019).

        • AML 13.3 AML 13.3 Record-keeping

          • AML 13.3.1

            All relevant details of the Relevant Person's Anti-Money Laundering training must be recorded, including:

            (a) dates when the training was given;
            (b) the nature of the training; and
            (c) the names of the Employees who received the training.
            Amended on (15 April, 2019).

          • AML 13.3.2 AML 13.3.2

            These records must be kept for at least six years from the date on which the training was given.

            Amended on (15 April, 2019).

            • Guidance

              1. The Regulator considers it appropriate that all new relevant Employees of a Relevant Person be given appropriate Anti-Money Laundering training as soon as reasonably practicable after commencing employment with the Relevant Person, and thereafter on a periodic basis.
              2. A relevant Employee would include a member of the Senior Management or operational staff, any Employee with customer contact or which handles or may handle customer monies or assets, and any other Employee who might otherwise encounter money laundering in the business.
              3. Relevant Persons should take an RBA to Anti-Money Laundering training. The Regulator considers that Anti-Money Laundering training should be provided by a Relevant Person to each of its relevant Employees at intervals appropriate to the role and responsibilities of the Employee. In the case of an Authorised Person the Regulator expects that training should be provided to each relevant Employee at least annually.
              4. The manner in which Anti‐Money Laundering training is provided by a Relevant Person need not be in a formal classroom setting, rather it may be via an online course or any other similarly appropriate manner.
              Amended on (3 February, 2020).

      • AML 14. AML 14. Suspicious Activity Reports

        • AML 14.1 AML 14.1 Application and definitions

          • AML 14.1.1

            In this Chapter "money laundering" and "terrorist financing" means the criminal offences defined in Federal AML Legislation.

            Amended on (15 April, 2019).

        • AML 14.2 AML 14.2 Internal reporting requirements

          • AML 14.2.1

            A Relevant Person must establish and maintain policies, procedures, systems and controls in order to monitor and detect suspicious activity or Transactions in relation to potential money laundering or terrorist financing.

          • AML 14.2.2

            A Relevant Person must have policies, procedures, systems and controls to ensure that whenever any Employee, acting in the ordinary course of his employment, either:

            (a) knows;
            (b) suspects; or
            (c) has reasonable grounds for knowing or suspecting,

            that a Person is engaged in or attempting money laundering or terrorist financing, that Employee promptly notifies the Relevant Person's MLRO and provides the MLRO with all relevant details ("Internal Suspicious Activity Report").

          • AML 14.2.3 AML 14.2.3

            A Relevant Person must have policies and procedures to ensure that disciplinary action can be taken against any Employee who fails to make such a report.

            • Guidance

              1. Circumstances that might give rise to suspicion or reasonable grounds for suspicion include:
              a. Transactions which have no apparent purpose, which make no obvious economic sense, or which are designed or structured to avoid detection;
              b. Transactions requested by a Person without reasonable explanation, which are out of the ordinary range of services normally requested or are outside the experience of a Relevant Person in relation to a particular Customer;
              c. where the size or pattern of Transactions, without reasonable explanation, is out of line with any pattern that has previously emerged or are deliberately structured to avoid detection;
              d. a Customer's refusal to provide the information requested without reasonable explanation;
              e. where a Customer who has just entered into a business relationship uses the relationship for a single Transaction or for only a very short period of time;
              f. an extensive use of offshore accounts, companies or structures in circumstances where the Customer's economic needs do not support such requirements;
              g. unnecessary routing of funds through third party accounts; or
              h. unusual Transactions without an apparently profitable motive.
              2. The requirement for Employees to notify the Relevant Person's MLRO should include situations when no business relationship was developed because the circumstances were suspicious.
              3. A Relevant Person may allow its Employees to consult with their line managers before sending a report to the MLRO. The Regulator would expect that such consultation does not prevent making a report whenever an Employee has stated that he has knowledge, suspicion or reasonable grounds for knowing or suspecting that a Person may be involved in money laundering. Whether or not an Employee consults with his line manager or other Employees, the responsibility remains with the Employee to decide for himself whether a notification to the MLRO should be made.
              4. An Employee, including the MLRO, who considers that a Person is engaged in or engaging in activity that he knows or suspects to be suspicious would not be expected to know the exact nature of the criminal offence or that the particular funds were definitely those arising from the crime of money laundering or terrorist financing.
              5. CDD measures form the basis for recognising suspicious activity. Sufficient guidance must therefore be given to the Relevant Person's Employees to enable them to form a suspicion or to recognise when they have reasonable grounds to suspect that money laundering or terrorist financing is taking place. This should involve training that will enable relevant Employees to seek and assess the information that is required for them to judge whether a Person is involved in suspicious activity related to money laundering or terrorist financing.
              6. A Transaction that appears unusual is not necessarily suspicious. Even Customers with a stable and predictable Transaction profile will have periodic Transactions that are unusual for them. Many Customers will, for perfectly good reasons, have an erratic pattern of Transactions or account activity. So the unusual is, in the first instance, only a basis for further inquiry, which may in turn require judgement as to whether it is suspicious. A Transaction or activity may not be suspicious at the time, but if suspicions are raised later, an obligation to report then arises.
              7. Effective CDD measures may provide the basis for recognising unusual and suspicious activity. Where there is a Customer relationship, suspicious activity will often be one that is inconsistent with a Customer's known legitimate activity, or with the normal business activities for that type of account or Customer. Therefore, the key to recognising "suspicious activity" is knowing enough about the Customer and the Customer's normal expected activities to recognise when their activity is abnormal.
              8. A Relevant Person may consider implementing policies and procedures whereby disciplinary action is taken against an Employee who fails to notify the Relevant Person's MLRO.

        • AML 14.3 AML 14.3 External Suspicious Activity Report

          • AML 14.3.1

            A Relevant Person must ensure that where the Relevant Person's MLRO receives a notification under Rule 14.2.2, the MLRO, without delay:

            (a) investigates and documents the circumstances in relation to which the notification made under Rule 14.2.2 was made;
            (b) determines whether in accordance with Federal Law No. 4 of 2002 an external Suspicious Activity Report must be made to the AMLSCU and documents such determination;
            (c) if required, makes an external Suspicious Activity Report to the AMLSCU as soon as practicable; and
            (d) notifies the Regulator of the making of such Suspicious Activity Report immediately following its submission to the AMLSCU.

          • AML 14.3.2

            The MLRO must document:

            (a) the steps taken to investigate the circumstances in relation to which an Internal Suspicious Activity Report is made; and
            (b) where no external Suspicious Activity Report is made to the AMLSCU, the reasons why no such report was made.

          • AML 14.3.3

            Where, following a notification to the MLRO under 14.2.2, no external Suspicious Activity Report is made, a Relevant Person must record the reasons for not making an external Suspicious Activity Report.

          • AML 14.3.4 AML 14.3.4

            A Relevant Person must ensure that if the MLRO decides to make an external Suspicious Activity Report, his decision is made independently and is not subject to the consent or approval of any other Person.

            • Guidance

              1. Relevant Persons are reminded that the failure to report suspicions of money laundering or terrorist financing may constitute a criminal offence that is punishable under the laws of the U.A.E.
              2. Suspicious Activity Reports under Federal Law No. 4 of 2002 should be emailed to the AMLSCU. The dedicated email address and the template for making a Suspicious Activity Report are available on the Regulator's website.
              3. In the preparation of a Suspicious Activity Report, if a Relevant Person knows or assumes that the funds which form the subject of the report do not belong to a Customer but to a third party, this fact and the details of the Relevant Person's proposed course of further action in relation to the case should be included in the report.
              4. If a Relevant Person has reported a suspicion to the AMLSCU, the AMLSCU may instruct the Relevant Person on how to continue its business relationship, including effecting any Transaction with a Person. If the Customer in question expresses his wish to move the funds before the Relevant Person receives instruction from the AMLSCU on how to proceed, the Relevant Person should immediately contact the AMLSCU for further instructions.

        • AML 14.4 AML 14.4 Suspension of Transaction and No Tipping-off Requirement

          • AML 14.4.1 AML 14.4.1

            A Relevant Person must not carry out Transactions which it knows or suspects or has reasonable grounds for knowing or suspecting to be related to Money Laundering until it has informed the AMLSCU and the Regulator pursuant to Rule 14.3.

            • Guidance

              1. Relevant Persons are reminded that in accordance with Article 16 of Federal Law No. 4 of 2002, Relevant Persons or any of their Employees must not tip-off any Person, that is, inform any Person that he is being scrutinised for possible involvement in suspicious activity related to money laundering, or that any other competent authority is investigating his possible involvement in suspicious activity relating to money laundering.
              2. If a Relevant Person reasonably believes that performing CDD measures will tip-off a Customer or potential Customer, it may choose not to pursue that process and should file a Suspicious Activity Report. Relevant Persons should ensure that their Employees are aware of and sensitive to these issues when considering the CDD measures.

        • AML 14.5 AML 14.5 Record-keeping

          • AML 14.5.1

            All relevant details of any internal or external Suspicious Activity Report pursuant to Rules 14.2 and 14.3 must be kept for at least 10 years from the date on which the report was made.

        • AML 14.6 AML 14.6 Freezing of assets

          • Guidance

            It may also apply to ADGM Courts for an order restraining a Person from transferring or disposing of any assets suspected of relating to money laundering. In cases involving suspected money laundering, the FSRA will usually take such action in co-ordination with the FIU.

            Added on (15 April, 2019).

      • AML 15. AML 15. General Obligations

        • AML 15.1 AML 15.1 Groups, Branches and subsidiaries

          • AML 15.1.1 AML 15.1.1

            (1) A Relevant Person which is an ADGM Entity must ensure that its policies, procedures, systems and controls required by Rule 6.2.1 apply to:
            (a) any of its Branches or Subsidiaries; and
            (b) any of its Group entities in the ADGM.
            (2) Where the regulator of another jurisdiction does not permit the implementation of policies, procedures, systems and controls consistent with those of the Relevant Person, the Relevant Person must:
            (a) inform the Regulator in writing; and
            (b) apply appropriate additional measures to manage the money laundering risks posed by the relevant Branch or Subsidiary.

            • Guidance

              A Relevant Person which is an ADGM Entity should conduct a periodic review to verify that any Branch or Subsidiary operating in another jurisdiction is in compliance with the obligations imposed under these Rules.

          • AML 15.1.2 AML 15.1.2

            A Relevant Person must:

            (a) communicate the policies and procedures which it establishes and maintains in accordance with these Rules to its Group entities, Branches and Subsidiaries; and
            (b) document the basis for its satisfaction that the requirement in Rule 15.1.1(2)(b) is met.

            • Guidance

              In relation to an Authorised Person, if the Regulator is not satisfied in respect of AML compliance of its Branches and Subsidiaries in a particular jurisdiction, it may take action, including making it a condition of the Authorised Person's Financial Services Permission that it must not operate a Branch or Subsidiary in that jurisdiction.

        • AML 15.2 AML 15.2 Group policies

          • AML 15.2.1

            A Relevant Person which is part of a Group must ensure that it:

            (a) understands the policies and procedures covering the sharing of information between Group entities, particularly when sharing CDD information;
            (b) has in place adequate safeguards on the confidentiality and use of information exchanged between Group entities, including consideration of relevant data protection legislation;
            (c) remains aware of the money laundering risks of the Group as a whole and of its exposure to the Group and takes active steps to mitigate such risks;
            (d) contributes to a Group-wide risk assessment to identify and assess money laundering risks for the Group; and
            (e) provides its Group-wide compliance, audit and AML functions with Customer account and Transaction information from Branches and Subsidiaries when necessary for AML purposes.

        • AML 15.3 AML 15.3 Notifications

          • AML 15.3.1

            A Relevant Person must inform the Regulator in writing as soon as possible if, in the course of its activities carried on in or from the ADGM or in relation to any of its Branches or Subsidiaries, it:

            (a) receives a request for information from a regulator or agency responsible for AML or Sanctions regarding enquiries into potential money laundering or terrorist financing or Sanctions breaches;
            (b) becomes aware, or has reasonable grounds to believe, that the following has or may have occurred in or through its business:
            (a) money laundering, contrary to Federal Law No. 4 of 2002 regarding 'Criminalisation of Money Laundering', Federal Decree Law No. 1 of 2004 regarding 'Combating Terrorism Offences', or Federal Law No. 4 of 2014 regarding 'Combating Terrorist Crimes';
            (b) a breach of Sanctions; or
            (c) acts amounting to bribery under the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions;
            (c) becomes aware of any money laundering or Sanctions matter in relation to the Relevant Person or a member of its Group which could result in adverse reputational consequences to the Relevant Person; or
            (d) becomes aware of any a significant breach of a Rule in the AML Rulebook or breach of Federal Law No. 4 of 2002 or Federal Law No. 1 of 2004 by the Relevant Person or any of its Employees.

          • AML 15.3.2

            A Relevant Person must inform the Regulator in writing as soon as possible if, in the course of its activities carried on in or from the ADGM, it suspects or becomes aware that another Person outside of its business is engaged in:

            (a) money laundering, contrary to Federal Law No. 4 of 2002 regarding 'Criminalisation of Money Laundering', Federal Decree Law No. 1 of 2004 regarding 'Combating Terrorism Offences', or Federal Law No. 4 of 2014 regarding 'Combating Terrorist Crimes';
            (b) a breach of Sanctions; or
            (c) acts amounting to bribery under the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

            This requirement does not apply to information or documents that are legally privileged or in the public domain.

        • AML 15.4 AML 15.4 Record keeping

          • AML 15.4.1

            A Relevant Person must, where relevant, maintain the following records:

            (a) a copy of all documents and information obtained in undertaking initial and on-going CDD or business partners due diligence;
            (b) the supporting records (consisting of the original documents or certified copies) in respect of the Customer business relationship, including Transactions;
            (c) notifications made under Rule 14.2.2;
            (d) Suspicious Activity Reports and any relevant supporting documents and information, including internal findings and analysis;
            (e) any relevant communications with the AMLSCU;
            (f) the documents in Rule 15.4.2; and
            (g) the relevant details of any Transaction carried out by the Relevant Person with or for a Customer,

            for at least 10 years from the date on which the notification or report was made, the business relationship ends or the Transaction is completed, whichever occurs last.

          • AML 15.4.2

            A Relevant Person must document, and provide to the Regulator on request, any of the following:

            (a) the risk assessment of its business undertaken under Rule 6.1.1;
            (b) how the assessment in (a) was used for the purposes of complying with Rule 7.2.1(1);
            (c) the risk assessment of the Customer undertaken under Rule 7.2.1(1)(a); and
            (d) the determination made under Rule 7.2.1(1)(b).

          • AML 15.4.3 AML 15.4.3

            The records maintained by a Relevant Person must be kept in such a manner that:

            (a) the Regulator or another competent third party is able to assess the Relevant Person's compliance with legislation applicable in the ADGM;
            (b) any Transaction which was processed by or through the Relevant Person on behalf of a Customer or other third party can be reconstructed;
            (c) any Customer or third party can be identified;
            (d) all Internal and external Suspicious Activity Reports can be identified; and
            (e) the Relevant Person can satisfy, within an appropriate time, any regulatory enquiry or court order to disclose information.

            • Guidance

              1. The records required to be kept under Rule 15.4.1 may be kept in electronic format, provided that such records are readily accessible and available to respond promptly to any Regulator requests for information.
              2. If the date on which the business relationship with a Customer has ended remains unclear, it may be taken to have ended on the date of the completion of the last Transaction.
              3. The records maintained by a Relevant Person should be kept in such a manner that:
              a. the Regulator or another competent authority is able to assess the Relevant Person's compliance with legislation applicable in the ADGM;
              b. any Transaction which was processed by or through the Relevant Person on behalf of a Customer or other third party can be reconstructed;
              c. any Customer or third party can be identified; and
              d. the Relevant Person can satisfy, within an appropriate time, any regulatory enquiry or court order to disclose information.

          • AML 15.4.4

            Where the records referred to in Rule 15.4.1 are kept by the Relevant Person outside the ADGM, a Relevant Person must:

            (a) take reasonable steps to ensure that the records are held in a manner consistent with these Rules;
            (b) ensure that the records are easily accessible to the Relevant Person; and
            (c) upon request by the Regulator, ensure that the records are available for inspection within a reasonable period of time.

          • AML 15.4.5

            A Relevant Person must:

            (a) verify if there is secrecy or data protection legislation that would restrict access without delay to the records referred to in Rule 15.4.1 by the Relevant Person, the Regulator or the law enforcement agencies of the U.A.E.; and
            (b) where such legislation exists, obtain without delay certified copies of the relevant records and keep such copies in a jurisdiction which allows access by those Persons in (a).

          • AML 15.4.6 AML 15.4.6

            A Relevant Person must be able to demonstrate that it has complied with the training and awareness requirements in Chapter 13 through appropriate measures, including the maintenance of relevant training records.

            • Guidance

              The Regulator considers that "appropriate measures" in Rule 15.4.6 may include the maintenance of a training log setting out details of:

              a. the dates when the training was given;
              b. the nature of the training; and
              c. the names of Employees who received the training.

        • AML 15.5 AML 15.5 Annual AML Return

          • AML 15.5.1

            A Relevant Person which is:

            (a) an Authorised Person or Recognised Body; or
            (b) an auditor,

            must complete the AML Return form on an annual basis and retain the AML Return for inspection by the Regulator upon the Regulator's request.

        • AML 15.6 AML 15.6 Communication with the Regulator

          • AML 15.6.1

            A Relevant Person must:

            (a) be open and cooperative in all its dealings with the Regulator; and
            (b) ensure that any communication with the Regulator is conducted in the English language.

        • AML 15.7 AML 15.7 Employee disclosures

          • AML 15.7.1 AML 15.7.1

            A Relevant Person must ensure that it does not prejudice an Employee who discloses any information regarding money laundering to the Regulator or to any other relevant body involved in the prevention of money laundering.

            • Guidance

              The Regulator considers that "relevant body" in Rule 15.7.1 would include the AMLSCU or another financial intelligence unit, the police, or an Abu Dhabi or Federal ministry.

      • AML 15. AML 15. DNFBP Registration And Supervision

        Chapter 15 in this version of AML is new material with Chapter 15 (General Obligations) from the previous version being incorporated into Chapter 4 in this version of AML.

        • Guidance

          1. FSMR gives the Regulator a power to supervise DNFBPs' compliance with relevant Anti-Money Laundering laws in the State. FSMR also gives the Regulator a number of other powers in relation to DNFBPs, including powers of enforcement. This includes a power to obtain information and to conduct investigations into possible breaches of the FSMR. The Regulator may also impose fines for breaches of FSMR or the Rules. It may also suspend or withdraw the registration of a DNFBP in various circumstances.
          2. The Regulator takes a risk-based approach to regulation of persons which it supervises. Generally, the Regulator will work with DNFBPs to identify, assess, mitigate and control relevant risks where appropriate. The Guidance & Policies Manual ("GPM") describes the Regulator's enforcement powers under FSMR and outlines its policy for using these powers.
          3. Rule 15.1.1 requires a DNFBP to be registered by the Regulator to conduct its activities in the ADGM. Rule 15.2.1 sets out the criteria a DNFBP must meet to be registered.
          4. A DNFBPs is defined in Rule 3.2.1 and includes the following class of persons whose business is carried out in the ADGM:
          a. a real estate agency which carries out transactions with other Persons that involve the acquiring or disposing of real property;
          b. a dealer in precious metals or precious stones;
          c. a dealer in any saleable item of a price equal to or greater than USD15,000;
          d. an accounting firm, audit firm, insolvency firm or taxation consulting firm;
          e. a law firm, notary firm or other independent legal business; or
          f. a Company Service Provider.
          5. In determining if a Person is a DNFPB the Regulator will adopt a 'substance over form' approach. That is, it will consider what business or profession is in fact being carried on, and its main characteristics, and not just what business or profession the person purports, or is licensed, to carry on in the ADGM.
          6. The Regulator considers that a "law firm, notary firm or other independent legal business, includes any business or profession that involves a legal service, including advice or services related to laws in the U.A.E. The Regulator does not consider it necessary for the purposes of the definition that the:
          a. Person is licensed to provide legal services in the U.A.E; or
          b. the individuals or employees providing the legal service are qualified or authorised to do so.
          7. The Regulator considers that that "accounting firm, audit firm, insolvency firm or taxation consulting firm", includes forensic accounting services that use accounting skills, principles and techniques to investigate suspected illegal activity or to analyse financial information for use in legal proceedings.
          Added on (15 April, 2019).

        • AML 15.1 AML 15.1 DNFBP Prohibition

          • AML 15.1.1

            A person who is a DNFBP must not carry on any activities in or from the ADGM unless that person is registered under AML 15.4 by the Regulator as a DNFBP.

             

          • AML 15.1.2

            The Regulator may delegate its powers for the registration, suspension and cancellation of the a DNFBP's registration of a DNFBP to the Registrar of Companies.

             

        • AML 15.2 AML 15.2 Criteria for Registration as a DNFBP

          • AML 15.2.1

            (1) To be registered as a DNFBP, an applicant must demonstrate to the Regulator's satisfaction that:
            (a) it is fit and proper to perform anti-money laundering functions; and
            (b) it has adequate resources, systems and controls, including policies and procedures, to comply with all applicable anti-money laundering requirements under Federal AML legislation, FSMR and these Rules;
            (2) In assessing if an applicant is fit and proper under (1)(a), the Regulator may, without limiting the matters it may take into account under that paragraph, consider the applicant, its senior management, its Beneficial Owners, other entities in its Group and any other Person with whom it has a relationship.
            (3) The Regulator will in assessing if an applicant is fit and proper, consider the cumulative effect of matters that, if considered individually, may be regarded as insufficient to give reasonable cause to doubt the fitness and propriety of the applicant.

             

        • AML 15.3 AML 15.3 Application for Registration as a DNFBP

          • AML 15.3.1

            A person may apply to the Regulator to be registered as a DNFBP by completing and submitting the appropriate form.

             

          • AML 15.3.2

            The Regulator may require an applicant to provide additional information or documents reasonably required by the Regulator for it to be able to consider an application for registration including, but not limited to, information or documents relating to the activities, ownership, group structure, financial and other resources of the applicant.

             

          • AML 15.3.3

            Where, at any time between filing an application and the grant or refusal of registration as a DNFBP, an applicant becomes aware of a material change in its circumstances that is reasonably likely to be relevant to its application it shall inform the Regulator in writing of the change without delay.

             

          • AML 15.3.4

            Any person who is a DNFBP upon the making of this Chapter and was previously a Relevant Person prior to the making of this Chapter:

            (a) is deemed to be registered as a DNFBP at the time of the making of this Chapter; and
            (b) must apply for registration under Rule 15.3:
            (i) within 12 months of the making of this Chapter; or
            (ii) at the date of the renewal of its Commercial Licence under the Commercial Licensing Regulations 2015;

            whichever comes first.

             

        • AML 15.4 AML 15.4 Grant of an Application

          • AML 15.4.1

            The Regulator may grant an application for DNFBP registration as a DNFBP if it is wholly satisfied that the applicant meets the criteria for registration under Rule 15.3.1.

             

          • AML 15.4.2

            Where the Regulator decides to register a DNFBP, it shall as soon as is practicable inform the applicant in writing of that decision and of the date on which registration is to take effect.

             

        • AML 15.5 AML 15.5 Refusal of an Application

          • AML 15.5.1

            The Regulator may refuse to grant an application for DNFBP registration where it is not wholly satisfied that the applicant meets the criteria for registration under Rule 15.3.1.

             

        • AML 15.6 AML 15.6 DNFBP Notifications

          • AML 15.6.1

            A DNFBP must promptly notify the Regulator of any change in its:

            (a) name;
            (b) legal status;
            (c) address;
            (d) MLRO;
            (e) senior management; or
            (f) Beneficial ownership.

             

          • AML 15.6.2

            (1) A DNFBP must notify the Regulator in writing at least fourteen days in advance of it ceasing to carry on the business activities that establishes it as a DNFBP.
            (2) The notice must include a request to cancel its registration, an explanation of the reason for the DNFBP ceasing business, the planned date of the cessation of its activities, and copies of any relevant documents must be submitted with the notice.

             

        • AML 15.7 AML 15.7 Suspension and withdrawal of DNFBP Registration

          • AML 15.7.1

            (1) The Regulator may suspend the registration of a DNFBP at the request of the DNFBP or on its own initiative.
            (2) The Regulator may withdraw the registration of a DNFBP:
            (a) at the request of the DNFBP;
            (b) if the Registrar of Companies notifies it that the DNFBP no longer holds the relevant commercial licence to operate in the ADGM; or
            (c) on its own initiative.

             

          • AML 15.7.2 AML 15.7.2

            (1) The Regulator may exercise its power on its own initiative under Rule 15.7.1 (1) or (2)(c) where:

            (a) the DNFBP no longer meets the criteria for DNFBP registration;
            (b) the DNFBP is in breach of, or has been in breach of, the Law or Rules or other Anti-Money Laundering Legislation;
            (c) the DNFBP is insolvent or entering into administration;
            (d) the DNFBP is no longer carrying on business in the ADGM; or
            (e) the Regulator considers that exercising the power is necessary or desirable in the pursuit of its objectives in section 1.(3).

             

            • Guidance

              1. A DNFBP may request the withdrawal of its registration because, for example, it no longer meets the definition of a DNFBP, becomes insolvent or enters into administration, or proposes to leave the ADGM.
              2. In addition to being able to withdraw registration at the request of a DNFBP, the Regulator may, on its own initiative, suspend or withdraw the registration of a DNFBP in various circumstances.

        • AML 15.8 AML 15.8 Disclosure of regulatory status

          • AML 15.8.1

            A DNFBP must not:

            (a) misrepresent its regulatory status with respect to the Regulator expressly or by implication; or
            (b) use or reproduce the logo of the Regulator without express written permission from the Regulator and in accordance with any conditions for use imposed by the Regulator.

             

        • AML 15.9 AML 15.9 Co-ordination between the Regulator and the Registrar of Companies

          • AML 15.9.1

            (1) The Registrar of Companies shall not grant a person who is a DNFBP a commercial licence to operate in the ADGM until the Regulator has confirmed to the Registrar of Companies that it intends to register the person as a DNFBP.
            (2) The Regulator shall as soon as is practicable notify the Registrar of Companies where it suspends or withdraws the registration of a DNFBP.
            (3) The Registrar of Companies shall as soon as is practicable suspend or withdraw (as the case may be) the commercial licence of the DNFBP where it receives a notification under (2).

             

      • AML 16. AML 16. Non-Profit Organisations ("NPOs")

        • AML 16.1 AML 16.1 Responsibility for NPO compliance

          • AML 16.1.1

            An NPO's Governing Body is responsible for establishing, maintaining and monitoring the NPO's obligations under this chapter.

             

          • AML 16.1.2

            An NPO must maintain information on the following:

            (a) the purpose and objectives of its stated activities;
            (b) the identity of the persons who own, control or direct its activities, including the Governing Body and senior management;
            (c) the relevant controls that have been put in place to ensure that all funds are fully accounted for, and are spent in a manner that is consistent with the purpose and objectives of its stated activities; and
            (d) the relevant measures that it has taken to confirm the identity, credentials and good standing of beneficiaries and associated NPOs to ensure that they are not involved with terrorists or terrorist organisations or use its charitable funds to support.

             

        • AML 16.2 AML 16.2 Record Keeping

          • AML 16.2.1

            An NPO must maintain for a period of at least six years records of its obligations required under Rule 16.1.2, covering both domestic and international transactions, which are sufficiently detailed to verify that funds have been received and spent in a manner consistent with the purpose and objectives of the NPO.

             

        • AML 16.3 AML 16.3 Cooperation

          • AML 16.3.1

            An NPO must deal with the Regulator in an open and co-operative manner and keep the Regulator informed of significant events or anything else relating to the NPO of which the Regulator would be reasonable expect to be notified.

             

          • AML 16.3.2

            An NPO must, at the request of the Regulator:

            (a) give or procure the giving of specified information, Documents, files, tapes, computer data or other material in the NPO's possession or control to the Regulator;
            (b) make its Employees readily available for meetings with the Regulator;
            (c) give the Regulator access to any information, Documents, records, files, tapes, computer data or systems, which are within the NPO's possession or control and provide any facilities to the Regulator;
            (d) permit the Regulator to copy Documents or other material on the premises of the NPO at the NPO's expense;
            (e) provide any copies of those Documents or other material as requested by the Regulator; and
            (f) answer truthfully, fully and promptly, all questions which are put to it by the Regulator.

             

      • AML APP 1 AML APP 1 [DELETED]

        • AML A1.1 [Deleted]

          Deleted on (15 April, 2019).

        • AML A1.2 [Deleted]

          Deleted on (15 April, 2019).

        • AML A1.3 [Deleted]

          Deleted on (15 April, 2019).

        • AML A1.4 [Deleted]

          Deleted on (15 April, 2019).

        • AML A1.5 [Deleted]

          Deleted on (15 April, 2019).

    • Islamic Finance Rules (IFR) [VER04.030220]

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    • Islamic Finance Rules (IFR) [VER04.030220]

      • IFR 1. IFR 1. INTRODUCTION

        • IFR 1.1 IFR 1.1 Application

          • IFR 1.1.1 IFR 1.1.1

            These Islamic Finance Rules apply to:

            (a) every Authorised Person who carries on, or holds itself out as carrying on, an Islamic Financial Business in the ADGM whether as an Islamic Financial Institution or through an Islamic Window;
            (b) a Domestic Fund which is operated or held out as being operated as an Islamic Fund; and
            (c) an Authorised Person making an Offer in the ADGM relating to a Security which is, or is held out as being, a Shari'a-compliant Security.

            • Guidance

              Certain of the requirements that apply to Authorised Persons Conducting Islamic Financial Business or distributing Shari'a-compliant Securities are included in these Islamic Finance Rules. An Authorised Person that has a Financial Services Permission to operate as an Islamic Financial Institution or that has a Financial Services Permission to operate an Islamic Window will also be subject to the requirements relating to such Regulated Activity or specified category of Regulated Activity that are included in other Rulebooks of the ADGM Rulebook as required by the terms of that Authorised Person's Financial Services Permission.

              Amended on (3 February, 2020).

        • IFR 1.2 IFR 1.2 Overview of the IFR Rulebook

          References in these Islamic Finance Rules to numbered IFRs are references to specific numbered chapters of these Islamic Finance Rules.

          Amended on (3 February, 2020).

          • Guidance

            (i) The rules in these Islamic Finance Rules are made under, or for the purposes of, the Financial Services and Markets Regulations 2015. Guidance may indicate any additional rulebook to which these Islamic Finance Rules relate.
            (ii) IFR 2 and IFR 3 contain the general requirements and obligations that apply to an Authorised Person who conducts any Islamic Financial Business. IFR 4 contains the accounting and audit requirements that apply to such Authorised Persons.
            (iii) IFR 5 contains additional requirements that apply to an Authorised Person that carries on the Regulated Activity of Managing Profit Sharing Investment Accounts (PSIAs).
            (iv) IFR 6 contains the additional requirements that apply to a Fund Manager of an Islamic Fund.
            (v) IFR 7 contains specific requirements that apply to Reporting Entities that Offer Securities that are expressed to be Shari'a-compliant. Reporting Entities that Offer Securities that are expressed to be Shari'a-compliant will also be subject to the general requirements that apply to Offers of Securities and reporting entities must comply with such requirements as set out in the Markets Rules (MKT Rulebook).
            (vi) IFR 8 contains the additional requirements applying to Persons who carry on insurance business or insurance intermediation as Takaful.
            Amended on (3 February, 2020).

      • IFR 2. IFR 2. ISLAMIC FINANCE

        • IFR 2.1 IFR 2.1 Application

          • IFR 2.1.1

            This IFR 2 applies to every Authorised Person to whom these Islamic Finance Rules apply in accordance with IFR 1.1.

        • IFR 2.2 IFR 2.2 Activities that constitute Conducting Islamic Financial Business

          Conducting Islamic Financial Business means carrying on one or more Regulated Activities or specified category of Regulated Activity in accordance with Shari'a and Islamic Financial Business shall be construed accordingly.

          • Guidance

            The Financial Services and Markets Regulations 2015 sets out the activities that constitute Regulated Activities.

        • IFR 2.3 IFR 2.3 Conducting Islamic Financial Business

          • IFR 2.3.1

            An Authorised Person shall not hold itself out as Conducting Islamic Financial Business unless it has a Financial Services Permission authorising it to Conduct Islamic Financial Business either:

            (a) as an Islamic Financial Institution; or
            (b) by operating an Islamic Window.

          • IFR 2.3.2

            An Authorised Person that has a Financial Services Permission to operate as an Islamic Financial Institution is an Authorised Person whose entire business operations are conducted in accordance with Shari'a.

          • IFR 2.3.3 IFR 2.3.3

            An Authorised Person, other than an Islamic Financial Institution, that has a Financial Services Permission to operate an Islamic Window is an Authorised Person that conducts Islamic Financial Business as a segregated part of its overall business operations.

            • Guidance

              (i) Part 4 of the Financial Services and Markets Regulations 2015 governs the making of an application for a Financial Services Permission to conduct Islamic Financial Business.
              (ii) An Authorised Person must obtain the relevant Financial Services Permission before carrying on Islamic Financial Business as an Islamic Financial Institution or through an Islamic Window.
              (iii) An Authorised Person with a Financial Services Permission to operate an Islamic Window may conduct those of its activities that are held out as being conventional Regulated Activities without regard for these Islamic Finance Rules but shall conduct those of its activities that are expressed to be Islamic Financial Business through its Islamic Window in accordance with these Islamic Finance Rules.
              (iv) An Authorised Person may, subject to any restrictions in the ADGM Rulebook, carry on more than one Regulated Activity (including, without limitation, more than one Islamic Financial Business), provided that such activities fall within the scope of the Authorised Person's Financial Services Permissions required.

        • IFR 2.4 IFR 2.4 Islamic financial instruments and products

          • IFR 2.4.1 IFR 2.4.1

            Unless otherwise stated in these Islamic Finance Rules, an Authorised Person (whether acting as an Islamic Financial Institution or through an Islamic Window) will be entitled to carry on any Regulated Activity or specified category of Regulated Activity as Islamic Financial Business provided that:

            (a) it has complied with all other applicable provisions of the ADGM Rulebook in relation to the Regulated Activity or specified category of Regulated Activity to be carried on as Islamic Financial Business; and
            (b) the carrying on of such Regulated Activity or specified category of Regulated Activity as an Islamic Financial Business has been approved by its Shari'a Supervisory Board.

            • Guidance

              (i) Whether or not a Regulated Activity or specified category of Regulated Activity is to be carried on as Islamic Financial Business that Regulated Activity or specified category of Regulated Activity must be carried out in compliance with (or in reliance on an exemption from) all other relevant parts of the ADGM Rulebook.
              (ii) These Islamic Finance Rules set out the specific instances where additional rules are required in order to ensure that certain Regulated Activities or certain specified categories of Regulated Activity qualify as Islamic Financial Business and to ensure that such Regulated Activities or specified categories of Regulated Activity remain Shari'a-compliant.
              (iii) For Regulated Activities or specified categories of Regulated Activity carried on as Islamic Financial Business that are not specifically referred to in these Islamic Finance Rules, the requirement under IFR 2.4.1(b) will be sufficient to qualify that Regulated Activity or specified category of Regulated Activity as Islamic Financial Business without the need for additional steps to be taken unless the Regulator believes that any such additional steps may be necessary.
              (iv) The Regulator shall have the power to designate a Regulated Activity or specified category of Regulated Activity as not being in compliance with Shari'a in the event that the Regulator believes that such Regulated Activity or specified category of Regulated Activity involves matters that are contrary to the aims of Shari'a.
              (v) The ADGM regulatory regime applies to any Authorised Person carrying on any Islamic Financial Business in the ADGM if the activity:
              (A) relates to a financial instrument or product of the kind described in Guidance Notes (viii) and (ix) (Profit Sharing Investment Accounts), (x) and (xi) (Investments), and (xii) to (xv) (Takaful) below; and/or
              (B) is conducted by way of business and not expressly excluded from regulation as a Regulated Activity. Note there are a number of such exclusions in the Financial Services and Markets Regulations 2015.
              (vi) The Regulator will, when considering the treatment of Islamic Financial Business arrangements, take a "substance over form" approach giving particular weight to the economic substance of a particular activity over the legal and/or Shari'a form taken by it.
              (vii) The issue of financial products which are securities such as shares, bonds (falling under paragraphs 88 or 90 of Schedule 1 to the Financial Services and Markets Regulations 2015), Sukuk or units in a Collective Investment Fund (in each case as defined in the Financial Services and Markets Regulations 2015) attracts product-specific disclosure requirements such as the publication of a Prospectus or an Exempt Disclosure Statement. Where such securities are included on an Official List of securities or made available to the public in the ADGM, there are initial and ongoing disclosure and other obligations that apply to the Reporting Entity (generally the issuer) under the MKT Rulebook. These MKT obligations are distinct from the obligations that apply to Persons carrying on Regulated Activities in respect of such Securities.
              Amended on (3 February, 2020).

            • Profit Sharing Investment Accounts (PSIAs)

              (viii) PSIAs do not fall within the definitions of Dealing in Investments, Arranging Deals in Investments or Advising on Investments or Credit in Schedule 1 to the Financial Services and Markets Regulations 2015 or the definition of Investments in the Glossary (“GLO”). They are contractual arrangements under which Islamic banks invest clients' funds, often (though not always) on a pooled basis, and are generally treated by the bank as off balance sheet. They are generally structured under the Shari'a principle of Mudaraba, the guiding principle of which is that the investor bears the full investment risk. Although PSIAs have the characteristics of a Collective Investment Fund, under an express exclusion provided under paragraph 63 of Schedule 1 to the Financial Services and Markets Regulations 2015, they are not treated as such. Instead, Managing a PSIA is a distinct Regulated Activity as defined in paragraph 64 of Schedule 1 to the Financial Services and Markets Regulations 2015.
              (ix) Because Managing a PSIA is a Regulated Activity, the ADGM regulatory regime that applies to Authorised Persons carrying on Regulated Activities in the ADGM applies to Islamic Financial Institutions and Islamic Windows that Manage PSIAs. As PSIAs are not financial products, the issue of PSIAs, or any advising or arranging activities conducted in relation to PSIAs, especially by a third party, do not attract prospectus-like disclosure or any advising or dealing-related COBS requirements (such as a suitability assessment). Instead, they attract a tailored regulatory regime under these Islamic Finance Rules that applies to the Authorised Person that Manages the PSIA (see IFR 5).
              Amended on (3 February, 2020).

            • Specified Investments

              (x) Specified Investments are defined paragraphs 84 to 99 of the Financial Services and Markets Regulations 2015. Any of the conventional specified investments defined paragraphs 85 to 99 of Schedule 1 to the Financial Services and Markets Regulations 2015 can be offered in Shari'a-compliant form, provided that the directions of the Shari'a Supervisory Board engaged in connection with such offer are complied with. Shari'a-compliant Specified Investment include, without limitation:
              (A) Instruments given entitlements to investments that are structured in a Shari'a-compliant manner including, without limitation, under a Wa'ad structure;
              (B) Certificates representing certain Financial Instruments that are structured in a Shari'a-compliant manner;
              (C) Units in a Collective Investment Fund that are units in an Islamic Fund;
              (D) Options that are structured in a Shari'a-compliant manner including, without limitation, options using a Wa'ad, Arboun and/or Musawama structure;
              (E) Futures that are structured in a Shari'a-compliant manner including, without limitation, futures using a Wa'ad, Arboun and/or Salam structure; and
              (F) rights under a Credit Agreement where such Credit Agreement is structured in the form of a Shari'a-compliant credit agreement including, without limitation, Shari'a-compliant credit agreements using a Murabaha, Ijara, Istisna'a/Ijara, Wakala, Mudaraba and/or Musharaka structure.
              (xi) The Regulator will, when considering whether or not a Shari'a-compliant investment is a Specified Investment, take a "substance over form" approach giving particular weight to the economic substance of a particular investment over the legal and/or Shari'a form taken by that investment.
              (xii) The ADGM regulatory regime applies to Authorised Persons who carry on in the ADGM any regulatory activity in relation to any Shari'a-compliant products that fall within the definition of Specified Investments. However, particular products or instruments including, without limitation, Profit Sharing Investment Accounts (PSIAs), Takaful and Islamic Funds attract product/instrument specific additional conduct and other requirements, which are included in these Islamic Finance Rules.

            • Takaful

              (xiii) Takaful is the Shari'a-compliant equivalent of conventional insurance, and exists in both the form of Family (or Life) Takaful and General Takaful. Takaful is derived from an Arabic word that means joint guarantee, whereby a group of participants agree among themselves to support one another jointly for the losses arising from specified risks. In a Takaful arrangement the participants contribute a sum of money as a Tabarru' commitment into a common fund that will be used mutually to assist the members against a specified type of loss or damage. The underwriting in Takaful is thus undertaken on a mutual basis, similar in some respects to conventional mutual insurance. A typical Takaful Provider consists of a two-tier structure that is a hybrid of a mutual and a commercial form of company although in principle it could be a pure mutual structure. The Takaful Operator's role is generally confined to managing the Takaful activities and investing the fund assets in accordance with Shari'a.
              (xiv) Any Authorised Persons conducting Takaful activities shall, for the purposes of the ADGM Rulebook, be deemed to be conducting insurance business. There are two types of Regulated Activities that comprise insurance business: Effecting Contracts of Insurance as principal or Carrying Out Contracts of Insurance as Principal. Accordingly, any Authorised Person carrying on these Regulated Activities is subject to the ADGM regime for regulating Regulated Activities. Where an Authorised Person carries out the activities described under Effecting Contracts of Insurance or Carrying Out Contracts of Insurance as Principal in connection with Takaful such Authorised Person will be subject to the ADGM regime for regulating Regulated Activities and, in addition, will be subject to the Takaful-specific requirements set out in this Rulebook (see IFR 8). In addition, there are certain activities relating to insurance, such as advising and arranging, which are regulated as Insurance Intermediation as defined in Chapter 4 of Schedule 1 to the Financial Services and Markets Regulations 2015. Authorised Persons conducting those activities in relation to Takaful are regulated in the same way as Authorised Persons conducting such activities in relation to conventional insurance.
              (xv) Family Takaful
              (A) Family Takaful deals with the provision of financial relief to the participants and/or their family in the event of misfortunes that relate to the death or disability of the participants. This category of Takaful normally requires the Takaful Operator to engage in a longer-term relationship over a defined number of years with the Takaful participants, throughout which the participant is required to make regular instalment payments in consideration for his or her participation in the Takaful scheme.
              (B) In Family Takaful, the paid Takaful contribution of a participant will usually be segregated into two accounts which feed two different funds. The first is the Participants' Investment Fund (PIF), and the aggregate PIFs constitute an investment fund for the purposes of capital formation. The second is the Participants' Risk Fund (PRF), which is a risk fund; that is, an element of the business that is inherent in the underwriting activities, and the contributions to which are made on the basis of Tabarru' commitment.
              (C) The segregation of the amounts credited to the PIF and the PRF, respectively, is commonly made based on certain percentages of the Takaful contributions paid, and this is normally part of the Family Takaful product pricing and design. The Takaful Operator will indicate in the Family Takaful contract the distinction between the two accounts and their relative proportions within the overall contribution, which cannot be unilaterally altered throughout the term of the Takaful contract.
              (D) Nevertheless, there are some Family Takaful products, such as group Takaful or term Takaful, that do not necessarily involve a long-term relationship between the Takaful undertakings and the Takaful participants. These products offer a shorter period of coverage and, as such, they have no investment element in favour of the participants. Normally, these types of products would work on a similar mechanism to General Takaful, whereby all Takaful contributions are considered as Tabarru' and credited directly into the PRF.
              (xvi) General Takaful
              (A) General Takaful schemes are basically contracts of joint guarantee on a short-term basis (normally one year), providing mutual compensation in the event of a specified type of loss. The schemes are designed to meet the needs for protection of individuals and corporate bodies in relation to material loss or damage resulting from a catastrophe or disaster inflicted upon real estate, assets or belongings of participants. The Takaful contribution paid is pooled into the PRF under the principle of Tabarru' to match the risk elements of the business that are inherent in its underwriting activities.
              (B) Although investment activities in the General Takaful pool or fund are secondary to the underwriting activities, they may be important for the solvency of the fund, especially in the case of longer-tailed risks.
              Amended on (3 February, 2020).

        • IFR 2.5 IFR 2.5 Shari'a-compliant Regulated Activity

          • IFR 2.5.1

            For the purposes of paragraph 64 of Schedule 1 to the Financial Services and Markets Regulations 2015, carrying on a Regulated Activity in manner that complies with Shari'a is a specified kind of activity. Such Shari'a-compliant Regulated Activities shall include without limitation:

            (a) Dealing in Investments as Principal where the Investments are Shari'a-compliant investments;
            (b) Dealing in Investments as Agent where the Investments are Shari'a-compliant investments;
            (c) Arranging Deals in Investments where the investments are Shari'a-compliant investments;
            (d) Advising on Investments or Credit where the investments are Shari'a-compliant investments or the Credit is to be provided in a Shari'a-compliant manner;
            (e) activities relating to insurance in the form of Takaful and/or Retakaful;
            (f) subject to IFR 2.5.2 below, Accepting Deposits that are Shari'a-compliant deposits;
            (g) providing Shari'a-compliant Credit under Credit Agreements;
            (h) Operating a Multilateral Trading Facility or Organised Trading Facility in relation to Shari'a-compliant instruments;
            (i) Managing Assets where the assets are Shari'a-compliant assets; and
            (j) Managing a Collective Investment Fund that is an Islamic Fund or Acting as Trustee of an Investment Trust that is a Shari'a-compliant Investment Trust.

          • IFR 2.5.2

            Managing a Profit Sharing Investment Account is not a Regulated Activity for the purposes of Accepting Deposits or collective investment but rather is a distinct Regulated Activity.

          • IFR 2.5.3

            The Shari'a-compliant Regulated Activities listed in IFR 2.5.1(c) and IFR 2.5.1(d) above shall not constitute the Conducting of Islamic Financial Business and shall not require an Authorised Person that engages in the Regulated Activities listed in IFR 2.5.1(c) and IFR 2.5.1(d) to have a Financial Services Permission under IFR 2.3 in the limited circumstances in which the parties to that Investment or the provision of Credit are each separately advised as to matters of Shari'a and the Authorised Person undertaking such Regulated Activity:

            (a) has a Financial Services Permission authorising it carry out such Regulated Activity under the Financial Services and Markets Regulations 2015;
            (b) has informed the parties to that Investment or provision of Credit that it does not hold a Financial Services Permission authorising it to advise on Islamic Financial Business as an Islamic Financial Institution or through an Islamic Window;
            (c) does not provide any advice in connection with, or related to, matters of Shari'a in respect of such Investments or the provision of Credit; and
            (d) has satisfied itself that each party to that Investment or provision of Credit is separately advised as to matters of Shari'a.

          • IFR 2.5.4

            The Regulator will, when considering whether or not a Shari'a-compliant activity is a Regulated Activity, take a "substance over form" approach giving particular weight to the economic substance of a particular activity over the legal and/or Shari'a form taken by it.

      • IFR 3. IFR 3. GENERAL OBLIGATIONS

        • IFR 3.1 IFR 3.1 Application

          • IFR 3.1.1

            This IFR 3 applies to an Authorised Person that carries on Islamic Financial Business in the ADGM.

        • IFR 3.2 IFR 3.2 Constitution of an Islamic Financial Institution

          • IFR 3.2.1

            An Authorised Person which is an Islamic Financial Institution must ensure that its constitutional documents state that its entire business will be conducted in accordance with Shari'a.

        • IFR 3.3 IFR 3.3 Systems and controls

          • IFR 3.3.1 IFR 3.3.1

            An Authorised Person Conducting Islamic Financial Business must establish and maintain systems and controls which enable it to comply with the applicable Shari'a requirements.

            • Guidance

              (a) This IFR 3 should be read in conjunction with GEN 3.
              (b) Responsibility for ensuring that an Islamic Financial Institution or Islamic Window complies with Shari'a ultimately rests with that Authorised Person's senior management. The systems and controls required by IFR 3.3.1 will assist senior management to ensure that there is such compliance.
              (c) The Governing Body should, when setting the business objectives and strategies of an Islamic Financial Institution or Islamic Window and on an on-going basis, make use of the expertise of the Islamic Financial Institution's or Islamic Window's Shari'a Supervisory Board as appropriate.
              (d) Similarly, Approved Person(s) or Recognised Person(s) performing Controlled Function(s) or Recognised Function(s) within the Islamic Financial Institution or Islamic Window, particularly compliance and internal audit, should have easy access to the Shari'a Supervisory Board in relation to matters involving Shari'a compliance.
              (e) The members of the Shari'a Supervisory Board of an Islamic Financial Institution or Islamic Window should also have adequate access to the Governing Body, senior management and the Persons performing Control Functions as appropriate to ensure that their roles can be effectively discharged.

        • IFR 3.4 IFR 3.4 Policy and procedures manual

          • IFR 3.4.1

            An Authorised Person Conducting Islamic Financial Business must implement and maintain an Islamic Financial Business policy and procedures manual which addresses the following matters:

            (a) the manner in which the compliance function will be undertaken, in respect of Shari'a compliance;
            (b) the manner in which the Shari'a Supervisory Board will oversee and advise in regard to the Islamic Financial Business conducted by the Authorised Person;
            (c) the manner in which Shari'a Supervisory Board fatawa, rulings and guidelines will be recorded, disseminated and implemented and the internal Shari'a review undertaken;
            (d) the manner in which disputes between the Shari'a Supervisory Board and the Authorised Person in respect of Shari'a compliance will be addressed;
            (e) the process for approving those internal systems and controls which are in place to ensure not only that the Islamic Financial Business is carried out in compliance with Shari'a, but that information is disseminated, using an appropriate method and manner, to investors and Persons to whom access to its facilities are provided;
            (f) the manner in which conflicts of interest will be identified and managed including where prescribed; and
            (g) in respect of an Authorised Person operating an Islamic Window, the systems and controls in place to ensure the appropriate separation of the Islamic Financial Business of the Authorised Person from its conventional business.

        • IFR 3.5 IFR 3.5 Shari'a Supervisory Board

          • IFR 3.5.1

            Where an Authorised Person has been granted a Financial Services Permission to conduct Islamic Financial Business it shall comply at all times with the following:
            (a) An Authorised Person that has a Financial Services Permission authorising it to conduct Islamic Financial Business as an Islamic Financial Institution shall appoint a Shari'a Supervisory Board.
            (b) An Authorised Person that has a Financial Services Permission authorising it to conduct Islamic Financial Business through an Islamic Window shall appoint a Shari'a Supervisory Board.
            (c) The Regulator may make, vary or withdraw rules prescribing the appointment, formation, conduct and operation of a Shari'a Supervisory Board.

          • IFR 3.5.2 IFR 3.5.2

            When an Authorised Person appoints a Shari'a Supervisory Board, it must ensure that:

            (a) the Shari'a Supervisory Board has at least three members;
            (b) the members appointed to the Shari'a Supervisory Board are competent to perform their functions as Shari'a Supervisory Board members;
            (c) any appointments, dismissals or changes in respect of members of the Shari'a Supervisory Board are approved by the Governing Body of the Authorised Person; and
            (d) no member of the Shari'a Supervisory Board is a director or Controller of the Authorised Person.

            • Guidance

              For the purposes of IFR 3.5.2, an Authorised Person should consider the previous experience and qualifications of the proposed Shari'a Supervisory Board members to assess whether the proposed Shari'a Supervisory Board member is competent to advise on the Islamic Financial Business to be undertaken by the Authorised Person.

          • IFR 3.5.3

            An Authorised Person must document its policy in relation to:

            (a) how appointments, dismissals or changes will be made to the Shari'a Supervisory Board;
            (b) the process through which the suitability of Shari'a Supervisory Board members will be considered; and
            (c) the remuneration of the members of the Shari'a Supervisory Board.

          • IFR 3.5.4 IFR 3.5.4

            An Authorised Person must establish and maintain, for six years, records of:

            (a) its assessment of the competency of the Shari'a Supervisory Board members;
            (b) the agreed terms of engagement of each member of the Shari'a Supervisory Board; and
            (c) the matters in IFR 3.5.2(c) and 3.5.3.

            • Guidance

              The records of the assessment of competency of Shari'a Supervisory Board members should clearly indicate; at least:

              (i) the factors that have been taken into account when making the assessment of competency;
              (ii) the qualifications and experience of the Shari'a Supervisory Board members;
              (iii) the basis upon which the Authorised Person has deemed that the proposed Shari'a Supervisory Board member is suitable; and
              (iv) details of any other Shari'a Supervisory Boards of which the proposed Shari'a Supervisory Board member is, or has been, a member.

          • IFR 3.5.5

            (a) The Authorised Person must ensure that the Islamic Financial Business policy and procedures manual it is required to maintain under IFR 3.4.1 provides that:
            (i) a member of the Shari'a Supervisory Board is obliged to notify the Authorised Person of any conflict of interest that such member may have with respect to the Authorised Person or, in the case of an Investment Trust, the Trustee; and
            (ii) the Authorised Person will take appropriate steps to manage any such conflict of interest so that the Islamic Financial Business is carried out appropriately and in compliance with Shari'a, the interest of a client is not adversely affected and all clients are fairly treated and not prejudiced by any such interests.
            (b) If an Authorised Person is unable to manage a conflict of interest as provided above, it must dismiss or replace the member as appropriate.

          • IFR 3.5.6

            If requested by the Regulator, an Authorised Person must provide the Regulator with information on its appointed or proposed Shari'a Supervisory Board members with regard to the qualifications, skills, experience and independence of the Shari'a Supervisory Board members.

          • IFR 3.5.7

            An Authorised Person must take reasonable steps to ensure that it and its Employees:

            (a) provide such assistance as the Shari'a Supervisory Board reasonably requires to discharge its duties;
            (b) give the Shari'a Supervisory Board right of access at all reasonable times to relevant records and information;
            (c) do not interfere with the Shari'a Supervisory Board's ability to discharge its duties; and
            (d) do not provide false or misleading information to the Shari'a Supervisory Board.

        • IFR 3.6 IFR 3.6 Shari'a reviews

          • IFR 3.6.1

            An Authorised Person must ensure that all Shari'a reviews are undertaken by the Shari'a Supervisory Board in accordance with AAOIFI GSIFI No 2.

          • IFR 3.6.2

            (a) An Authorised Person must commission an annual report from the Shari'a Supervisory Board which complies with AAOIFI GSIFI No 1.
            (b) An Authorised Person must deliver a copy of the annual report of the Shari'a Supervisory Board to the Regulator within 14 days of having received it.

        • IFR 3.7 IFR 3.7 Internal Shari'a review

          • IFR 3.7.1

            An Authorised Person must perform an internal Shari'a review to assess the extent to which the Authorised Person complies with fatawa, rulings and guidelines issued by its Shari'a Supervisory Board.

          • IFR 3.7.2

            An Islamic Financial Institution must perform the internal Shari'a review in accordance with AAOIFI GSIFI No. 3.

          • IFR 3.7.3 IFR 3.7.3

            An Authorised Person which operates an Islamic Window must, to the extent possible, perform the internal Shari'a review in accordance with AAOIFI GSIFI No. 3 and must document the manner in which it will conduct that part of the internal Shari'a review that is not conducted in accordance with AAOIFI GSIFI No. 3.

            • Guidance

              GSIFI No. (3) (Internal Shari'a Review) establishes standards and provides guidance on the internal Shari'a review in institutions that conduct business in accordance with Shari'a. The standard covers the following:

              (i) objectives;
              (ii) internal Shari'a review;
              (iii) independence and objectivity;
              (iv) professional proficiency;
              (v) scope of work;
              (vi) performance of the internal Shari'a review work;
              (vii) management of the internal Shari'a review;
              (viii) quality assurance; and
              (ix) elements of an effective internal Shari'a review control system.

          • IFR 3.7.4 IFR 3.7.4

            An Authorised Person must ensure that the internal Shari'a review is performed by the internal audit function or the compliance function of the Authorised Person and that the individuals or departments involved in performing the review are competent and sufficiently independent to assess compliance with Shari'a.

            • Guidance

              For the purposes of assessing competency of personnel or departments which perform the internal Shari'a review, an Authorised Person should consult AAOIFI GSIFI No. 3 paragraphs 9 to 16 inclusive.

        • IFR 3.8 IFR 3.8 Additional conduct requirements

          • Guidance

            COBS contains conduct of business requirements that apply to Authorised Persons conducting Regulated Activities. Set out below are additional conduct requirements that apply to an Authorised Person carrying out any Regulated Activity in accordance with Shari'a.

            Amended on (3 February, 2020).

          • Disclosure relating to Shari'a Supervisory Board

            • IFR 3.8.1 IFR 3.8.1

              (a) An Authorised Person, must, subject to IFR 3.8.1(b) below, disclose to each client:
              (i) at the outset of the relationship and thereafter at any time on request, details of the members of the Authorised Person's Shari'a Supervisory Board; and
              (ii) at any time on request, details of the manner and frequency of Shari'a reviews.
              (b) An Authorised Person does not have to make the disclosure required under IFR 3.8.1(a) if it is a Fund Manager of an Islamic Fund and is making an Offer of Units of that Islamic Fund in accordance with the disclosure requirements of these Islamic Finance Rules.
              (c) An Authorised Person must disclose the following information to each Person granted access to its facilities at the outset of the relationship, and thereafter whenever the information changes:
              (i) the members of the Authorised Person's Shari'a Supervisory Board; and
              (ii) if the Person granted access to its facilities requests, the manner and frequency of Shari'a reviews.

              • Guidance

                (i) An Authorised Person may make the initial disclosures required under IFR 3.8.1(a) by including such information in the Client Agreement provided under COBS 3.
                (ii) An Authorised Person Managing a PSIA may make additional disclosure required to be made relating to that PSIA by including such information in the Client Agreement. See IFR 5 for additional disclosure for PSIAs.
                (iii) A Fund Manager making an Offer of a Unit of an Islamic Fund it manages is required to include information specified in IFR 3.8.1(a) in the Prospectus which it must prepare and make available to clients, hence the exemption in IFR 3.8.1. A similar exemption is available to Fund Managers with regard to key information that must be provided to a client under COBS 3.3.1(e).
                Amended on (3 February, 2020).

          • Marketing material

            • IFR 3.8.2 IFR 3.8.2

              In addition to information required by COBS 3.2, any marketing material communicated by an Authorised Person to a Person must state which Shari'a Supervisory Board has reviewed the products or services to which the material relates.

              Amended on (3 February, 2020).

              • Guidance

                COBS 3.2.4 sets out the meaning of "marketing material".

                Amended on (3 February, 2020).

          • Islamic window

            • IFR 3.8.3 IFR 3.8.3

              (a) An Authorised Person that operates an Islamic Window must, subject to IFR 3.8.3(b) disclose to its clients and any Person granted access to its facilities whether or not it commingles funds attributable to its Islamic Financial Business with funds attributable to conventional financial business.
              (b) An Authorised Person does not have to make the disclosure required under IFR 3.8.3(a) if it is a Fund Manager of an Islamic Fund and is making an Offer of Units of that Islamic Fund in accordance with the disclosure requirements in these Islamic Finance Rules.

              • Guidance

                See Guidance under IFR 6.5.1 for the type of information required to be included in a Prospectus. The disclosures required under IFR 3.8.3(a) should initially be made in writing at the beginning of the relationship with a client or with a Person granted access to an Authorised Person's facilities. Additional disclosure should also be made if the Authorised Person changes its policy relating to commingling of funds attributable to its Islamic Financial Business with funds attributable to its conventional financial business.

          • Disclosure relating to client Money provisions

            • IFR 3.8.4

              An Authorised Person must disclose to its clients details about how any Client Money arising out of its Islamic Financial Business is or will be held.

        • IFR 3.9 IFR 3.9 Prudential requirements

          • IFR 3.9.1 IFR 3.9.1

            An Authorised Person in Prudential Category 1, 2, 3 or 5 which invests in or holds Islamic Contracts for purposes other than Managing PSIAs must calculate its Credit Risk or Market Risk in respect of those contracts in the same way as an Authorised Person holding or investing in Islamic Contracts for the purposes of Managing PSIAs as set out in IFR 5.4.

            • Guidance

              Prudential requirements in PRU apply in the same way to Authorised Persons conducting Islamic Financial Business, except to the extent added to or otherwise provided in these Islamic Finance Rules.

      • IFR 4. IFR 4. ACCOUNTING AND AUDITING

        • IFR 4.1 IFR 4.1 Application

          • IFR 4.1.1 IFR 4.1.1

            This IFR 4 applies to every Authorised Person carrying on Islamic Financial Business.

            • Guidance

              GEN 6 contains the general accounting and audit requirements applying to Authorised Persons.

        • IFR 4.2 IFR 4.2 Financial statements — specific disclosures

          • IFR 4.2.1

            An Authorised Person carrying on Islamic Financial Business must ensure that the financial statements required to be produced by it under GEN 6 contain the following additional disclosures:

            (a) the role and authority of the Shari'a Supervisory Board in overseeing the Authorised Person's Islamic Financial Business;
            (b) the method used in the calculation of the Zakat base;
            (c) whether Zakat has been paid by the Authorised Person;
            (d) where Zakat has been paid by the Authorised Person, the amount which has been paid; and
            (e) where Zakat has not been paid by the Authorised Person, sufficient information to allow a shareholder or other investor to compute the amount of his own liability to Zakat.

          • IFR 4.2.2

            An Authorised Person who operates an Islamic Window must ensure that the financial statements required to be produced by it under GEN 6 and IFR 4.2.1 contain the following additional disclosures:

            (a) a detailed statement of the funds mobilised according to Shari'a rules and principles and the assets financed by those funds;
            (b) a detailed statement of the income and expenditure attributable to its Islamic Financial Business; and
            (c) whether funds attributable to its Islamic Financial Business are commingled with funds attributable to its conventional business.

          • IFR 4.2.3

            An Authorised Person which is a Takaful Operator must ensure that the financial statements required to be produced by it under GEN 6 for each Takaful Fund contains the following disclosures:

            (a) income from contributions to the Takaful Fund;
            (b) revenues and gains from the Takaful Fund's investments;
            (c) amounts paid to the Takaful Operator;
            (d) amounts paid for Retakaful cover, net of any commissions;
            (e) amounts paid to Takaful contributors as a distribution of surplus;
            (f) amounts of any financing received from, or repaid to the Takaful operator;
            (g) changes in the actuarial reserves of the Takaful Fund; and
            (h) the position of the Takaful Fund at the end of the period, including actuarial reserves, policyholders' surplus and any loans outstanding.

          • IFR 4.2.4

            An Authorised Person which Manages a PSIA must ensure that the financial statements required to be produced by it under GEN 6 contain the following additional disclosures:

            (a) an analysis of income according to types of investments and their financing by customers;
            (b) the basis for the allocation of profits between Owners' Equity and PSIA holders;
            (c) the equity of PSIA holders at the end of the reporting period;
            (d) the bases used to determine any Profit Equalisation Reserve or Investment Risk Reserve;
            (e) the changes which have occurred in the Profit Equalisation Reserve and the Investment Risk Reserve during the reporting period;
            (f) any deductions made by the Authorised Person from its share of income, and any expenses borne by the Authorised Person on behalf of PSIA holders, as a contribution to increase the income of PSIA holders, if such contribution was material; and
            (g) the identity of any person to whom any remaining balances of any Profit Equalisation Reserve or Investment Risk Reserve is attributable in the event of liquidation.

      • IFR 5. IFR 5. MANAGING PROFIT SHARING INVESTMENT ACCOUNTS

        • IFR 5.1 IFR 5.1 Application

          • IFR 5.1.1 IFR 5.1.1

            This IFR 5 applies to an Authorised Person which conducts the Regulated Activity of Managing a Profit Sharing Investment Account (PSIA).

            • Guidance

              (i) A PSIA does not constitute a Deposit, owing to the fact that a PSIA is managed in relation to property of any kind, and the risk of loss of capital remains with the client and is limited to the amount contributed to the PSIA by that client. Accordingly, an Authorised Person should take great care to ensure that a PSIA is not represented as a deposit, either directly or indirectly. The Regulator may conclude that the Authorised Person is accepting a deposit instead of Managing a PSIA in certain circumstances, for example, where the Authorised Person attaches to the investment account characteristics or facilities that are generally regarded to be those of a Deposit or current account such as providing:
              (A) an explicit or implicit guarantee to the client against the risk of loss of capital; or
              (B) a cheque book, an ATM card or a debit card.
              (ii) The prudential Category for Islamic Financial Institutions and other Authorised Persons (acting through an Islamic Window) undertaking the Regulated Activity of Managing PSIAs (which may be either a Restricted PSIA or an Unrestricted PSIA) is determined in accordance with PRU Rule 1.3. An Authorised Person which Manages PSIAs (whether as an Islamic Financial Institution or through an Islamic Window) must comply with the requirements in PRU in relation to specific prudential requirements relating to Trading Book and Non-Trading Book activities, including Credit Risk, Market Risk, Liquidity Risk and Group Risk.

        • IFR 5.2 IFR 5.2 Additional disclosure requirements for PSIAs

          • IFR 5.2.1

            An Authorised Person must, prior to Managing a PSIA, provide written notice to the client that the client alone will bear any losses arising from the PSIA, which are limited to the amount of that client's contribution to the PSIA, unless there is negligence, misconduct or breach of contract on the part of the Authorised Person in Managing the PSIA in which case the losses caused by such negligence, misconduct or breach of contract shall be borne by the Authorised Person.

          • Client Agreement

            • IFR 5.2.2

              In addition to matters referred to in COBS 3.3, an Authorised Person must ensure that the following information is included in the Client Agreement relating to a PSIA:

              (a) how and by whom the funds of the client will be managed and invested including details of its policy on diversification of the portfolio;
              (b) the basis for the allocation of profit between the Authorised Person and the client;
              (c) confirmation of the client's investment objectives including details of any restrictions requested by the client, as agreed between the client and the Authorised Person;
              (d) a summary of the policies and procedures for valuation of assets or portfolio;
              (e) a summary of policies and procedures for the transfer of funds to and from the Profit Equalisation Reserve or Investment Risk Reserve accounts, if applicable;
              (f) particulars of the management of the PSIA and of any third party to whom the Authorised Person has or will delegate or outsource the management of the PSIA, including:
              (i) the name of the third party;
              (ii) the regulatory status of the third party; and
              (iii) details of the arrangement.
              (g) details of early withdrawal, redemption or other exit arrangement and any costs to a client as a result thereof;
              (h) details of segregation of the funds of the client from the funds of the Authorised Person and from any claims by the creditors of the Authorised Person;
              (i) details of whether funds from one PSIA will be commingled with the funds of another PSIA; and
              (j) details of any applicable charges and the basis upon which such charges will be calculated including, any deductions of fees that may be made by the Authorised Person from the profits of the PSIA.
              Amended on (3 February, 2020).

          • Periodic Statements

            • IFR 5.2.3

              (a) COBS 5.11 applies to an Authorised Person as if the Authorised Person is an Investment Manager in respect of those clients who are PSIA holders.
              (b) In addition to the requirements of COBS 5.11, an Authorised Person must ensure that a periodic statement provided to a client contains the following information:
              (i) details of the performance of the client's investment;
              (ii) the allocation of profit between the Authorised Person and the client; and
              (iii) where applicable, details of changes to the investment strategies that may affect the client's account or portfolio.
              Amended on (3 February, 2020).

          • Additional matters to be included in the policy and procedures manual

            • IFR 5.2.4 IFR 5.2.4

              Where an Authorised Person Manages a PSIA, its Islamic Financial Business policy and procedures manual must address the following additional matters:

              (a) the basis upon which a PSIA will be deemed restricted (a Restricted PSIA) or unrestricted (an Unrestricted PSIA);
              (b) the basis for allocation of profit or loss to the PSIA;
              (c) the basis for allocation of expenses to the PSIA;
              (d) the manner in which an Authorised Person's own funds, funds of Restricted PSIAs and funds from Unrestricted PSIAs are to be controlled;
              (e) the manner in which the funds of each PSIA holder (whether a Restricted PSIA or Unrestricted PSIA) will be managed;
              (f) the manner in which it will determine priority for investment of the Authorised Person's own funds and the funds of holders of Unrestricted PSIAs;
              (g) how provisions and reserves against equity and assets are to be applied; and
              (h) the manner in which losses incurred as a result of the misconduct, negligence or breach of contract for which the Authorised Person is responsible will be dealt with.

              • Guidance

                For the purposes of IFR 5.2.4, the policy and procedures manual should include procedures to ensure that the Authorised Person manages the accounts of PSIA holders in accordance with their instructions.

        • IFR 5.3 IFR 5.3 Funds of PSIA holders

          • IFR 5.3.1

            Unless clearly expressed in the contract between an Authorised Person and a PSIA holder, the Authorised Person may not use funds provided by a PSIA holder to fund its own corporate activities.

        • IFR 5.4 IFR 5.4 Prudential requirements

          • Application and Interpretation

            • IFR 5.4.1

              (a) This IFR 5 applies when calculating Credit Risk or Market Risk in respect of Islamic Contracts invested in or held by an Authorised Person Managing a PSIA, which is an Unrestricted PSIA.
              (b) In IFR 5.4.1(a), the Islamic Contracts referred to are contracts which are funded by amounts invested in the relevant Unrestricted PSIA.
              (c) In this IFR 5, the term "investing in or holding Islamic Contracts" means investing in or holding as principal.

          • Initial and ongoing capital requirements

            • Guidance

              (i) An Authorised Person undertaking Islamic Financial Business is required to meet initial and ongoing Capital Requirements in accordance with the Rules in Part 3 of Chapter 3 of PRU.
              (ii) In accordance with the Rules in Part 4 of chapter 3 of PRU, an Authorised Person undertaking Islamic Financial Business is required to ensure that only the eligible components of capital are included in the calculation of capital.
              (iii) In accordance with PRU Rule 3.12.9, an Authorised Person undertaking Islamic Financial Business is required to 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.
              (iv) For the purpose of calculating Capital Requirements, an Authorised Person undertaking Islamic Financial Business or otherwise investing in or holding Islamic Contracts should give due importance to the economic substance of the transaction contemplated by an Islamic Contract, in addition to the legal and Shari'a form of the Islamic Contract.
              Amended on (3 February, 2020).

          • Systems and controls in relation to PSIAs

            • Guidance

              The requirements in IFR 5.4.2 and 5.4.3 below are in addition to and not in replacement of the requirements in GEN 3.

            • IFR 5.4.2

              An Authorised Person Managing a PSIA must ensure that its senior management establishes and maintains systems and controls that ensure that the Authorised Person is financially sound and able at all times to satisfy the specific prudential requirements arising out of Managing PSIAs.

            • IFR 5.4.3

              (a) In addition to IFR 5.2.4, an Authorised Person Managing a PSIA must set out in a written policy how it proposes to organise and control the activities that arise from Managing a PSIA and ensure that the activities undertaken by it in Managing a PSIA are conducted in accordance with Shari'a.
              (b) The policy must as a minimum address, where appropriate, the following matters:
              (i) how the interests of that Authorised Person's shareholders and its PSIA holders are safeguarded;
              (ii) how the Authorised Person will limit the exposure of PSIA holders to the Authorised Person;
              (iii) a description of the controls to ensure that the funds of the PSIA are invested in accordance with the investment guidelines agreed in the PSIA Investment Contract;
              (iv) the basis for allocating profits and losses to the PSIA holders;
              (v) the policy for making provisions and reserves and, in respect of PSIAs, to whom these provisions and reserves revert in the event of a write-off or recovery;
              (vi) the Authorised Person's policy on the prioritisation of investment of own funds and those of Unrestricted PSIA holders;
              (vii) how liquidity mismatch will be monitored;
              (viii) the basis for allocating expenses to PSIA holders; and
              (ix) how the Authorised Person will monitor the value of its own assets and the assets of PSIA holders.

          • Displaced commercial risk

            • IFR 5.4.4 IFR 5.4.4

              An Authorised Person Managing a PSIA, which is an Unrestricted PSIA, must calculate a Displaced Commercial Risk Capital Requirement in respect of its PSIA business.

              • Guidance

                (i) An Authorised Person Managing a PSIA, on an unrestricted basis is subject to a unique type of risk referred to as Displaced Commercial Risk. This risk reflects the fact that an Authorised Person may find itself under commercial pressure to pay a rate of return to its PSIA holders which is sufficient to induce those investors to maintain the investment of their funds in an Unrestricted PSIA managed by the Authorised Person, rather than withdrawing those funds from the Unrestricted PSIA and investing them elsewhere. If this "required" rate of return is higher than that which would be payable under the normal terms of the PSIA Investment Contract, the Authorised Person may be under pressure to forgo some of the share of profit which would normally have been attributed to an Authorised Person and, by extension, be available for distribution to its shareholders (e.g. part of the Mudarib's share of the profits of a Mudaraba). Failure to do this might result in a volume of withdrawals of funds by investors large enough to jeopardise the Authorised Person's commercial position (or, in an extreme case, its solvency). Thus, part of the commercial risk attached to the returns attributable to the PSIA is, in effect, transferred to the shareholders of the Authorised Person or the Authorised Person's own capital. It also reflects situations whereby an investor may be permitted to exit an investment in a particular asset pool at par where the fair value of such assets is lower than their carrying amounts resulting in the Authorised Person absorbing the loss arising as a result of such shortfall.
                (ii) In an Unrestricted PSIA, the PSIA holder authorises the Authorised Person to invest the PSIA holder's funds in a manner which the Authorised Person deems appropriate without specifying any restrictions as to where, how or for what purpose the funds should be invested, provided that they are invested in a manner that complies with Shari'a. Under this arrangement, the Authorised Person can commingle the PSIA holder's funds with its own funds or with other funds which the Authorised Person has the right to invest on an unrestricted basis (i.e. funds from other Unrestricted PSIAs). The PSIA holders and the Authorised Person generally participate in the returns on the invested funds.
                (iii) In a Restricted PSIA, the PSIA holder imposes certain restrictions as to where, how and for what purpose the funds are to be invested. Further, the Authorised Person may be restricted from commingling its own funds with the restricted PSIA funds for the purposes of investment. In addition, there may be other restrictions that the PSIA holders may impose. In other words, the funds provided by holders of Restricted PSIAs are managed by the Authorised Person which does not have the right to use or dispose of the investments in which those funds are made except within the conditions of the relevant PSIA Investment Contract.
                (iv) An Authorised Person undertaking Islamic Financial Business is also exposed to fiduciary risk which arises where the terms of the relevant PSIA Investment Contract between the Authorised Person and the PSIA holder are breached and where the Authorised Person does not act in compliance with Shari'a.
                (v) An Authorised Person (whether acting as an Islamic Financial Institution or through an Islamic Window) is required to apply the Capital Requirements specified in PRU Chapter 3 to any Islamic Financial Business it carries on.

            • IFR 5.4.5

              (a) An Authorised Person's Displaced Commercial Risk Capital Requirement is based on 35% of the sum of CRCOM and the Market Risk capital requirement of assets funded by Unrestricted PSIA holders and is calculated using the following formula:
                   PSIACOM = PSIACOMcredit + PSIACOMmarket x 35%.
              (b) PSIACOM is the Displaced Commercial Risk Capital Requirement;
              (c) PSIACOMcredit is the Credit Risk capital requirement for assets funded by Unrestricted PSIA holders and is calculated in accordance with PRU Section 4.8; and
              (d) PSIACOMmarket is the Market Risk capital requirement for assets funded by Unrestricted PSIA holders and is calculated in accordance with PRU Chapter 5.
              Amended on (3 February, 2020).

          • Credit risk and counterparty risk for Islamic contracts

            • IFR 5.4.6

              (a) An Authorised Person Managing a PSIA, which is an Unrestricted PSIA, must calculate its PSIAComcredit in relation to all Islamic Contracts financed by Unrestricted PSIAs in the manner prescribed in this IFR 5.
              (b) An Authorised Person must, when undertaking the calculation in IFR 5.4.6(a), apply an appropriate risk weighting for the relevant Islamic Contract.

            • IFR 5.4.7 IFR 5.4.7

              (a) In this IFR 5:
              (i) "E" represents the Exposure determined by an Authorised Person as applicable to an Islamic Contract; and
              (ii) "CRW" represents the risk weighting or capital charge assessed by an Authorised Person as appropriate to that Islamic Contract.
              (b) Where an Islamic Contract is in the Non-Trading Book, an Authorised Person must determine the PSIACOMcredit for that contract by applying the following formula:
              PSIACOMcredit = E x CRW x 10%.
              (c) Where an Islamic Contract is in the Trading Book, an Authorised Person must determine the PSIACOMcredit for that contract in accordance with the methodology in PRU Rules A4.7 and A4.8 as appropriate.
              (d) An Authorised Person must calculate its PSIACOMcredit of all contracts by:
              (i) identifying all Islamic Contracts to which this section applies;
              (ii) valuing the underlying investment or asset of each Islamic Contract and reducing the value of any such investment or asset in the manner stipulated in Rule 4.9of PRU, the result of which constitutes "E" for that Islamic Contract;
              (iii) determining the risk weighting or capital charge appropriate to each contract, which will constitute the CRW for that contract in accordance with PRU Rules 4.10, 4.11 and 4.12;
              (iv) applying the respective formula in IFR 5.4.7(b) or (c) to determine of PSIACOMcredit in respect of each contract; and
              (v) summing the PSIACOMcredit of each contract to determine the PSIACOMcredit applicable to the Authorised Person.

              • Guidance

                (i) The Regulator considers that this Guidance will assist an Authorised Person in applying the appropriate risk weighting or capital charge to each Islamic Contract for the purpose of IFR 5.4.7. Accordingly, the Regulator expects an Authorised Person managing PSIAs, which are Unrestricted PSIAs to pay due regard to this Guidance.
                (ii) The rules in this IFR 5 and this Guidance are also relevant to an Authorised Person which invests in or holds Islamic Contracts, when calculating CRCOM for Islamic Contracts under PRU Rule 4.
                (iii) Table 2 contains Guidance on how an Authorised Person (whether acting as an Islamic Financial Institution or through an Islamic Window) Managing a PSIA, which is an Unrestricted PSIA should apply risk weightings for Islamic Contracts in respect of calculating relevant E and CRW for its PSIACOMcredit component of the PSIACOM.

                Table 2
                1.
                Islamic Contract type
                2.
                Underlying investment or asset
                3.
                CRW
                Binding Murabaha for the Purchase Orderer (MPO) Asset with an Authorised Person before purchase by the Counterparty Apply the appropriate percentage from the second column in the table in PRU Rule A4.6.5
                Accounts receivable for the contract, i.e. amounts due from the Counterparty less any provision for doubtful debts CRW in accordance with PRU Chapter 4
                Murabaha and Non-binding Murabaha for the Purchase Orderer (MPO) Accounts receivable for the contract, i.e. amounts due from the Counterparty less any provision for doubtful debts CRW in accordance with PRU Chapter 4
                Mudaraba and Musharaka Where the underlying investment meets the requirements for inclusion in the Trading Book Market Risk Capital Requirement for the exposure associated with the underlying investment determined in accordance with PRU Chapter 5
                Investment in commercial enterprise to undertake business ventures other than trading activities (or other than those which meet the requirements for inclusion in the Trading Book) CRW of 400% on the exposure
                Investment in real estate assets and other movable assets, using underlying Ijarah and Murabaha contracts CRW of the lessee for the underlying Ijarah contracts or the CRW of the counterparty of the underlying Murabaha contract, in accordance with PRU App4
                Ijarah/Ijarah Muntahia Bittamleek Asset with an Authorised Person available for lease before purchase by the Counterparty — for both contracts with both binding or non- binding promise to lease Apply the appropriate percentage from the second column in the table in PRU Rule A4.6.5
                Residential real estate where the lessee has the right to purchase property at the end of the lease and the lessor has a legally enforceable first charge over the property Apply the appropriate percentage in accordance with PRU Rule 4.12.17
                Total estimated value of lease receivables for the whole duration of the Ijarah, less any recovery value of the leased asset CRW of Ijarah lessee, in accordance with PRU Rule 4.12
                Full recourse Istisna'a — with or without parallel Istisna'a and limited / non-recourse Istisna'a with/without parallel Istisna'a Net balance of the work-in-progress CRW of the Istisna'a buyer, in accordance with PRU Rule 4.12
                Total amount receivable from the counterparty, pursuant to contract billings CRW of Istisna'a buyer, in accordance with PRU Rule 4.12
                Salam and parallel Salam Value of the underlying asset receivable for the Salam contract CRW in accordance with PRU Rule 4.12
                Assets acquired 100%
                Balance in relevant accounts receivable CRW in accordance with PRU Rule 4.12
                Kefala The amount of the guarantee CRW in accordance with PRU Rule 4.12
                Sukuk held in the Non-Trading Book Receivables from the Sukuk structure, including the principal and any returns associated with it, arising from any of the following as underlying contracts:
                 
                ● Salam
                ● Istisna'a
                ● Ijarah
                ● Murabaha
                ● Mudaraba
                ● Musharaka
                CRW applicable to underlying Ijarah, Salam or Murabaha contracts, in accordance with PRU Rule 4.12

                If the Sukuk provides recourse to the issuer, CRW applicable to the issuer or CRW applicable to underlying contracts of the Sukuk is in accordance with PRU Rule 4.12 whichever is higher
                  Usufructs/services CRW applicable to underlying service provider or usufruct owner, in accordance with PRU Rule 4.12. If the Sukuk provides recourse to the issuer, CRW applicable to the issuer or CRW applicable to underlying service provider or usufruct owner in accordance with PRU App4, whichever is higher
                  Leased assets The higher of CRW of the underlying leased assets and that of the issuer
                  Investment agency (Wakala) The higher of CRW of the underlying assets and that of the issuer
                  Muzara'a (share of produce of the land) Musaqa (share of produce of the trees) Mugarasa (share in the land and the trees) 100%
                  Mixture of tangible and intangible assets The higher of CRW of the underlying assets and that of the issuer
                  Where the underlying investment meets the requirements for inclusion in the Trading Book Market Risk Capital Requirement for the exposure associated with the underlying investment determined in accordance with Chapter 5 of PRU
                Bai' Bithaman Ajil Residential and commercial properties Plant and equipment Motor vehicles Shares Land CRW in accordance with PRU Chapter 4
                Arboun Where an Authorised Person has made the purchase deposit CRW in accordance with PRU Chapter 4
                Where an Authorised Person has received the purchase deposit No CRW is applicable
                Where the contract would meet the requirements for inclusion in the Trading Book Market Risk Capital Requirement for the exposure associated with the underlying investment determined in accordance with PRU Chapter 5
                (iv) Where an Islamic Contract is not listed in Table 2, an Authorised Person should consult with the Regulator, on a case-by-case basis, to determine the:
                (A) contract type and the underlying investments or assets to calculate the E; and
                (B) appropriate risk weighting or the capital charge for such contract to calculate the CRW.
                (v) In some cases, as stipulated in the relevant parts of column 3 of Table 2, the calculation of capital requirement should be carried out as prescribed in PRU Rule A4.6.5 and in accordance with PRU Chapter 5.
                (vi) In determining the E of a Binding Murabaha for the Purchase Orderer (MPO), as per PRU Rule A4.6.5, E should equal the total acquisition cost of the asset (purchase price and other direct costs) less market value of the asset (net of any haircut) less any security deposit provided.
                (vii) In determining the E of Ijarah / Ijarah Munthia Bittamleek contract, as per PRU Rule A4.6.5, E should equal the total acquisition cost of the asset (purchase price and other direct costs) less the market value of the asset (net of any haircut), less any Arboun (earnest money deposit received from the potential lessee).
                (viii) In addition to paragraph 7 above, in the case of an Ijarah Muntahia Bittamleek contract, the exposure may be reduced by the recovery value of the leased asset, only in cases where there is a reasonable basis to conclude that the leased asset can be repossessed and effectively redeployed as a leased asset to another Counterparty. This is important because the asset leased under the Ijarah Muntahia Bittamleek contract is usually customised equipment or large pieces of equipment which are integrated with other assets of the lessee and hence are unsuitable for repossession and releasing to another lessee.
                (ix) In determining the E of an Istisna'a contract, the exposures arising from such a contract should not be netted off against exposures arising from a Parallel Istisna'a contract entered into by an Authorised Person for procuring the underlying investment for the Istisna'a contract.
                (x) In determining the E of a Salam contract, the exposures arising from such a contract should not be netted off against exposures arising from a Parallel Salam contract entered into by an Authorised Person for procuring the underlying asset for the Salam contract.
                (xi) Off-balance sheet exposures for import or export financing contracts based on Murabaha, where the underlying goods or shipment are collateralised and insured, should attract a 20% CCF to an Authorised Person that issues or confirms the letter of credit.
                (xii) Where Mudaraba and Musharaka contracts are used to invest in commercial enterprise to undertake business ventures other than trading activities (or other than those which meet the requirements for inclusion in the Trading Book), the E is measured as the amount invested in the commercial enterprise less any specific provisions. If there is a guarantee and such guarantor is not connected to the commercial enterprise, then the CRW for the guarantor will be applied for risk weighting for the amount of any such guarantee.
                (xiii) In addition to the relevant Rules prescribed in PRU Chapter 4 and PRU App4, an Authorised Person may consider the following types of collateral as eligible collateral for Credit Risk management:
                (A) Hamish Jiddiyyah (security deposit) only for agreements to purchase or lease preceded by a binding promise;
                (B) Arboun where earnest money deposit held after a contract is established as collateral to guarantee contract performance; and
                (C) in Mudaraba investment in project finance, an Authorised Person may use the collateralisation of the progress payments made by the ultimate customers to mitigate the exposures of unsatisfactory performance by the Mudarib.
                (xiv) Where an Authorised Person places funds under a Mudaraba contract, subject to a Shari'a compliant guarantee from a third party and such a guarantee relates only to the Mudaraba capital, the capital amount should be risk-weighted at CRW of the guarantor provided that the CRW of that guarantor is lower than the CRW of the Mudarib (as a Counterparty). Otherwise, the CRW of the Mudarib will apply.
                (xv) An Authorised Person placing liquid funds with a central bank or another financial institution on a short-term Mudaraba basis in order to obtain a return on those funds, may apply the CRW applicable to the Mudarib (as a Counterparty), provided the Mudarib effectively treats the liquid funds placement as its liability, although normally such placements are not treated as liabilities of the Mudarib.
                Amended on (3 February, 2020).

          • Market risk

            • IFR 5.4.8

              An Authorised Person Managing a PSIA, which is an Unrestricted PSIA, must calculate its PSIACOMmarket in relation to all underlying Islamic Contracts in the manner prescribed in PRU Chapter 5, except as may be provided in IFR 5.4.9 to 5.4.17.

            • IFR 5.4.9

              An Authorised Person must treat Sukuk held in its Trading Book as equity for the purpose of calculating its Equity Risk Capital Requirement and determine the same in accordance with PRU Rule 5.5.1.

            • IFR 5.4.10

              Where investments are made using Musharaka or Mudaraba contracts with commodities as the underlying assets, an Authorised Person must calculate its Commodities Risk Capital Requirement in accordance with PRU Rule 5.7.1.

            • IFR 5.4.11

              An Authorised Person which is exposed to the risk of foreign currencies and gold under any Islamic Contract, must calculate its Foreign Exchange Risk Capital Requirement in accordance with PRU Rule 5.6.2.

            • IFR 5.4.12

              An Authorised Person which is exposed to commodities including precious metals but excluding gold under any Islamic Contract, must calculate its Commodities Risk Capital Requirement in accordance with PRU Rule 5.7.

            • IFR 5.4.13

              (a) Commodities held by an Authorised Person for selling or leasing when executing a Murabaha, non-binding MPO, Salam or parallel Salam contract must be included in the calculation of its Commodities Risk Capital Requirement.
              (b) Where an Authorised Person executes Salam and parallel Salam contracts, the resultant long and short positions may be set off for calculating the net open position, provided that the positions are in the same commodity, regardless of how its Commodities Risk Capital Requirement is calculated.

            • IFR 5.4.14

              Where an Authorised Person executes Musharaka or Mudaraba contracts for investing in entities or investment vehicles that trade in foreign exchange, equities or commodities, it must include the relevant underlying assets in the calculation of its Market Risk Capital Requirement in accordance with PRU Chapter 5.

          • Concentration risk

            • Guidance

              (i) This IFR 5 sets specific Large Exposure limits for assets financed by PSIAs, which are Unrestricted PSIAs. The Regulator uses these limits to provide constraints on the amount of Concentration Risk to which an Authorised Person is subject in respect of its PSIA holdings. In assessing PSIA Large Exposures, an Authorised Person may take advantage of the exemptions and partial exemptions set out in Rule A4.11 of PRU.
              (ii) An Authorised Person has a Large Exposure where its PSIA holders' credit Exposure to a single Counterparty or issuer, or group of Closely Related or Connected Counterparties, is large in relation to the Authorised Person's Capital Resources. Where Exposure to a Counterparty or issuer is large, PSIA holders risk a large loss should the Counterparty default.
              (iii) Exposures arising from assets that are financed by an Authorised Person's own funds are dealt with in PRU Rule 4.15.

          • Exposure limits

            • IFR 5.4.15 IFR 5.4.15

              An Authorised Person Managing a PSIA, which is an Unrestricted PSIA, must not have an Exposure to a Counterparty, Connected Counterparty, group of Closely Related Counterparties or to a group of Connected Counterparties that exceeds any one of the following percentages of its Capital Resources:

              (a) 25% if financed by its Capital Resources or Unrestricted PSIAs; or
              (b) 40% if financed by an aggregate of its own Capital Resources and Unrestricted PSIAs.
              Amended on (3 February, 2020).

              • Guidance

                In accordance with PRU Rule 4.15.5, the aggregate of an Authorised Person's Exposure to a Counterparty or to a group of Closely Related Counterparties may not exceed 25% of the Authorised Person's Capital Resources.

            • IFR 5.4.16

              The sum of an Authorised Person's non-exempt Large Exposures must not exceed 800% of its Capital Resources for Exposures funded by the Authorised Person's Capital Resources and Unrestricted PSIAs.

            • IFR 5.4.17

              An Authorised Person must:

              (a) monitor and control its Exposures funded by PSIAs, which are Unrestricted PSIAs, on a daily basis to ensure they remain within the concentration risk limits specified in IFR 5.4.15; and
              (b) if a breach occurs, notify the Regulator immediately and confirm it in writing.

      • IFR 6. IFR 6. ISLAMIC COLLECTIVE INVESTMENT FUNDS

        • Guidance

          This IFR 6 contains additional requirements that apply to a Collective Investment Fund operated or held out as being operated as an Islamic Fund. A Collective Investment Fund is defined in Part 11 of the Financial Services and Markets Regulations 2015. The definition in Part 11 of the Financial Services and Markets Regulations 2015 is very wide and can capture some Islamic Financial Business. However, under Part 1 of the Financial Services and Markets Regulations 2015 and the Fund Rules, the Regulator can make Rules excluding certain arrangements or types of arrangements from constituting a Fund. Certain types of Islamic Financial Business are not regulated as Collective Investment Funds due to express exclusions provided. Key Islamic Financial Business-related exclusions under the collective investment regime are managing insurance (in the form of Takaful), participation rights evidenced by Sukuk certificates and Managing PSIAs.

        • IFR 6.1 IFR 6.1 Application

          • IFR 6.1.1 IFR 6.1.1

            (a) This IFR 6 applies in the case of a Domestic Fund:
            (i) which is an Islamic Fund, to its Fund Manager and where appointed, its Trustee; or
            (ii) which is an Umbrella Fund with one or more Islamic Sub-Funds, to its Fund Manager and where appointed, its Trustee in respect of those Sub-Funds.
            (b) The requirements that apply to a conventional Fund apply equally to an Islamic Fund, except as otherwise provided in this IFR 6.
            (c) In this IFR 6, except where otherwise provided, any reference to a Fund is to an Islamic Fund or to an Islamic Sub-Fund of an Umbrella Fund as the case may be and any reference to a Fund Manager is a reference to a Fund Manager of an Islamic Fund or a Fund Manager of an Islamic Sub-Fund of an Umbrella Fund.

            • Guidance

              (i) The Fund Rules contains the key requirements relating to the management and operation of conventional Collective Investment Funds. These Islamic Finance Rules set out the additional requirements that apply where such a Fund is managed or held out as being managed as an Islamic Fund. There are other requirements that apply to Authorised Persons managing Islamic Funds which are found in other modules of the ADGM Rulebook, such as the GEN Rulebook, COBS Rulebook and PRU Rulebook.
              (ii) While IFR 3 contains the requirements that apply to Authorised Persons which are Fund Managers of Collective Investment Funds, the requirements in this IFR 6 mainly focus on Shari'a compliance related requirements that apply at the Fund level. For example, while the systems and controls required under IFR 3.3 relate to the systems and controls that a firm must have in order to comply with its Shari'a obligations, IFR 6.1.3 sets out systems and controls that must be established and maintained at the Fund level.
              Amended on (3 February, 2020).

          • Systems and controls

            • IFR 6.1.2 IFR 6.1.2

              (a) The Fund Manager of a Fund must establish and maintain systems and controls which ensure that its management of the Fund and the Fund Property is Shari'a compliant.
              (b) A Fund Manager may, where it is practicable to do so, include the systems and controls required under IFR 6.1.2 (a) within those it is required to establish and maintain pursuant to IFR 3.3.1.

              • Guidance

                (i) Part 5 of the Fund Rules requires the Fund Manager to establish and maintain systems and controls, including, but not limited to, financial and risk controls to ensure sound management of the Fund in accordance with the Fund's Constitution and its most recent Prospectus, taking due account of the nature, scale and complexity of the Fund's investments and operations.
                (ii) IFR 3.3.1 requires a Fund Manager of an Islamic Fund to establish and maintain systems and controls to ensure the Shari'a compliance of that Islamic Fund.

          • Fund's constitutional documents

            • IFR 6.1.3 IFR 6.1.3

              (a) The Fund Manager of a Domestic Fund that is a Public Fund must ensure that its Fund's Constitution and Prospectus are, and remain, approved by the Fund's Shari'a Supervisory Board.
              (b) The Fund Manager of an Exempt Fund must ensure that the Fund's Constitution and Prospectus are, and remain, approved by the Fund Manager's Shari'a Supervisory Board.

              • Guidance

                See Guidance note (iii) under IFR 6.2.1.

          • Islamic Financial Business policy and procedures manual

            • Guidance

              A Fund Manager may, instead of having a separate Islamic Financial Business policy and procedures manual both at the firm level and at the Fund level, maintain a single Islamic Financial Business policy and procedures manual for the Fund Manager and the Funds it manages.

            • IFR 6.1.4

              The Fund Manager of an Islamic Fund must implement and maintain an Islamic Financial Business policy and procedures manual for the Fund which addresses the following matters:

              (a) the manner in which the compliance function will be undertaken, in respect of Shari'a compliance;
              (b) the manner in which the Shari'a Supervisory Board will oversee and advise in regard to the Islamic Financial Business conducted by the Fund Manager;
              (c) the manner in which Shari'a Supervisory Board fatawa, rulings and guidelines will be recorded, disseminated and implemented and the internal Shari'a review undertaken;
              (d) the manner in which disputes between the Shari'a Supervisory Board and the Fund Manager in respect of Shari'a compliance will be addressed;
              (e) the process for approving those internal systems and controls which are in place to ensure not only that the Islamic Financial Business is carried out in compliance with Shari'a, but that information is disseminated to Unitholders in an appropriate manner; and
              (f) the manner in which conflicts of interest will be identified and managed, including as prescribed in IFR 6.2.4.

        • IFR 6.2 IFR 6.2 Shari'a Supervisory Board for an Islamic Fund

          • IFR 6.2.1 IFR 6.2.1

            (a) A Fund Manager of a Domestic Fund that is a Public Fund must, subject to IFR 6.2.1(c), appoint a Shari'a Supervisory Board to its Fund that meets the following requirements:
            (i) the Shari'a Supervisory Board has at least three members;
            (ii) the members appointed to the Shari'a Supervisory Board are competent to perform their functions as Shari'a Supervisory Board members of the Fund;
            (iii) any appointments, dismissals or changes in respect of members of the Shari'a Supervisory Board are approved by the Governing Body of the Fund Manager; and
            (iv) no member of the Shari'a Supervisory Board is a director or Controller of the Fund or its Fund Manager.
            (b) A Fund Manager may comply with the requirement in IFR 6.2.1(a) by appointing to the Fund the same Shari'a Supervisory Board as it has appointed to itself as an Authorised Person (and whether acting as an Islamic Financial Institution or through an Islamic Window) in accordance with IFR 3.5.2, provided the requirements in IFR 6.2.1(a) are also met.
            (c) A Fund Manager is not required to comply with the requirement in IFR 6.2.1(a) where it relies, for the purposes of making investments for the Fund, on a widely accepted Shari'a screening process such as investing in securities included in, or recognised by reference to, an Islamic index, sukuk, or treasury instruments issued by a Shari'a-compliant financial services provider regulated by an international recognised and reputable financial services regulator.

            • Guidance

              (i) In appointing a Shari'a Supervisory Board for the purposes of IFR 6.2.1(a), the Fund Manager should consider the previous experience and qualifications of the proposed Shari'a Supervisory Board members to assess whether the proposed Shari'a Supervisory Board member is competent to advise on the activities undertaken by the Islamic Fund. If the Fund Manager is appointing the same Shari'a Supervisory Board as it has appointed to the firm pursuant to IFR 6.2.1(b), the Fund Manager should still consider whether the requirements in both IFR 3.5.2(a) and IFR 6.2.1(a) are met in respect of that board.
              (ii) If the Fund Manager is relying on Shari'a screening methodologies such as the Dow Jones Shari'a index, such screening is generally regarded as widely accepted and accessible. However, if less widely known methodologies are used, the Fund Manager should be able, upon request by the Regulator, to demonstrate to the satisfaction of the Regulator the grounds on which it considers the particular methodology used to be acceptable and reliable.
              (iii) Although the Fund Managers of Exempt Funds and Qualified Investor Funds are not subject to the requirement for the appointment of a Shari'a Supervisory Board for such a Fund, they would need to ensure that the Exempt Funds or Qualified Investor Funds they manage continue to meet the Shari'a requirements applicable to the relevant Fund. They may use a member of the Shari'a Supervisory Board appointed at the firm level for the purposes of ascertaining compliance with the Shari'a requirements. The manner in which they demonstrate to the Unitholder of the Exempt Fund or Qualified Investor Fund as to how they achieve such compliance is a matter left to negotiation (i.e. subject to contractual terms) between the Unitholders and the Fund Manager.
              (iv) A Foreign Fund Manager may not be able to take advantage of IFR 6.2.1(b), unless it has a Shari'a Supervisory Board appointed at the firm level. In contrast the Authorised Fund Manager of a Foreign Fund will be able to use its Shari'a Supervisory Board to meet the Shari'a Supervisory Board requirement relating to the Fund as set out in IFR 6.2.1(b).

          • IFR 6.2.2

            (a) Subject to 6.2.2(b), the Fund Manager of a Fund must document the Fund's policy in relation to:
            (i) how appointments, dismissals or changes will be made to the Shari'a Supervisory Board;
            (ii) the process through which the suitability of Shari'a Supervisory Board members will be considered; and
            (iii) the remuneration of the members of the Shari'a Supervisory Board.
            (b) If the Fund Manager, pursuant to IFR 6.2.1(b), appoints to the Fund the same Shari'a Supervisory Board it has appointed to the firm, the documents required under IFR 6.2.2(a) must be included in or otherwise form part of the records required under IFR 3.5.3.

          • IFR 6.2.3 IFR 6.2.3

            (a) Subject to IFR 6.2.3(b), the Fund Manager of a Fund must establish and retain, for six years, records of:
            (i) its assessment of the competency of the Shari'a Supervisory Board members;
            (ii) the agreed terms of engagement of each member of the Shari'a Supervisory Board; and
            (iii) the matters in IFR 6.2.1(a)(iii) and IFR 6.2.2.
            (b) If the Fund Manager, pursuant to IFR 6.2.1(b), appoints to the Fund the same Shari'a Supervisory Board it has appointed to itself as an Authorised Person (and whether acting as an Islamic Financial Institution or through an Islamic Window), the records required under IFR 6.2.3(a) must be included in or otherwise form part of the records required under IFR 3.5.4.

            • Guidance

              (i) The records of the assessment of competency of Shari'a Supervisory Board members should clearly indicate, at least:
              (A) the factors that have been taken into account when making the assessment of competency;
              (B) the qualifications and experience of the Shari'a Supervisory Board members;
              (C) the basis upon which the Fund Manager has deemed that the proposed Shari'a Supervisory Board member is suitable; and
              (D) details of any other Shari'a Supervisory Boards of which the proposed Shari'a Supervisory Board member is, or has been, a member.
              (ii) If the Fund Manager is relying on IFR 6.2.1(b), then the due diligence process, and the records maintained under IFR 3.5.3 and IFR 3.5.4, should be augmented with the matters specified under IFR 6.2.1(a).

          • IFR 6.2.4

            (a) The Islamic Financial Business policy and procedures manual must provide that:
            (i) a member of the Shari'a Supervisory Board is obliged to notify the Fund Manager of any conflict of interest that such member may have with respect to the Fund or the Fund Manager, and if appointed, or in the case of an Investment Trust, the Trustee; and
            (ii) the Fund Manager will take appropriate steps to manage any such conflict of interest so that the Islamic Financial Business is carried out appropriately and in compliance with Shari'a, the interest of a Unitholder is not adversely affected and all Unitholders are fairly treated and not prejudiced by any such interests.
            (b) If a Fund Manager is unable to manage a conflict of interest as provided above, it must dismiss or replace the member as appropriate.

          • IFR 6.2.5

            The Fund Manager of a Fund must provide the Regulator at its request with information on the qualifications, skills, experience and independence of the individuals who are appointed or proposed to be approved as members of the Shari'a Supervisory Board.

          • IFR 6.2.6

            (a) The Fund Manager of a Fund must take reasonable steps to ensure that the Fund Manager and the Fund's Employees:
            (i) provide such assistance as the Shari'a Supervisory Board reasonably requires to discharge its duties;
            (ii) give the Shari'a Supervisory Board right of access at all reasonable times to relevant records and information;
            (iii) do not interfere with the Shari'a Supervisory Board's ability to discharge its duties; and
            (iv) do not provide false or misleading information to the Shari'a Supervisory Board.
            (b) If appointed, the Trustee must also take reasonable steps to ensure that its Employees comply with IFR 6.2.6(a)(i)–(iv).

        • IFR 6.3 IFR 6.3 External Shari'a reviews and periodic reports

          • IFR 6.3.1

            A Fund Manager of a Domestic Fund that is a Public Fund, other than a Fund relying on the exemption in IFR 6.2.1(c), must ensure that all Shari'a reviews of the Fund are undertaken by the Shari'a Supervisory Board in accordance with AAOIFI GSIFI No 2.

          • IFR 6.3.2 IFR 6.3.2

            (a) In the case of a Domestic Fund that is a Public Fund other than a Fund relying on the exemptions in IFR 6.2.1(c), the Fund Manager must commission an interim and an annual report relating to the Fund operations from the Shari'a Supervisory Board which complies with AAOIFI GSIFI No 1.
            (b) The Fund Manager must deliver a copy of the annual interim report referred to in (a) to the Unitholders in accordance with Chapter 16 of the Fund Rules and must include the report of the Shari'a Supervisory Board in the annual report required under Chapter 16 of the Fund Rules.

            • Guidance

              Although the Fund Managers of Exempt Funds and Qualified Investor Funds are not subject to the Shari'a review process required under IFR 6.3, they would need to ensure that the Exempt Fund or Qualified Investor Fund continues to meet the Shari'a requirements, particularly for the purposes of their annual and interim reports, which are required to be prepared under Chapter 16 of the Fund Rules. However, the manner in which they demonstrate to the Unitholders of the Fund how they achieve such compliance is a matter left to negotiation (i.e. subject to contractual terms) between the Unitholders and the Fund Manager.

        • IFR 6.4 IFR 6.4 Internal Shari'a review

          • IFR 6.4.1 IFR 6.4.1

            (a) The Fund Manager of a Domestic Fund that is a Public Fund must perform an internal Shari'a review to assess the extent to which the Fund complies with fatawa, rulings and guidelines issued by the Fund's Shari'a Supervisory Board.
            (b) The Fund Manager must perform the internal Shari'a review in accordance with AAOIFI GSIFI No. 3.
            (c) The Fund Manager of an Umbrella Fund which has an Islamic Sub-Fund must, to the extent possible, perform the internal Shari'a review in accordance with AAOIFI GSIFI No. 3 and must document the manner in which it will conduct that part of the internal Shari'a review that is not conducted in accordance with AAOIFI GSIFI No. 3.

            • Guidance

              (i) Although the Fund Managers of Exempt Funds and Qualified Investor Funds are not subject to the specific internal Shari'a requirements under IFR 6.4, they would need to ensure that the Exempt Fund or Qualified Investor Fund continues to meet the applicable Shari'a requirements. However, the manner in which they demonstrate to the Unitholders of the Fund how they achieve such compliance is a matter left to negotiation (i.e. subject to contractual terms) between the Unitholders and the Fund Manager.
              (ii) AAOIFI GSIFI No. (3) (Internal Shari'a Review) establishes standards and provides guidance on the internal Shari'a review in institutions that conduct business in conformity with Shari'a. The standard covers the following:
              (A) objectives;
              (B) internal Shari'a review;
              (C) independence and objectivity;
              (D) professional proficiency;
              (E) scope of work;
              (F) performance of the internal Shari'a review work;
              (G) management of the internal Shari'a review;
              (H) quality assurance; and
              (I) elements of an effective internal Shari'a review control system.

          • IFR 6.4.2 IFR 6.4.2

            The Fund Manager must ensure that the internal Shari'a review referred to in this IFR 6 is performed by the internal audit function of the Fund or the compliance function of the Fund and that the individuals or departments involved in performing the review are competent and sufficiently independent to assess compliance with Shari'a.

            • Guidance

              For the purposes of assessing competency of personnel or departments which perform the internal Shari'a review, Fund Manager should consult AAOIFI GSIFI No. 3 paragraphs 9 to 16 inclusive.

        • IFR 6.5 IFR 6.5 Additional disclosure in a Prospectus of an Islamic Fund which is a Public Fund

          • Guidance

            Chapter 9 of the Fund Rules set out the Prospectus requirements. In addition to complying with those requirements as applicable to the particular Fund, the Fund Manager of an Islamic Fund that is a Public Fund must comply with the additional requirements set out in this IFR 6.

          • IFR 6.5.1 IFR 6.5.1

            A Fund Manager of an Islamic Fund which is a Public Fund must state in the Fund's Prospectus:

            (a) that all the operations in relation to the Fund will be conducted in accordance with Shari'a;
            (b) if the Fund has a Shari'a Supervisory Board appointed to it, the names of the members of the Shari'a Supervisory Board and their qualifications and experience and, whether or not the Fund Manager's Shari'a Supervisory Board is appointed to the Fund pursuant to IFR 6.2.1(b);
            (c) if the Fund does not have a Shari'a Supervisory Board appointed to it pursuant to IFR 6.2.1(c), what widely acceptable screening methodologies are used by the Fund to ensure Shari'a compliance with respect to investments made for the Fund, and the board that has approved them;
            (d) if applicable, the manner and frequency of Shari'a reviews;
            (e) how earnings prohibited by Shari'a will be disposed of; and
            (f) whether Zakat is the responsibility of the Fund or the responsibility of the Unitholders.

            • Guidance

              (i) A Fund Manager should consider providing additional information to support the statement under IFR 6.5.1(a) as indicated in 2 and 3 below.
              (ii) The Fund Manager should provide sufficient details setting out the basis upon which the Fund has been approved and certified as Shari'a compliant by its Shari'a Supervisory Board. Such details should include the basis of the underlying principles, i.e. the Fatawa or rulings, including reference to any relevant Ijtihad, Ijma, Qiyas or other. Where applicable, reference should be made to any Islamic indices to be used. In addition, where applicable, the screening process and any filters used should be identified.
              (iii) The Fund Manager should set out each of the key features of the Fund and explain the rationale for determining why each of these features are considered Shari'a compliant by the Fund's Shari'a Supervisory Board.

        • IFR 6.6 IFR 6.6 Investments in other Funds

          • IFR 6.6.1

            (a) An Islamic Fund which is a Public Fund may invest in Units of another Fund, except where otherwise provided in the Fund Rules, only where the Fund Manager has taken reasonable care to determine, before investing in that other Fund, it:
            (i) is the subject of an independent annual audit conducted in accordance with IFRS or US GAAP;
            (ii) has mechanisms in place to enable Unitholders to redeem their Units within a reasonable time if it is an open-ended Fund;
            (iii) is prohibited from having more than 20% of its gross asset value in the Units of other Funds; and
            (iv) has a proper and disclosed basis for asset valuation and the pricing of Units in that Fund.

        • IFR 6.7 IFR 6.7 Periodic Reports of an Islamic Fund

          • Guidance

            Chapter 16 of the Fund Rules sets out the periodic reports and related requirements. These are additional requirements that apply to Islamic Funds.

          • IFR 6.7.1

            In addition to the matters specified in Chapter 16.5 of the Fund Rules, an annual report of an Islamic Fund, other than a Fund which is an Umbrella Fund, must contain the report specified in IFR 6.3.2(b).

        • IFR 6.8 IFR 6.8 Islamic Real Estate Investment Trusts (Islamic REITs)

          • IFR 6.8.1

            (a) A Fund Manager, or any other Authorised Person making an Offer of a Unit of an Islamic Fund or otherwise marketing an Islamic Fund, must not include the term "Islamic Real Estate Investment Trust" or "Islamic REIT" or refer to an Islamic Fund or otherwise hold out an Islamic Fund as being an Islamic Real Estate Investment Trust or an Islamic REIT, unless it is a Public Property Fund which complies with IFR 6.8.1(b) below.
            (b) An Islamic REIT is a Public Property Fund which:
            (i) is primarily aimed at investments in income-generating Real Property which complies with Shari'a principles;
            (ii) distributes to the Unitholders at least 80% of its audited annual net income; and
            (iii) if at any time during the operation of the Islamic Fund the requirements are not met, the Fund Manager, and, if appointed the Trustee, must immediately notify the Regulator and the exchange of the failure to meet the requirements in these Islamic Finance Rules and what measures have been or will be taken to remedy the breach.

          • IFR 6.8.2

            (a) A Fund Manager of an Islamic REIT must ensure that it distributes to the Unitholders as dividends each year an amount not less than 80% of its audited annual net income.
            (b) The Persons providing oversight functions in respect of the Fund must determine if any;
            (i) revaluation surplus credited to income, or
            (ii) gains on disposal of Real Property,
            shall form part of net income for distribution to Unitholders.

          • IFR 6.8.3

            Where an Islamic REIT holds any Real Property via one or more Special Purpose Vehicles, the Fund Manager must ensure that each Special Purpose Vehicle distributes to the Fund all of its net income as permitted by the laws and regulations of the jurisdiction where the Special Purpose Vehicle is established.

          • IFR 6.8.4

            (a) A Fund Manager of an Islamic REIT must ensure, subject to IFR 6.8.4(b), that any investment made in respect of property under development whether on its own or in a joint venture is undertaken only where the Islamic REIT intends to hold the developed property upon completion.
            (b) The total purchase price and development cost of the property under development in IFR 6.8.4(a) must not exceed 30% of the net asset value of the Fund Property of the Islamic REIT.
            (c) For the purposes of this Rule, the Regulator would not consider property development activities to include refurbishment, retrofitting and renovation.

          • IFR 6.8.5 IFR 6.8.5

            A Fund Manager of an Islamic REIT may obtain financing either directly or through its Special Purpose Vehicle up to 65% of the total gross asset value of the Fund provided that such financing is provided in a Shari'a-compliant manner.

            • Guidance

              1. Remedial action may not require the disposal of Fund assets to pays off part of the borrowings where such disposal would be prejudicial to the interest of Unitholders.
              2. As there are no specific risks that arise by virtue of a Fund being an Islamic Fund, the prudential requirements that apply to a Category 3 firm as set out in the PRU Rulebook apply to such Fund Managers. However, if the underlying assets of the Fund are invested in financial products or instruments that are Islamic and have certain features which would raise any prudential risks, it is the responsibility of the Fund Manager to address such risks. The Regulator would provide any additional clarifications regarding such matters upon request.
              Amended on (3 February, 2020).

      • IFR 7. IFR 7. OFFERS OF ISLAMIC SECURITIES

        • IFR 7.1 IFR 7.1 Application

          • IFR 7.1.1 IFR 7.1.1

            (a) Subject to IFR 7.1.1(b) below, this IFR 7 applies to any Authorised Person who Offers Islamic Securities in the ADGM.
            (b) A Person making Offers of Islamic Securities in the ADGM must comply with the requirements in the Financial Services and Markets Regulations 2015 and the MKT Rulebook except to the extent otherwise provided in this IFR 7.
            (c) Islamic Securities, for the purposes of this IFR 7, do not include Units of an Islamic Fund.
            Amended on (3 February, 2020).

            • Guidance

              (i) IFR 7 applies to any Authorised Person that Offers Islamic Securities irrespective of whether such Authorised Person is an Islamic Financial Institution, acts through an Islamic Window or is a conventional institution. A conventional institution may be held to offer Islamic Securities where it acts as the underwriter of an issuance of Sukuk or where it elects to act as the obligor under a Sukuk issuance.
              (ii) The issue of Securities is not an activity that constitutes a Regulated Activity. Therefore, the activities such as the issue of Shares, Debentures (Sukuk) or Warrants do not attract the Regulated Activity prohibitions in the Financial Services and Markets Regulations 2015. However, the Offer of Securities is an activity to which the Financial Services and Markets Regulations 2015 and the MKT Rulebook apply. Under the Financial Services and Markets Regulations 2015, a Person making an Offer of Securities in the ADGM is subject to numerous disclosure requirements, unless exempt.
              (iii) Offers of Islamic Securities which are Units of a Fund are not subject to the requirements in this IFR 7 because the Financial Services and Markets Regulations 2015 and Fund Rules provide for such activities to be regulated. IFR 6 sets out additional requirements that apply to the Fund Manager when Offering Units of an Islamic Fund.
              (iv) The definition of the term Islamic Securities is in GLO.
              Amended on (3 February, 2020).

        • IFR 7.2 IFR 7.2 Contents of a Prospectus for Islamic Securities

          • IFR 7.2.1

            Where the relevant Securities are held out as being in accordance with Shari'a, the Prospectus relating to those Securities must include:

            (a) details of the members of the Shari'a Supervisory Board appointed by the Issuer who have undertaken the review of the relevant Securities;
            (b) details of the qualifications and experience of each of those Shari'a Supervisory Board members;
            (c) the opinion of the Shari’a Supervisory Board in respect of whether the Securities are Shari’a compliant;
            (d) in the case of issuance of Sukuk:
            (i) a description of the structure of the underlying transaction (including a structure diagram) and an explanation of the flow of funds; and
            (ii) where applicable, the disclosures required by the Shari'a Standards published from time to time by AAOIFI in respect of investment Sukuk; and
            (e) instead of the statement required under MKT Rule 4.5.1(3)(d), a prominent disclaimer in bold, on the front page of this Prospectus as follows:
            "The Regulator does not accept any responsibility for the content of the information included in the Prospectus, including the accuracy or completeness of such information. The liability for the content of the Prospectus lies with the issuer of the Prospectus and other Persons, such as Experts, whose opinions are included in the Prospectus with their consent. The Regulator has also not assessed the suitability of the Securities to which the Prospectus relates to any particular investor or type of investor and has not determined whether they are Shari'a compliant. If you do not understand the contents of this Prospectus or are unsure whether the Securities to which the Prospectus relates are suitable for your individual investment objectives and circumstances, you should consult an authorised financial advisor or other appropriately qualified Expert."
            Amended on (3 February, 2020).

        • IFR 7.3 IFR 7.3 Continuing disclosure relating to Islamic Securities

          • IFR 7.3.1

            The Reporting Entity responsible for Islamic Securities must, without delay, disclose to the markets and the Regulator details of any changes to the membership of its Shari'a Supervisory Board, the identity, qualifications and experience of any new Shari'a Supervisory Board members and the identity of any Shari'a Supervisory Board members who resign or are dismissed.

          • IFR 7.3.2

            A Listed Entity with Islamic Securities admitted to the Official List of Securities must make the required market disclosures in accordance with the requirements under section A1.1 of App 1 and comply with the other continuing obligations under section A1.2 of App 1.

        • IFR 7.4 IFR 7.4 Admission of Islamic Securities to an Official List of Securities

          • IFR 7.4.1

            If Securities are held out as being in accordance with Shari'a, the following documents must be submitted by the Applicant, in final form, to the Regulator by midday two clear business days before the Regulator is to consider the application:

            (a) a copy of the Shari'a pronouncement issued by the Shari'a Supervisory Board;
            (b) details of any declaration of trust or the instrument providing for the creation and issuance of the Security; and
            (c) a copy of all material transaction documents pertaining to the Shari'a nature of the Securities.

      • IFR 8. IFR 8. TAKAFUL

        • IFR 8.1 IFR 8.1 Application

          • IFR 8.1.1

            (a) This IFR 8 applies to an Authorised Person who carries on or holds itself out as carrying on (either as an Islamic Financial Institution or through an Islamic Window) insurance business or insurance intermediation in the form of Takaful.
            (b) In addition to the requirements in this IFR 8, the requirements that apply to conventional insurance business or Insurance Intermediation shall apply to an Authorised Person that carries on or holds itself out as carrying on insurance business or Insurance Intermediation in the form of Takaful.

        • IFR 8.2 IFR 8.2 Specific disclosure for Takaful

          • IFR 8.2.1 IFR 8.2.1

            Where an insurer or an insurance intermediary conducts Takaful with a retail client, the disclosure for the purposes of COBS 6.7 must include:

            (a) the nature of the contracts between the Takaful Fund and the Takaful Operator;
            (b) the method of calculation of any fees or share of profits paid from the Takaful Fund to the Takaful Operator;
            (c) the basis on which any surpluses in the Takaful Fund will be shared; and
            (d) any circumstances in which additional contributions to the Takaful Fund may be required.
            Amended on (3 February, 2020).

            • Guidance

              (i) Authorised Persons conducting insurance business comprising Takaful must comply with the requirements in PIN. Takaful-related prudential requirements are not included in these Islamic Finance Rules because of the closely integrated nature of such requirements with the requirements that apply to conventional insurance.
              (ii) Note that structures of Takaful Operators (including Retakaful Providers) vary, as do the Islamic contracts governing their business. As the Regulator has not as yet thought it appropriate to limit the permissible structures and contracts, the Regulator is willing to consider modifications to the ADGM Rulebook to apply the most appropriate prudential regime to a Takaful Operator. For many Takaful Operators, this is likely to involve capital tests at the level of the Takaful participants' fund or funds, and for the firm as a whole.

      • IFR APP 1 IFR APP 1 Continuing Obligations

        • IFR A1.1 IFR A1.1 Continuing obligations — Market disclosures for listed entities

          • IFR A1.1.1

            This table forms part of IFR 7.3.2.

          • IFR A1.1.2

            A Listed Entity must, on the occurrence of an event specified in column 1, make the required disclosure detailed in column 2, within the time specified in column 3, in respect of the Securities identified with a "✔" in column 4, of this Table.

            A.2.1.1
            Certificates  
              EVENT GIVING RISE TO DISCLOSURE OBLIGATION DISCLOSURE REQUIRED TIME OF DISCLOSURE Structured Products Shares Warrants over Shares Warrants over Debentures Debentures Shares Debentures Units
            ISLAMIC SECURITIES
            1. Any material change in the Shari'a nature of its Listed Securities as determined by the Shari'a Supervisory Board Market disclosure of the material change As soon as possible
            2. Where there are any material changes to the structure of the Listed Securities, or the use of proceeds, then the Listed Entity must obtain and disclose a new Shari'a opinion Market disclosure of the new Shari'a opinion As soon as possible

        • IFR A1.2 IFR A1.2 Other continuing obligations for listed entities

          • IFR A1.2.1

            This table forms part of IFR 7.3.2.

          • IFR A1.2.2

            A Listed Entity must, on the occurrence of an event specified in column 1, undertake the requirements detailed in column 2, within the time specified in column 3, in respect of the Securities identified with a "✓" in column 4, of this Table.

            A.2.2.1
              EVENT REQUIREMENTS TIME Structured Products Shares Warrants over Shares Warrants over Debentures Debentures Certificates Units
            Shares Debentures
            REGISTRATION
            1. Appointment of an independent Shari'a Supervisory Board to evaluate the Shari'a compliance of the Islamic equity Securities on an annual basis Notify the Regulator Annually          
            2. Any proposed decision with regard to any change in its board of directors or Shari'a Supervisory Board Consult with the Regulator In advance

    • Prudential — Investment, Insurance Intermediation and Banking Rules (PRU) [VER06.201218]

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    • Prudential — Investment, Insurance Intermediation and Banking Rules (PRU) [VER10.250521]

      • PRU 1 PRU 1 APPLICATION, INTERPRETATION AND CATEGORISATION

        • PRU 1.1 PRU 1.1 Application

          • PRU 1.1.1 PRU 1.1.1

            (1) Subject to (2), these Rules apply to every Authorised Person where its Financial Services Permission authorises it to carry on one or more of the Regulated Activities listed in 1.3.1(a), 1.3.2(a), 1.3.3(1)(a), 1.3.4(a), 1.3.5(a), 1.3.6(a) or 1.3.7(a).
            (2) In respect of a Fund Manager that:
            (a) manages only Venture Capital Funds; or
            (b)    (i) manages only Venture Capital Funds; and
            (ii) undertakes one or both of the Regulated Activities of Advising on Investments or Credit and Arranging Deals in Investments where those activities are restricted to co-investments in assets in which a Venture Capital Fund managed by the Authorised Person has invested or will invest;
            only the requirements under Sections 2.3 and 6.12 apply.
            (3) These Rules apply to an Authorised Person in accordance with both its status as a Domestic Firm or as a Branch and, secondly, its Category as determined under Section 1.3.
            (4) Where a Chapter, Part or Section of these Rules applies to a limited scope of Categories of Authorised Person, the term "Authorised Person" used in those provisions is to be read accordingly.
            (5) These Rules apply to the whole business of an Authorised Person except in relation to Client Assets and Insurance Money that are held or controlled by an Authorised Person which are not included in any prudential calculation.

            • Guidance

              1. The effect of Rule 1.1.1(1) is that these Rules apply to all Authorised Persons, except those that are Insurers, Representative Offices or Credit Rating Agencies. In the case of Insurers, those firms that are authorised to effect or carry out Contracts of Insurance should instead refer to the PIN Rulebook.
              2. Rule 1.1.1(2) does not apply to an Authorised Person where its Financial Services Permission authorises it to carry on one or both of the Regulated Activities of Advising on Investments or Credit and Arranging Deals in Investments where those activities are not restricted to co-investments in assets in which a Venture Capital Fund managed by the Authorised Person has invested or will invest.
              3. These Rules apply to Authorised Persons classified as Domestic Firms and to those Authorised Persons conducting Regulated Activities through a Branch in ADGM.
              4. These Rules reinforce the fitness and propriety requirements for Authorised Persons found in GEN 3 – Management, Systems and Controls and Principle 3. These Rules are comprised of the following:
              a. an initial Chapter establishing a categorisation of firms for the application of these Rules;
              b. two general Chapters detailing overall requirements: General Requirements and Capital and Leverage;
              c. six Chapters detailing specific requirements relating to the following particular risk types: Credit Risk, Market Risk, Operational Risk, interest rate risk in the Non-Trading Book, Group Risk and Liquidity Risk;
              d. a Chapter imposing processes for risk self-assessment by Authorised Persons and supervisory assessment by the Regulator; and
              e. a final Chapter imposing public disclosure requirements.
              5. With regards to Authorised Persons carrying on Islamic Financial Business, there are additional matters that should be included in their report to the Regulator which are in the Islamic Finance Rulebook (IFR) (see IFR rules).
              6. To assist Authorised Persons two tables are provided that set out the application of these Rules to Domestic Firms (Application Table A) and Branches (Application Table B), based on the different Categories of Authorised Persons. These tables are for guidance purposes only.
               
              APPLICATION TABLE A
              FOR AN AUTHORISED PERSON THAT OPERATES AS A DOMESTIC FIRM
              Chapter Category 1 Category 2 Category 3A Category 3B Category 3C Category 4 Category 5
              1. Application, Interpretation and Categorisation Whole Chapter
              2. General Requirements Whole Chapter
              3. Capital and Leverage Whole Chapter, except Rule 3.2.2, and Sections 3.6, 3.7 and 3.20 Whole Chapter, except Rule 3.2.2, and Sections 3.6, 3.7, 3.20 and 3.21. Whole Chapter, except Rule 3.2.2 and Sections 3.5 and 3.21. Whole Chapter, except Rule 3.2.2 and Sections 3.6, 3.7 and 3.20.
              4. Credit Risk Whole Chapter       Whole Chapter
              5. Market Risk Whole Chapter Only Sections 5.1, 5.2 and 5.6       Whole Chapter, except Section 5.4
              6. Operational Risk Whole Chapter, except Section 6.12 Whole Chapter, except Sections 6.10 and 6.11 Whole Chapter, except Section 6.12
              7. Interest Rate Risk In the Non-Trading Book Whole Chapter          
              8. Group Risk Whole Chapter Only Sections 8.1 and 8.5 Whole Chapter
              9. Liquidity Risk Whole Chapter, except Rule 9.2.2(3) Only Rule 9.2.2 (3)       Whole Chapter, except Rule 9.2.2(3)
              10. Supervisory Review and Evaluation Process Whole Chapter Whole Chapter, except Sections 10.4 and 10.6   Whole Chapter
              11. Disclosure Requirements Whole Chapter         Whole Chapter
               
               
              APPLICATION TABLE B
              FOR AN AUTHORISED PERSON THAT OPERATES AS A BRANCH IN ADGM
              Chapter Category 1 Category 2 Category 3A Category 3B Category 3C Category 4 Category 5
              1. Application, Interpretation and Categorisation Whole Chapter
              2. General Requirements Whole Chapter
              3. Capital and Leverage Only Rule 3.2.2
              4. Credit Risk Only Sections 4.1 to 4.4 and Rules 4.5.1 to 4.5.7 and 4.5.9       Only Sections 4.1 to 4.4 and Rules 4.5.1 to 4.5.7 and 4.5.9
              5. Market Risk Only Sections 5.1 and 5.2       Only Sections 5.1 and 5.2
              6. Operational Risk Whole Chapter, except Sections 6.11 and 6.12 Whole Chapter, except Sections 6.10 and 6.11 Whole Chapter, except Section 6.12
              7. Interest Rate Risk In the Non-Trading Book Whole Chapter          
              8. Group Risk Only Sections 8.1, 8.2 and 8.5 Only Sections 8.1 and 8.5 Only Sections 8.1, 8.2 and 8.5
              9. Liquidity Risk Whole Chapter, except Rule 9.2.2(3), 9.3.12 and 9.3.13 Only Rule 9.2.2 (3)       Whole Chapter, except Rule 9.2.2(3) , 9.3.12 and 9.3.13
              10. Supervisory Review and Evaluation Process              
              11. Disclosure Requirements              

               

        • PRU 1.2 PRU 1.2 Glossary

          • PRU 1.2.1

            The following terms and abbreviations bear the following meanings for the purpose of these Rules:

            Accepting Deposits Means the Regulated Activity specified in paragraph 38 of Schedule 1 of the FSMR.
            Accounting Records Means records and underlying documents comprising initial and other accounting entries and associated supporting documents such as:
            (a) cheques;
            (b) records of electronic fund transfers;
            (c) invoices;
            (d) contracts;
            (e) the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in journal entries; and
            (f) work sheets and spread sheets supporting cost allocations, computations, reconciliations and disclosures.
            Acting as the Administrator of a Collective Investment Fund Means the Regulated Activity specified in paragraph 60 of Schedule 1 of the FSMR.
            Acting as the Trustee of an Investment Trust Means the Regulated Activity specified in paragraph 61 of Schedule 1 of the FSMR.
            Adjusted Capital Resources Capital resources calculated in accordance with the PIN rules.
            Administering a Specified Benchmark Means the Regulated Activity specified in paragraph 68(1)(b) of the FSMR Schedule 1.
            Advising on Investments or Credit Means the Regulated Activity specified in paragraph 28 of Schedule 1 of the FSMR.
            ALCO Asset and Liability Committee.
            Alternative Standardised Approach The manner in which the Operation Risk Capital Requirement is calculated in accordance with Sections 6.11 and A6.3.
            Annual Audited Expenditure The expenditure calculated in accordance with Rule 3.7.3.
            Arranging Credit Means the Regulated Activity specified in paragraph 50 of Schedule 1 of the FSMR.
            Arranging Custody Means the Regulated Activity specified in paragraph 46 of Schedule 1 of the FSMR.
            Arranging Deals in Investments Means the Regulated Activity specified in paragraph 16 of Schedule 1 of the FSMR.
            Asset-Backed Commercial Paper (ABCP) Programme A programme that predominantly issues commercial paper with an Original Maturity of one year or less that is backed by assets or other Exposures held in a bankruptcy-remote SPE.
            Associate Means, in respect of a Person 'A' holding Shares or entitled to exercise, or control the exercise of voting power, in an Authorised Person or a Holding Company of an Authorised Person:
            (1)
            (a) the spouse of A;
            (b) a child or stepchild of A;
            (c) the trustee of any settlement, including an disposition or arrangement under which property is held on trust or subject to a comparable obligation, under which A has a life interest in possession;
            (d) an Undertaking of which A is a Director;
            (e) a Person who is an Employee or Partner of A;
            (f) where A is an Undertaking:
            (i) a Director of A;
            (ii) a Subsidiary or wholly owned Subsidiary of A; or
            (iii) a Director or Employee of such a Subsidiary or wholly owned Subsidiary; or
            (g) a Person who has an agreement or arrangement with A with respect to the acquisition, holding or disposal of Shares or other interests in the Authorised Person or the Holding Company of an Authorised Person or under which they undertake to act together in exercising their voting power in relation to an Authorised Person or the Holding Company of an Authorised Person or that other Person.
            (2) Means in respect of a Person 'A', any Person, including an affiliated company which is:
            (a) an Undertaking in the same Group as A; or
            (b) any other Person whose business or domestic relationship with A or his Associate might reasonably be expected to give rise to a community of interest between them which may involve a conflict of interest in dealings with third parties.
            AT1 Additional tier 1.
            AT1 Capital Has the meaning given in Section 3.14.
            Auditor A Partnership or Company that is registered by the Regulator to provide audit services to:
            (a) an Authorised Person or Recognised Body that is a Domestic Firm or to;
            (b) a Domestic Fund; or
            (c) a Public Listed Company.
            Authorised Person A Person, other than a Recognised Body, who holds a Financial Services Permission.
            Bank Means a Credit Institution.
            Base Capital Requirement Has the meaning given in Section 3.6.
            Basic Indicator Approach The manner in which the Operational Risk Capital Requirement is calculated in accordance with Sections 6.11 and A6.1.
            BCBS The Basel Committee on Banking Supervision.
            Body Corporate Any body corporate, and a body corporate constituted under the law of a country or territory outside of ADGM.
            Branch Means a place of business within ADGM:
            (a) which has no separate legal personality;
            (b) forms a legally dependant part of an Authorised Person whose principal place of business and head office is in a jurisdiction other than ADGM; and
            (c) through which the Authorised Person carries on Regulated Activities in or from ADGM.
            By Way of Business A Person carries on an activity specified in these Rules by way of business only if he carries on that activity from a permanent place of business maintained by him in ADGM and:
            (a) engages in that activity in a manner which constitutes the carrying on of a business by him;
            (b) holds himself out as willing and able to engage in that activity; or
            (c) regularly solicits other Persons to engage with him in transactions constituting that activity.
            Capital Conservation Buffer Means the capital buffer requirements as applied in Section 3.9.
            Capital Requirement The amount of capital an Authorised Person must hold, calculated in accordance with Sections 3.3, 3.4 or 3.5, as applicable.
            Capital Resources The total Capital Resources of an Authorised Person calculated in accordance with Section 3.11.
            Carrying Out Contracts of Insurance as Principal Means the Regulated Activity specified in paragraph 32 of Schedule 1 of the FSMR.
            Category A prudential grouping of Authorised Persons which determines the application of these Rules.
            CCF Credit conversion factor.
            CEA Credit equivalent amount.
            Central Bank The Central Bank of the UAE or its equivalent in another country or territory.
            Certificate Certificate is an instrument:
            (a) which confers on the holder contractual or property rights to or in respect of a Share, Debenture, Unit or Warrant held by a Person; and
            (b) the transfer of which may be effected by the holder without the consent of that other Person;
            but excludes rights under an Option.
            CET1 Common equity tier 1.
            CET1 Capital Has the meaning given in Section 3.13.
            Clean-Up Call An Option that permits the SE Exposures (e.g. asset-backed Securities) to be called before all of the underlying Exposures or SE Exposures have been repaid. In the case of Traditional Securitisations, this is generally accomplished by repurchasing the remaining SE Exposures once the pool balance or outstanding Securities have fallen below some specified level. In the case of a synthetic Exposure, the Clean-Up Call may take the form of a clause that extinguishes the credit protection.
            Client A Retail Client, Professional Client or Market Counterparty.
            Client Assets Means Client Money and Client Investments.
            Client Investments Means all Investments held or controlled by an Authorised Person on behalf of a Client in the course of, or in connection with the carrying on of Investment Business.
            Client Money Means money of any currency which an Authorised Person holds on behalf of a Client (including any receivables of the Authorised Person in respect of bank accounts or clearing or brokerage accounts) or which an Authorised Person treats as Client Money, subject to the exclusions in COBS 14.2.6.
            CLN Credit-linked note.
            Close Links A Person (Person A) has Close Links with a Person (Person B) if:
            (a) Person B:
            (i) is a Holding Company of Person A;
            (ii) is a Subsidiary of Person A;
            (iii) is a Holding Company of the Subsidiary of Person A;
            (iv) is a Subsidiary of a Holding Company of Person A; or
            (v) owns and controls 20% or more of the voting rights or Shares of Person A; or
            (b) Person A owns and controls 20% or more of the voting rights or Shares of Person B.
            Close Relative In relation to any individual:
            (a) his spouse;
            (b) his children and step-children, his parents and step-parents, his brothers and sisters and his step-brothers and step-sisters; and
            (c) the spouse of any individual within (b).
            Closely Related Has the meaning given in Rule A4.11.5.
            Collateral Means a Client Investment which has been paid for in full by a Client and which is held or controlled by the Authorised Person under the terms of a deposit, pledge, charge or other security arrangement.
            Collective Investment Fund Means an arrangement falling within section 106 of FSMR and which is not excluded under FUNDS Chapter 2.
            Collective Investment Fund Risk Capital Requirement A component of Market Risk Capital Requirement calculated in accordance with Section 5.9.
            Commodities Risk Capital Requirement A component of the Market Risk Capital Requirement to cover the risk of holding or taking positions in commodities, including precious metals, but excluding gold, calculated in accordance with Section 5.7.
            Concentration Risk The risk faced by an Authorised Person arising out of its Large Exposures.
            Connected In relation to a Person (A), a Person which has or has at any relevant time had the following relationship to A:
            (a) a member of A's Group;
            (b) a Controller of A;
            (c) a member of a Partnership of which A is a member;
            (d) an Employee or former Employee of A;
            (e) if A is a Company:
            (i) an officer or manager of A or of a Parent of A;
            (ii) an agent of A or of a Parent of A;
            (f) if A is a Partnership is or has been a member, manager or agent of A; or
            (g) if A is an unincorporated association of Persons which is not a Partnership, is or has been an officer, manager or agent of A.
            Connected Counterparties For Concentration Risk purposes, and in relation to a Person, a Connected Counterparty means another Person to whom the first Person has an Exposure and who fulfils one of the following conditions:
            (a) he is Connected to the first Person;
            (b) he is an Associate of the first Person;
            (c) the same Persons significantly influence the Governing Body of each of them; or
            (d) one of those Persons has an Exposure to the other that was not incurred for the clear commercial advantage of both of them and which is not on arm's length terms.
            Constitution Means in relation to a Fund:
            (a) which is in the form of a Body Corporate, the instrument of incorporation;
            (b) which is in the form of an Investment Trust, the trust deed;
            (c) which is in the form of a Partnership, the partnership deed; or
            (d) adopting a form other than one specified in paragraphs (a) to (c) of this definition, an instrument creating the legal form of the Fund to which the Fund Manager is a party setting out provisions relating to any aspect of the operation or management of the Fund.
            Controlled Early Amortisation Early Amortisation that meets the conditions in Rule 4.14.58.
            Counterparty Means any Person with or for whom an Authorised Person carries on, or intends to carry on, any regulated business or associated business. In this context, Counterparty includes an individual, unincorporated body, company, government, local authority or other public body.
            Counterparty Risk The risk that an Authorised Person's Counterparty does not perform its obligations under the terms of a contract.
            CPW Counterparty weighting.
            CR Exposure The Exposure value or amount for a Credit Risk Exposure.
            CRA Means a credit rating agency.
            Credit Derivative Any contract which transfers the Credit Risk of a reference obligation or set of reference obligations from the protection buyer to the protection seller, such that the protection seller has an Exposure to the reference obligation(s).
            Credit Enhancement A contractual arrangement in which the Authorised Person retains or assumes an SE Exposure and, in substance, provides some degree of added protection to other parties to the transaction.
            Credit Facility Any facility which includes any arrangement or agreement which extends monetary credit whether funded or unfunded to a Person including but not limited to any loan or syndicated loan, mortgage, overdraft, financial lease, letter of credit, financial guarantee, trade finance, transaction finance, project finance or asset finance.
            Credit Institution Means:
            (a) an undertaking whose business is to receive Deposits or other repayable funds from the public and to grant Credits for its own account; or
            (b) an Electronic Money Institution.
            Credit Quality Grade A credit quality step in a credit quality assessment scale. A credit quality assessment scale is a scale onto which the credit assessments of an ECAI or an expert credit agency are mapped.
            Credit Rating Agency A Person carrying on in or from ADGM the Regulated Activity of Operating a Credit Rating Agency for which it has an authorisation under its Financial Services Permission.
            Credit Risk Means, in relation to an Authorised Person, the risk of loss if another party fails to perform on its financial obligation to the Authorised Person.
            Credit Risk Capital Requirement (CRCOM) The credit risk capital requirement calculated in accordance with Section 4.6.
            Credit-Enhancing Interest-Only Strip An on-balance sheet asset that:
            (a) represents a valuation of cash flows related to future margin income; and
            (b) is subordinated.
            CRM Credit risk mitigation.
            CRW Credit risk weight for an Exposure.
            CV Contracted value for delivery.
            Dealing in Investments as Agent Means the Regulated Activity specified in paragraph 12 of Schedule 1 of the FSMR.
            Dealing in Investments as Principal Means the Regulated Activity specified in paragraph 4 of Schedule 1 of the FSMR.
            Debenture Means an instrument creating or acknowledging indebtedness, whether secured or not, but excludes:
            (a) an instrument creating or acknowledging indebtedness for, or for Money borrowed to defray, the consideration payable under a contract for the supply of goods or services;
            (b) a cheque or other bill of exchange, a banker's draft or a letter of credit (but not a bill of exchange accepted by a banker);
            (c) a banknote, a statement showing a balance on a bank account, or a lease or other disposition of property; and
            (d) a Contract of Insurance.
            Delta The measure of an Option's sensitivity to a change in value of the underlying Investment, asset or property.
            Deposit
            (1) Means a sum of Money paid on terms:
            (a) under which it will be repaid, with or without interest or a premium, and either on demand or at a time or in circumstances agreed by or on behalf of the Person making the payment and the Person receiving it; and
            (b) which is not referable to the provision of property (other than currency) or services or the giving of security.
            (2) In (1) Money is paid on terms which are referable to the provision of property or services or the giving of security if:
            (a) it is paid by way of advance or part payment under a contract for the sale, hire or other provision of property or services, and is repayable only in the event that the property or services are not in fact sold, hired or otherwise provided;
            (b) it is paid by way of security for the performance of a contract or by way of security in respect of loss which may result from the non-performance of a contract; or
            (c) without prejudice to (b), it is paid by way of security for the delivery up of property, whether in a particular state of repair or otherwise.
            (3) A sum is not a Deposit if it is paid:
            (a) by a Person in the course of carrying on a business consisting wholly or to a significant extent of lending Money;
            (b) by one company to another at a time when both are members of the same Group;
            (c) by an Authorised Person authorised under its Financial Services Permission to carry on the following Regulated Activities:
            (i) Accepting Deposits;
            (ii) Effecting Contracts of Insurance; or
            (iii) Carrying Out Contracts of Insurance as Principal; or
            (d) by a Person who is a Close Relative of the Person receiving it or who is a Director, manager or Controller of that Person.
            (4) A sum is not a Deposit if it is received:
            (a) by a lawyer acting in his professional capacity;
            (b) by an accountant acting in his professional capacity;
            (c) by an Authorised Person or a Recognised Body authorised under its Financial Services Permission to carry on any one or more of the following Regulated Activities:
            (i) Dealing in Investments as Principal;
            (ii) Dealing in Investments as Agent;
            (iii) Arranging Credit;
            (iv) Arranging Deals in Investments;
            (v) Managing Assets;
            (vi) Operating a Collective Investment Fund;
            (vii) Effecting Contracts of Insurance;
            (viii) Carrying Out Contracts of Insurance as Principal;
            (ix) Insurance Intermediation;
            (x) Insurance Management; or
            (xi) Managing a Profit Sharing Investment Account,
            in the course of or for the purpose of any such Regulated Activity disregarding any applicable exclusions in the GEN rules; or
            (d) by a Person as consideration for the issue by him of a Debenture.
            Derivative or Derivative Contract Means Specified Investments falling within paragraphs 94 to 96 of Schedule 1 of FSMR or, so far as relevant to such investments, any investment falling within paragraph 98 of that Schedule.
            Director
            (1) In relation to an Undertaking established under the Companies Regulations, a Person who appears on the Register of Directors maintained by the Registrar of Companies; and
            (2) in relation to all other Undertakings, a Person who has been admitted to a register which has a corresponding meaning to the Register of Directors or performs the function of acting in the capacity of a Director, by whatever name called.
            Displaced Commercial Risk Capital Requirement The requirement calculated in accordance with the IFR rules.
            Domestic Firm An Authorised Person or Recognised Body which:
            (a) has its registered and head office in the ADGM; or
            (b) if it is a Subsidiary of an Undertaking whose principal place of business and head office is in a jurisdiction other than the ADGM, has its registered office in the ADGM.
            Domestic Fund A Fund established or domiciled in the ADGM.
            Duration Method A measure of General Market Risk calculated in accordance with Rule A5.2.19.
            DvP Delivery versus Payment.
            E An Exposure value or amount.
            E* An Exposure value or amount adjusted in the manner provided in the relevant Rule.
            EAE The Exposure value or amount for an Early Amortisation Exposure.
            Early Amortisation A mechanism that, once triggered, allows investors to be paid out prior to the originally stated maturity of the Amortisation provision will be considered either controlled or non-controlled.
            ECAI A CRA or an external credit rating agency approved by the Regulator for the purpose of these Rules.
            Effecting Contracts of Insurance Means the Regulated Activity specified in paragraph 31 of Schedule 1 of the FSMR.
            Employee Means an individual:
            (a) who is employed or appointed by a Person in connection with that Person's business, whether under a contract of service or for services or otherwise; or
            (b) whose services, under an arrangement between that Person and a third party, are placed at the disposal and under the control of that Person.
            Equity Risk Capital Requirement A component of Market Risk Capital Requirement and calculated in accordance with Section 5.5.
            Evergreening Evergreening refers to the practice by some banks to roll over or renew their non-performing loans or potentially non-performing loans, so that they can avoid recognising them as non-performing loans in their accounts and consequently avoid provisioning for them.
            Excess Spread Gross finance charge collections and other income received by the trust or SPE minus certificate interest, servicing fees, charge-offs, and other senior trust or SPE expenses.
            Expenditure Based Capital Minimum A Capital Requirement calculated in accordance with Section 3.7.
            Exposure
            (1) The maximum loss that an Authorised Person (and where applicable its PSIA holders) might suffer if:
            (a) a Counterparty or a group of Connected Counterparties fail to meet their obligations; or
            (b) it realises assets or off-balance sheet positions.
            (2) An Exposure also includes any asset or off-balance sheet item, which could result in a potential loss to the Authorised Person due to Market Risk or Operational Risk or any other risk factor.
            FCCA Financial Collateral Comprehensive Approach as described in Rule 4.9.5.
            FCSA Financial Collateral Simplified Approach as described in Rule 4.9.5.
            Financial Group A group of entities which includes an Authorised Person and:
            (a) any Parent incorporated in ADGM;
            (b) any Financial Institution subsidiaries (whether direct or indirect) of the Parent or Parents in (a) or of the Authorised Person;
            (c) any Financial Institution in which the Parent or Parents in (a), the Financial Institution subsidiaries in (b) or the Authorised Person (whether direct or indirect) hold 20% or more of the voting rights or capital; and
            (d) any entity which the Regulator directs the Authorised Person to include in accordance with Rule 8.1.2.
            Financial Group Capital Resources The Capital Resources of a Financial Group calculated in accordance with Rule 8.3.4.
            Financial Institution Means:
            (1) an Authorised Person; or
            (2) any Person which carries out as its principal business an activity which would, if carried out in ADGM, be a Regulated Activity; and
            (3) is not one of the following:
            (A) a governmental organisation, including the Central Bank of any State; or
            (B) a multilateral development bank.
            Financial Instrument Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity.
            Financial Product Means an Investment, a Credit Facility, a Deposit, a Profit Sharing Investment Account, or a Contract of Insurance.
            Financial Services Permission is a permission given, or having effect as if so given, by the Regulator in accordance with Part 4 of the Financial Services and Markets Regulations.
            First Loss Position Represents the first level of support provided to the Special Purpose Entity or vehicle that should bear all, or a significant part of, the risk associated with the items held by the Special Purpose Entity or vehicle.
            Foreign Exchange Risk Capital Requirement A component of the Market Risk Capital Requirement and as calculated in accordance with Section 5.6.
            Fund Means a Collective Investment Fund.
            Fund Manager Means a Person responsible for the management of the property held for or within a Fund and who otherwise operates the Fund.
            Fund Property The property held for or within a Fund.
            Future Means an instrument comprising rights under a contract:
            (a) for the sale of a commodity or property of any other description under which delivery is to be made at a future date and at a price agreed on when the contract is made and that contract:
            (i) is made or traded on a regulated exchange;
            (ii) is made or traded on terms that are similar to those made or traded on a regulated exchange; or
            (iii) would, on reasonable grounds, be regarded as made for investment and not for commercial purposes; or
            (b) where the value of the contract is ultimately determined by reference, wholly or in part, to fluctuations in:
            (i) the value or price of property of any description; or
            (ii) an index, interest rate, exchange rate, any combination of these, or other factor designated for that purpose in the contract; and
            which is wholly settled by cash or set-off between the parties but excludes:
            (iii) rights under a contract where one or more of the parties takes delivery of any property to which the contract relates;
            (iv) a contract under which Money is received by way of Deposit or an acknowledgement of a debt on terms that any return to be paid on the sum deposited or received will be calculated by reference to an index, interest rate, exchange rate or any combination of these or other factors; or
            (v) a Contract of Insurance.
            Gamma The measure of the rate of change of Delta.
            General Market Risk
            (1) For the purposes of the Interest Rate Risk Capital Requirement, means the risk that losses may arise from price changes in Securities caused by parallel or non-parallel shifts in the yield curve or from price movements in the equity market for a given country;
            (2) For the purposes of the Equity Risk Capital Requirement, means the risk that losses may arise from a price movement in the equity market for a given country; or
            (3) For the purposes of internal models, means both of the above risks.
            Governing Body The board of Directors, Partners, committee of management or other Governing Body of an Undertaking.
            Group Has the meaning given in section 258 of FSMR.
            Group Risk The risk of loss to the Authorised Person as a result of its membership of, or linkages within a Group.
            High Quality Liquid Assets (HQLA) Liquid assets that meet the conditions in Rules A9.2.2 to A9.2.9 of App9.
            Holding Company Has the meaning given in the Companies Regulations.
            Home State Regulator Means the relevant Regulated Activities regulator of a Branch in its home member state.
            ICR Means the Individual Capital Requirement given in Section 10.6.
            Implicit Support Arises when an Authorised Person provides support to a securitisation in excess of its predetermined contractual obligation.
            Insurance Intermediation Means the Regulated Activity specified in paragraph 33 of Schedule 1 of the FSMR.
            Insurance Management Means the Regulated Activity specified in paragraph 36 of Schedule 1 of the FSMR.
            Insurance Manager An Authorised Person whose Financial Services Permission authorises it to carry on the Regulated Activity of Insurance Management.
            Insurance Money
            (1) Means, subject to (2), any monies arising from Insurance Intermediation or the Insurance Management business which are any of the following:
            (a) premiums, additional premiums and return premiums of all kinds;
            (b) claims and other payments due under Contracts of Insurance;
            (c) refunds and salvages;
            (d) fees, charges, taxes and similar fiscal levies relating to Contracts of Insurance;
            (e) discounts, commissions and brokerage; or
            (f) monies received from or on behalf of a Client of an Insurance Manager, in relation to his Insurance Management business.
            (2) Monies are not Insurance Monies where there is a written agreement in place between the Insurance Intermediary or Insurance Manager and the Insurer to whom the relevant monies are to be paid (or from whom they have been received) under which the Insurer agrees that:
            (a) the Insurance Intermediary or Insurance Manager , as the case may be, holds as agent for the Insurer all monies received by it in connection with Contracts of Insurance effected or to be effected by the Insurer;
            (b) insurance cover is maintained for the Client once the monies are received by the Insurance Intermediary or the Insurance Manager , as the case may be; and
            (c) the Insurer's obligation to make a payment to the Client is not discharged until actual receipt of the relevant monies by the Client.
            (3) In this definition, a Client of an Insurance Manager means:
            (a) any Insurer for which the Insurance Manager provides Insurance Management;
            (b) any shareholder of an Insurer mentioned in (a); or
            (c) any Person on whose behalf the Insurance Manager undertakes to establish that Person as an Insurer.
            Insurer A Person carrying on in the ADGM either or both of the following Regulated Activities for which it has authorisation under its Financial Services Permission:
            (a) Effecting Contracts of Insurance; or
            (b) Carrying Out Contracts of Insurance as Principal.
            Interest Rate Risk Capital Requirement A component of Market Risk Capital Requirement and calculated in accordance with Section 5.4.
            Internal Capital Adequacy Assessment Process (ICAAP) The internal capital adequacy assessment process prescribed in Chapter 10.
            Internal Risk Assessment Process (IRAP) The internal risk assessment process prescribed in Section 10.3.
            International Financial Reporting Standards Means the International Financial Reporting Standards as issued and amended from time to time by the International Accounting Standards Board.
            Investment
            (1) Means either a Security or Derivative.
            (2) Such Security or Derivative includes:
            (a) a right or interest in the relevant Security or Derivative; and
            (b) any instrument declared as a Security or Derivative by the GEN rules.
            Investment Business The business of:
            (a) Dealing in Investments as Principal;
            (b) Dealing in Investments as Agent;
            (c) Arranging Credit;
            (d) Arranging Deals in Investments;
            (e) Managing Assets;
            (f) Advising on Investments or Credit;
            (g) Operating a Collective Investment Fund;
            (h) Providing Custody;
            (i) Arranging Custody;
            (j) Managing a Profit Sharing Investment Account; or
            (k) Acting as the Trustee of an Investment Trust.
            Investment Grade A credit rating which is a Credit Quality Grade of 1, 2 or 3.
            Investment Risk Reserve Represents the amount that is appropriated out of the income of investment account holders, after allocating the Mudarib's share, in order to meet future losses attributable to investment account holders.
            Investment Trust Means an express trust created solely for collective investment purposes under section 114 of FSMR.
            Islamic Contracts Any contract designed to comply with Shari'a.
            Islamic Financial Business Any part of the financial business of an Authorised Person or Recognised Body which is carried out in accordance with Shari'a.
            Islamic Financial Institution An Authorised Person or Recognised Body which has, on its Financial Services Permission, an endorsement authorising it to conduct its entire financial business in accordance with Shari'a.
            Issuer In relation to:
            (a) any Security other than a Unit in a Collective Investment Fund, means the Person by whom it is or is to be issued;
            (b) a Unit in a Collective Investment Fund, means the Fund Manager; and
            (c) an interest in a Limited Liability Partnership, means the Partnership.
            Large Exposure An Exposure, whether in an Authorised Person's Non-Trading Book or Trading Book, or both, to a Counterparty or group of Closely Related Counterparties or a group of Counterparties Connected to the Authorised Person which in aggregate equals or exceeds 10% of the Authorised Person's Capital Resources.
            LCR Requirement The LCR required to be maintained by an Authorised Person under Rule 9.3.4.
            Leverage Ratio The amount expressed as a percentage value that is calculated in accordance with Rule 3.18.
            Liquidity Coverage Ratio (LCR) The amount expressed as a percentage value that is calculated in accordance with Rule 9.3.4 and section A9.2 of App9.
            Liquidity Risk The risk that an Authorised Person, although solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure such resources only at excessive cost.
            Managing a Collective Investment Fund Means the Regulated Activity specified in paragraph 59 of Schedule 1 of the FSMR.
            Managing a Profit Sharing Investment Account Means the Regulated Activity specified in paragraph 64(2) of Schedule 1 of the FSMR.
            Managing Assets Means the Regulated Activity specified in paragraph 56 of Schedule 1 of the FSMR.
            Market Counterparty
            (1) An Authorised Person may treat a Professional Client referred to in part (2) of the definition of Professional Client as a Market Counterparty provided that the firm:
            (a) in the case of a Professional Client referred to in part (2)(a) to (f) of the definition of Professional Client, has given to that Client a prior written notification of the classification as a Market Counterparty and that Client has not requested to be treated otherwise; and
            (b) in the case of a Professional Client referred to in part (2)(g), (h), or (i) of the definition of Professional Client, has obtained the prior written consent of that Client to be treated as a Market Counterparty.
            (2) The notification and consent referred to in (1) may be given in respect of all services or in respect of each individual Transaction.
            (3) The notification in (1)(a) need only be given to one of:
            (a) a Fund or its Fund Manager; or
            (b) a pension fund or its management company.
            Market Risk The risk of loss that arises from fluctuations in the values of assets or in interest or exchange rates.
            Market Risk Capital Requirement The requirement calculated in accordance with Rule 5.3.1.
            Matched Principal Has the meaning described in Rule 1.3.3(2).
            Maturity Ladder A table that ordinally ranks the maturity time bands and assets and liabilities within them.
            Maturity Method This is an advanced approach that an Authorised Person may use to measure the risk of holding or taking positions in debt Securities and other interest rate-related instruments, calculated in accordance with Rule A5.2.17.
            Maturity Mismatch A difference between the maturity of an asset and the corresponding liability.
            MDB Multilateral development bank.
            Modified Duration The time period calculation for the purposes of the Duration Method in accordance with Rule A5.2.21.
            Money Any form of money, including cheques and other payable orders.
            Multilateral Trading Facility (MTF) Means a system which brings together multiple third party buying and selling interests in Investments, in accordance with its non-discretionary rules, in a way that results in a contract in respect of such Investments.
            MV Market value.
            Netting A process by which the claims and obligations between two Counterparties are offset against each other to leave a single net sum.
            Non-Trading Book Describes positions, Exposures and on-and off-balance sheet items, which are not in the Trading Book.
            NP Nominal principal amount.
            OBS Exposures Off balance sheet Exposures.
            Operating a Collective Investment Fund
            (1) Means:
            (a) being legally accountable to the Unitholders in the Fund for the management of the property held for or within a Fund under the Fund's Constitution; and
            (b) establishing, managing or otherwise operating or winding up a Collective Investment Fund.
            (2) To the extent that any activity under (1) constitutes Managing Assets, Acting as the Administrator of a Collective Investment Fund, Dealing in Investments as Agent, Dealing in Investments as Principal, Arranging Credit, Arranging Deals in Investments, or Providing Custody, such a Regulated Activity is taken to be incorporated within Managing a Collective Investment Fund.
            (3) The Person referred to in (1) is a Fund Manager.
            Operating a Credit Rating Agency Means the Regulated Activity specified in paragraph 65 of Schedule 1 of the FSMR.
            Operating a Multilateral Trading Facility or Organised Trading Facility Means the Regulated Activity specified in paragraph 54 of Schedule 1 of the FSMR.
            Operating a Representative Office Means the Regulated Activity specified in paragraph 67 of Schedule 1 of the FSMR.
            Operational Risk
            (1) Refers to the risk of incurring losses due to the failure of systems, processes, and personnel to perform expected tasks.
            (2) Operational Risk losses also include losses arising out of legal risk.
            Operational Risk Capital Requirement The requirement calculated in accordance with Section 6.11.
            Option An Option is an instrument that confers on the holder, upon exercise, rights of the kind referred to in any of the following:
            (a) a right to acquire or dispose of:
            (i) a Security (other than a Warrant) or contractually based Investment;
            (ii) currency of any country or territory; or
            (iii) a commodity of any kind;
            (b) a right to receive a cash settlement, the value of which is determined by reference to:
            (i) the value or price of an index, interest rate or exchange rate; or
            (ii) any other rate or variable; or
            (c) a right to acquire or dispose of another Option under (a) or (b).
            Option Risk Capital Requirement A component of the Market Risk Capital Requirement and calculated in accordance with Section 5.8.
            Organised Trading Facility (OTF) Means a system which brings together multiple third party buying and selling interests in Investments, in accordance with its discretionary rules, in a way that results in a contract in respect of such Investments.
            Original Maturity
            (1) The time period between the date an offer is made and the date it expires or lapses.
            (2) In relation to Debentures, the interval between its issue date and the date on which it becomes due and payable.
            Originator
            (1) An entity which, either itself or through related entities, directly or indirectly, creates the Exposure being securitised; or
            (2) any entity which purchases or advises or causes an SPE to purchase the Exposures of a third party, which are then used in a securitisation (for avoidance of doubt, selling credit protection such that the entity or the SPE has a long position in the Credit Risk of the obligor is equivalent to purchasing Exposures).
            (3) Where an entity lends to an SPE with a view to enabling that SPE to make loans which are then used in a securitisation, the entity will generally be deemed to be acting as an Originator.
            OTC Derivative or OTC Derivative Contract Means a Derivative Contract the execution of which does not take place on a Recognised Investment Exchange.
            Parent Means a Holding Company as defined in section 1015 of the Companies Regulations 2015.
            Partner In relation to an Undertaking which is a Partnership, a Person occupying the position of a Partner, by whatever name called.
            Partnership Means any partnership, including a partnership constituted under the law of a country, jurisdiction or territory outside the ADGM, but not including a Limited Liability Partnership.
            Person A Person includes any natural person, Body Corporate or body unincorporated, including a legal person, company, Partnership, unincorporated association, government or state.
            PII Professional indemnity insurance.
            Potential Future Credit Exposure (PFCE) An amount calculated by multiplying the nominal principal amount of an OTC Derivative contract by a specified percentage dependent on the nature and residual maturity of the contract.
            Private Equity Fund A Fund is a Private Equity Fund if it;
            (a) invests in unlisted companies, by means of Shares, convertible debt or other instruments carrying equity participation rights or reward; or
            (b) participates in management buy-outs or buy-ins.
            Professional Client
            (1) An Authorised Person may classify a Person as a Professional Client only if such a Person:
            (a) either:
            (i) has net assets of at least $500,000 (excluding the value of the primary residence of that Person). Assets held directly or indirectly by that Person may be included; or
            (ii) is, or has been in the previous 2 years:
            (A) an Employee of the Authorised Person; or
            (B) an Employee in a professional position in another Authorised Person;
            (b) subject to (2), appears, on reasonable grounds, to the Authorised Person , to have sufficient experience and understanding of relevant financial markets, products or transactions and any associated risks following the analysis specified in the COB rules; and
            (c) has not elected to be treated as a Retail Client in accordance with the COB rules.
            (2) An Authorised Person may consider the following Persons as possessing the necessary degree of experience and understanding of relevant financial markets, products or transactions without having to undertake the analysis referred to in (1)(b):
            (a) a Collective Investment Fund or a regulated pension fund;
            (b) a Financial Institution or the management company of a regulated pension fund;
            (c) a properly constituted government, government agency, central bank or other national monetary authority of any country or jurisdiction;
            (d) a public authority or state investment body;
            (e) a supranational organisation whose members are either countries, central banks or national monetary authorities;
            (f) a Recognised Body, regulated exchange or regulated clearing house;
            (g) a Body Corporate whose Shares are listed or admitted to trading on any regulated exchange of an IOSCO member country;
            (h) a Body Corporate which has called up Share capital of at least $10,000,000; or
            (i) any other institutional investor whose main activity is to invest in Financial Instruments, including an entity dedicated to the securitisation of assets or other financial transactions.
            (3) A personal investment vehicle may be classified as a Professional Client without having to meet the requirements in (1)(a)(i) if it is established and operated for the sole purpose of facilitating the management of the investment portfolio of an existing Professional Client.
            Profit Equalisation Reserve Represents the amount appropriated out of the Mudaraba income, before allocating the Mudarib's share, in order to maintain a certain level of investment returns for investment account holders and to increase owners' equity.
            Profit Sharing Investment Account (PSIA) An account or portfolio managed:
            (a) in relation to property of any kind, including the currency of any country or territory, held for or within the account or portfolio;
            (b) in accordance with Shari'a and held out as such; and
            (c) under the term of an agreement whereby:
            (i) the investor agrees to share any profit with the manager of the account or portfolio in accordance with a predetermined specified percentage or ratio; and
            (ii) the investor agrees that he alone will bear any losses in the absence of negligence or breach of contract.
            Providing Credit Means the Regulated Activity specified in paragraph 48 of Schedule 1 of the FSMR.
            Providing Custody Means the Regulated Activity specified in paragraph 43 of Schedule 1 of the FSMR.
            Providing Information in Relation to a Specified Benchmark Means the Regulated Activity specified in paragraph 68(1)(a) of Schedule 1of the FSMR.
            Providing Money Services Means the Regulated Activity specified in paragraph 52 of Schedule 1 of the FSMR.
            PSE Public sector enterprise.
            Public Listed Company Has the meaning given in the Companies Regulations.
            Qualifying Holding Any holding in the capital of a non-financial Undertaking of which the Authorised Person is a Controller.
            Recognised Body Means a Recognised Investment Exchange and a Recognised Clearing House.
            Recognised Clearing House Means a clearing house which provides Clearing Services in the ADGM in relation to which a recognition order is in force under Part 12 of FSMR.
            Recognised Investment Exchange Means an investment exchange in relation to which a recognition order is in force under Part 12 of FSMR.
            Regulated Activity An activity constitutes a Regulated Activity under these Rules where:
            (1) It is one of the activities below:
            (a) Accepting Deposits;
            (b) Providing Credit;
            (c) Providing Money Services;
            (d) Dealing in Investments as Principal;
            (e) Dealing in Investments as Agent;
            (f) Arranging Credit;
            (g) Arranging Deals in Investments;
            (h) Managing Assets;
            (i) Advising on Investments or Credit;
            (j) Managing a Collective Investment Fund;
            (k) Providing Custody;
            (l) Arranging Custody;
            (m) Effecting Contracts of Insurance;
            (n) Carrying Out Contracts of Insurance as Principal;
            (o) Insurance Intermediation;
            (p) Insurance Management;
            (q) Managing a Profit Sharing Investment Account;
            (r) Acting as the Administrator of a Collective Investment Fund;
            (s) Acting as the Trustee of an Investment Trust;
            (t) Operating a Representative Office;
            (u) Operating a Credit Rating Agency;
            (v) Administering a Specified Benchmark;
            (w) Operating a Multilateral Trading Facility or Organised Trading Facility;
            (x) Providing Information in Relation to a Specified Benchmark; and
            (y) Shari'a-compliant Regulated Activities; and
            (2) Such activity prescribed in (2) is carried on By Way of Business.
            Regulator Means the Regulated Activities regulator of ADGM.
            Related Person Has the meaning given in Rule 4.4.6.
            Relevant Entity Means any of the following:
            (a) a Financial Institution; or
            (b) a financial Holding Company.
            Representative Office A Person carrying on in the ADGM the Regulated Activity of Operating a Representative Office for which it has authorisation under its Financial Services Permission.
            Re-securitisation Has the meaning given in Section 4.14.
            Re-securitisation Exposure Has the meaning given in Section 4.14.2(c).
            Restricted PSIA (PSIAr) A PSIA in respect of the investment account holder imposes certain restrictions as to where, how and for what purpose his funds are to be invested.
            Retail Client Means a Client specified under COBS 2.3.
            Revolving Securitisation A Traditional or Synthetic Securitisation in which the specified items consist of revolving assets such as loan facilities or credit card balances which permit borrowers to vary the drawn amount within an agreed limit, or the scheme itself is revolving.
            Rho The measure of an Option's sensitivity to a change in interest rates.
            Risk Capital Requirement Has the meaning given in Section 3.8.
            RWA Risk weighted assets.
            SE Exposure The Exposure value or amount for a securitisation Exposure.
            Securities Underwriting Capital Requirement A component of the Market Risk Capital Requirement defined in Section 5.10.
            Security For the purposes of these Rules, a Security is:
            (a) a Share;
            (b) a Debenture;
            (c) a Warrant;
            (d) a Certificate;
            (e) a Unit;
            (f) a Structured Product; or
            (g) a Derivative.
            Servicer A Person that administers the securitised items.
            SFT Securities Financing Transactions, such as repo, reverse repo, security lending and borrowing, and margin lending transactions.
            Share Means a share or stock in the capital of any Body Corporate or any unincorporated body but excludes:
            (a) an instrument creating or acknowledging indebtedness for, or for Money borrowed to defray, the consideration payable under a contract for the supply of goods or services;
            (b) a cheque or other bill of exchange, a banker's draft or a letter of credit (but not a bill of exchange accepted by a banker);
            (c) a banknote, a statement showing a balance on a bank account, or a lease or other disposition of property; and
            (d) any Contract of Insurance.
            Shari'a-compliant Regulated Activities Means the Regulated Activities specified in paragraph 64 of Schedule 1 of the FSMR.
            Simplified Approach An alternative application of the provisions of Chapter 4 for an Authorised Person in Category 2 and 3A, as described in Sections 4.7 and A4.12.
            Special Purpose Entity (SPE) A corporation, trust, or other entity organised for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPE, and the structure of which is intended to isolate the SPE from the Credit Risk of an Originator or seller of Exposures. SPEs are commonly used as financing vehicles in which Exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust.
            Specific Risk The risk that losses on an Authorised Person's net long or short position in an individual equity or Security may arise from a negative or positive price movement of that equity or Security relative to the relevant market generally.
            Sponsor An Authorised Person that repackages third party assets directly into a securitisation scheme. Where an Authorised Person repackages non-investment Grade third party assets, it may fall within the definition of an Originator unless it originates or repackages no more than 10% of the scheme's total assets.
            Standardised Approach The manner in which the Operational Risk Capital Requirement is calculated in accordance with Sections 6.11 and A6.2.
            Structured Product Means an instrument comprising rights under a contract where:
            (a) the gain or loss of each party to the contract is ultimately determined by reference to the fluctuations in the value or price of property of any description, an index, interest rate, exchange rate or a combination of any of these as specified for that purpose in the contract ("the underlying factor") and is not leveraged upon such fluctuations;
            (b) the gain or loss of each party is wholly settled by cash or set-off between the parties;
            (c) each party is not exposed to any contingent liabilities to any other Counterparty; and
            (d) there is readily available public information in relation to the underlying factor;
            but excludes any rights under an instrument:
            (e) where one or more of the parties takes delivery of any property to which the contract relates;
            (f) which is a Debenture; or
            (g) which is a Contract of Insurance.
            Subsidiary Has the meaning given to the term in the Companies Regulations.
            Supervisory Review and Evaluation Process (SREP) The supervisory review and evaluation process prescribed in Chapter 10.
            Synthetic Securitisation Has the meaning given in Rule 4.14.2(b).
            T Trade date, which is the date on which a transaction is entered into.
            T1 Tier 1.
            T1 Capital Has the meaning given in Rule 3.12.1.
            T2 Tier 2.
            T2 Capital Has the meaning given in Rule 3.15.1.
            Theta The ratio of the change in an Option price to the decrease in time to expiration. Theta can also be referred to as time decay.
            Total Return Swap A contract under which two parties exchange their positive or negative returns on a notional amount of a reference asset for a specified period of time.
            Trading Book The positions and Exposures including on and off-balance sheet items eligible for inclusion in the Trading Book, as described in Section 2.2.
            Traditional Securitisation Has the meaning given in Rule 4.14.2(a).
            Trust Administration Services The provision of Trust Administration Services include:
            (a) the keeping of Accounting Records relating to an express trust and the preparation of trust accounts;
            (b) the preparation of trust instruments or other documents relating to an express trust;
            (c) the management and administration of trust assets subject to an express trust;
            (d) dealing with trust assets subject to an express trust, including the investment, transfer and disposal of such assets;
            (e) the distribution of trust assets subject to an express trust; and
            (f) the payment of expenses or remuneration out of an express trust.
            Trust Deed A deed entered into by a Fund Manager and the Trustee to create an Investment Trust.
            Trustee Means the Person, described under FUNDS 12.3.4 who is appointed under a Trust Deed as the trustee of an Investment Trust to hold the Investment Trust's Property on trust for the Unitholders and to oversee the operation of the Investment Trust and, in relation to a Domestic Fund, is authorised under its Financial Services Permission to Act as the Trustee of the Investment Trust.
            Undertaking Means:
            (a) a Body Corporate or Partnership; or
            (b) an unincorporated association carrying on a trade or business, with or without a view to profit.
            Underwriting An arrangement under which a party agrees to buy, before issue, a specified quantity of Securities in an issue of Securities on a given date at a given price, if no other party has purchased or acquired them.
            Unit Means a unit in or a Share representing the rights or interests of a Unitholder in a Fund.
            Unitholder Means any holder of a Unit in the Fund or of any right or interest in such a Unit, otherwise known as a 'participant' and whose name is entered on the Fund's register in relation to that Unit.
            Unrestricted PSIA (PSIAu) A PSIA in respect of which the investment account holder authorises the Authorised Person to invest the account holder's funds in a manner which the Authorised Person deems appropriate without laying down any restrictions as to where, how and for what purpose the funds should be invested.
            Unsettled Transaction A transaction where delivery of an instrument is due to take place against the receipt of cash but remains outstanding.
            VaR Value at risk.
            Vega The measure of the sensitivity of the value of the Option to a change in the volatility of the underlying asset.
            Walkaway Clause A provision which permits a non-defaulting party to make payments, or no payments at all, to the estate of the defaulter, even if the defaulter is a net creditor.
            Warrant Means an instrument that confers on the holder a right entitling the holder to an unissued Share, Debenture or Unit.

        • PRU 1.3 PRU 1.3 Categories of Authorised Persons

          • Guidance

            1. In these Rules, Authorised Persons are assigned "Categories" to create a clear framework for determining the provisions of PRU applying to each Authorised Person. The Rules in this Section enable an Authorised Person to determine into which Category it falls.
            2. The table in A1.1 of App1 sets out the categorisation process diagrammatically. In that table, an emboldened box indicates the Regulated Activity that is determinative of the Category into which an Authorised Person falls. An Authorised Person may, if authorised under its Financial Services Permission to do so, conduct any number of Regulated Activities specified under any lower Category than the one that applies to the Authorised Person in accordance with this Section. (For this purpose Category 5 is considered to be equivalent to Category 1.) For example, a Category 1 firm could conduct any one or more of the Regulated Activities specified under Categories 2, 3A, 3B, 3C or 4 (if authorised to do so). However, a Category 4 firm may only conduct the Regulated Activities listed under Category 4, given that is the Category for which it is authorised.

          • Category 1

            • PRU 1.3.1 PRU 1.3.1

              An Authorised Person is in Category 1 if:

              (a) its Financial Services Permission authorises it to carry on one or more of the Regulated Activities of Accepting Deposits or Managing a Profit Sharing Investment Account which is a PSIAu; and
              (b) it does not meet the criteria of Category 5.

              • Guidance

                A Category 1 Authorised Person may be authorised to conduct other Regulated Activities, but it is the authorisation for Accepting Deposits or Managing a Profit Sharing Investment Account which is a PSIAu that is determinative of its belonging to Category 1.

          • Category 2

            • Guidance

              1. A Category 2 Authorised Person may be authorised to conduct other Regulated Activities, but it is the authorisation for Dealing in Investments as Principal (not only as a Matched Principal) or Providing Credit, and the absence of authorisation for the activities specified in Rule 1.3.1, that are determinative of its belonging to Category 2.
              2. Where the dealing activities of a firm are limited to acting only as Matched Principal, the activities fall in the scope of Category 3A in accordance with Rule 1.3.3(1). A definition of "Matched Principal" is in Rule 1.3.3(2).

            • PRU 1.3.2

              An Authorised Person is in Category 2 if:

              (a) its Financial Services Permission authorises it to carry on one or both of the Regulated Activities of Providing Credit or Dealing in Investments as Principal (not as Matched Principal);
              (b) its dealing activities are not limited in scope as provided in Rule 1.3.3(1)(a)(i); and
              (c) it does not meet the criteria of Categories 1 or 5.

          • Category 3A

            • Guidance

              A Category 3A Authorised Person may be authorised to conduct other Regulated Activities, but it is the authorisation for Dealing in Investments as Agent and the absence of authorisation for the activities specified in Rules 1.3.1 and 1.3.2 that are determinative of its belonging to Category 3A. Provided that an Authorised Person carries out the Regulated Activity of Dealing in Investments as Agent in a manner that is wholly incidental to the activity of Managing an Investment Fund or Managing Assets, the Authorised Person shall be regarded as falling within Category 3C.

            • PRU 1.3.3

              (1) An Authorised Person is in Category 3A if:
              (a) its Financial Services Permission authorises it to carry on one or more of the Regulated Activities of:
              (i) Dealing in Investments as Principal (where it does so only as a Matched Principal); or
              (ii) Dealing in Investments as Agent; and
              (b) it does not meet the criteria of Categories 1, 2 or 5.
              (2) For the purposes of these Rules, an Authorised Person Deals in Investments as a "Matched Principal" if:
              (a) it enters into transactions as a principal only for the purpose of fulfilling its Clients' orders;
              (b) it holds positions for its own account ("positions") only as a result of a failure to match Clients' orders;
              (c) the total market value of the positions it holds is no more than 15% of the Firm's Tier 1 Capital Resources; and
              (d) the positions are incidental in nature and are strictly limited to the time reasonably required to carry out a transaction of that nature.

          • Category 3B

            • PRU 1.3.4 PRU 1.3.4

              An Authorised Person is in Category 3B if:

              (a) its Financial Services Permission authorises it to carry on one or more of the Regulated Activities of:
              (i) Providing Custody (where it does so for a Fund); or
              (ii) Acting as the Trustee of an Investment Trust; and
              (b) it does not meet the criteria of Categories 1, 2, 3A or 5.

              • Guidance

                A Category 3B Authorised Person may be authorised to conduct other Regulated Activities, but it is the authorisation for Providing Custody for a Fund or Acting as Trustee of a Fund, and the absence of authorisation for the activities specified in Rules 1.3.1, 1.3.2 and 1.3.3 that are determinative of its belonging to Category 3B.

          • Category 3C

            • PRU 1.3.5 PRU 1.3.5

              An Authorised Person is in Category 3C if:

              (a) its Financial Services Permission authorises it to carry on one or more of the Regulated Activities of:
              (i) Managing Assets;
              (ii) Managing a Collective Investment Fund;
              (iii) Providing Custody (where it does so other than for a Fund);
              (iv) Managing a Profit Sharing Investment Account which is a PSIAr;
              (v) Providing Trust Services (where it is acting as trustee in respect of at least one express trust); or
              (vi) Providing Money Services; and
              (b) it does not meet the criteria of Categories 1, 2, 3A, 3B or 5.

              • Guidance

                A Category 3C Authorised Person may be authorised to conduct other Regulated Activities, but it is the authorisation for Managing Assets, Managing a Collective Investment Fund, Providing Custody other than for a Fund or Managing a Profit Sharing Investment Account which is a PSIAr, Providing Trust Services (where it is acting as a trustee in respect of at least one express trust) or Providing Money Services, and the absence of authorisation for the activities specified in Rules 1.3.1, 1.3.2, 1.3.3 and 1.3.4 that are determinative of its belonging to Category 3C.

          • Category 4

            • PRU 1.3.6 PRU 1.3.6

              An Authorised Person is in Category 4 if:

              (a) its Financial Services Permission authorises it to carry on one or more of the Regulated Activities of Arranging Credit, Arranging Deals in Investments, Advising on Investments or Credit, Arranging Custody, Insurance Intermediation, Providing Trust Services (where it is not acting as trustee in respect of an express trust), Insurance Management, Acting as the Administrator of a Collective Investment Fund, Administering a Specified Benchmark, Operating a Credit Rating Agency, Operating a Multilateral Trading Facility or Organised Trading Facility, Operating a Representative Office or Providing Information in Relation to a Specified Benchmark; and
              (b) it does not meet the criteria of Categories 1, 2, 3A, 3B, 3C or 5.

              • Guidance

                An Authorised Person in Category 4 may not be authorised to conduct any other Regulated Activity beyond those listed in Rule 1.3.6(a); if it were so authorised it would belong to another Category.

          • Category 5

            • PRU 1.3.7

              An Authorised Person is in Category 5 if it:

              (a) is an Islamic Financial Institution; and
              (b) Manages a Profit Sharing Invesment Account which is a PSIAu.

            • PRU 1.3.8 PRU 1.3.8

              Authorised Persons which carry out Regulated Activities other than and in addition to Islamic Financial Business will be required to comply with the relevant capital requirements which apply to those Regulated Activities.

              • Guidance

                Authorised Persons in Categories 1 to 4 may also carry out Islamic Financial Business, but only those Authorised Persons in Categories 1 or 5 may Manage a Profit Sharing Investment Account which is a PSIAu. They will not fall within Category 5 unless the whole of the business is conducted in accordance with Shari'a and they Manage a Profit Sharing Investment Account which is a PSIAu, carry on Islamic Financial Business or carry out Shari'a-compliant Regulated Activities.

      • PRU 2 PRU 2 GENERAL REQUIREMENTS

        • Introduction

          • Guidance

            This Chapter details the threshold conditions for the mandatory maintenance of a Trading Book, periodic prudential reporting requirements to the Regulator, and guidance on prudent valuation practices. App2 includes detailed Rules on the positions to be included in the Trading Book, the valuation of such positions, prudent valuation practices and associated issues related to the identification and treatment of Trading Book positions. App2 also specifies the Regulator's expectations with regard to the need for a documented Trading Book policy and risk management systems and controls for the Trading Book. App2 also presents in a tabulated format, detailed specifications on periodic prudential reporting requirements for different categories of Authorised Persons.

        • PRU 2.1 PRU 2.1 Application

          • PRU 2.1.1

            This Chapter applies to an Authorised Person in any Category.

        • PRU 2.2 PRU 2.2 Trading Book

          • PRU 2.2.1

            An Authorised Person must have a Trading Book if:

            (a) it has positions that must be included in a Trading Book in accordance with Section A2.1 of App2;
            (b) those positions are held with trading intent in accordance with Rule A2.1.5; and
            (c) the total value of the positions eligible for inclusion in the Trading Book pursuant to (a) and (b):
            (i) normally exceeds $15 million or 5% of its combined on and off-balance sheet positions; or
            (ii) has exceeded $20 million or 6% of its combined on- and off-balance sheet positions at any time in the preceding 12 month period.

          • PRU 2.2.2

            An Authorised Person that must have a Trading Book in accordance with Rule 2.2.1 must:

            (a) comply with the requirements of Section A2.1 of App2; and
            (b) differentiate its business between Trading Book activity and Non-Trading Book activity on a consistent basis.

          • PRU 2.2.3

            An Authorised Person which has a Trading Book must have adequate systems and controls to:

            (a) monitor the size of its Trading Book; and
            (b) ensure that positions are included consistently in its Trading Book and Non-Trading Book so that:
            (i) the inclusion of hedging positions in the Trading Book or the Non-Trading Book at all times reflects the intent of the Authorised Person in holding the position; and
            (ii) adequate records are made if positions are transferred between Trading and Non-Trading Books so that the transfers may be identified.

        • PRU 2.3 PRU 2.3 Reporting

          • PRU 2.3.1

            (1) An Authorised Person must comply with the accounting and prudential reporting requirements set out in this Chapter and PRU which apply to it.
            (2) The Regulator may impose additional reporting requirements on an Authorised Person.

          • PRU 2.3.2 PRU 2.3.2

            An Authorised Person must, subject to Rule 2.3.3:

            (a) prepare its returns in accordance with the Rules in this Chapter, the instructional guidelines in PRU and elsewhere, and the requirements of the Electronic Prudential Reporting System (EPRS) of the Regulator including the frequency of submission detailed therein; and
            (b) submit the returns to the Regulator using EPRS.

            • Guidance

              The returns and instructional guidelines are provided in these Rules and EPRS.

          • PRU 2.3.3

            The Regulator may by way of a written notice direct an Authorised Person to submit its returns in a form, manner or frequency other than as prescribed in Rule 2.3.2. An Authorised Person must continue to submit its returns in accordance with this direction until the Regulator by way of written notice directs otherwise.

          • PRU 2.3.4

            (1) In relation to an annual return the form must be certified through EPRS by the SEO, a Director or a Partner of the Authorised Person.
            (2) In relation to a quarterly or a monthly return the form must be certified through EPRS by an Officer of the Authorised Person which has previously been identified by the Authorised Person as having the authority to provide the certification for that purpose.

          • PRU 2.3.5

            If the Regulator notifies an Authorised Person, or the Authorised Person itself forms the view, that a return that has been submitted to the Regulator appears to be inaccurate or incomplete, the Authorised Person must consider the matter and within a reasonable time it must correct any inaccuracies and make good any omissions, and re-submit the relevant parts of the return.

          • PRU 2.3.6

            (1) An Authorised Person must use the appropriate forms set out in EPRS for the preparation and submission of returns which are required under these Rules.
            (2) All returns must be completed in dollars ($).

          • PRU 2.3.7

            (1) An Authorised Person must submit to the Regulator annual returns, within four months of the end of the financial year of the Authorised Person.
            (2) An Authorised Person must submit to the Regulator quarterly returns, in the applicable format prescribed by the Regulator, within one month of the end of the reporting period to which the return relates.
            (3) An Authorised Person must submit to the Regulator monthly returns, in the applicable format prescribed by the Regulator, within fifteen days of the end of the reporting period to which the return relates.

          • PRU 2.3.8 PRU 2.3.8

            (1) When a return which is required under these Rules is not submitted on or before the due date or within the prescribed period, such non-submission incurs an administrative fee of $1,000.
            (2) Nothing in this Rule limits the right of the Regulator to take any other action.

            • Guidance

              If a return is not submitted by the date on which it becomes due, the Person is in breach of a Rule and the Regulator is entitled to take action including, but not limited to, taking steps to withdraw authorisation to conduct Regulated Activities.

        • PRU 2.4 PRU 2.4 Prudent valuation practices

          • Guidance

            1. This Section and related Section A2.5 in App2 provide Authorised Persons with Guidance on prudent valuation for positions that are accounted for at fair value, whether they are in the Trading Book or in the Non-Trading Book (also known as the banking book).
            2. A framework for prudent valuation practices should at a minimum include adequate systems and controls and valuation methodologies. The Regulator's expectations in this regard are set out in Section A2.5 App2.
            3. The Guidance is especially important for positions without actual market prices or observable inputs to valuation, as well as less liquid positions which raise supervisory concerns about prudent valuation. The Guidance is not intended to require Authorised Persons to change valuation procedures for financial reporting purposes.
            4. The Regulator will assess an Authorised Person's valuation procedures for consistency with the Guidance. The Regulator may impose a valuation adjustment if there is a material degree of inconsistency between the Authorised Person's valuation procedures and the Guidance.

      • PRU 3 PRU 3 CAPITAL AND LEVERAGE

        • Introduction

          • Guidance

            1. This Chapter deals with all aspects of prudential requirements relating to the capital adequacy of Authorised Persons, in terms of both quantity and quality, and, where appropriate, the maintenance of liquid assets. (Chapter 9 covers more generally the related prudential topic of liquidity, the ability of an Authorised Person to meet its financial obligations as they fall due.) The Chapter outlines the minimum capital requirements that an Authorised Person should meet, consistent with Pillar 1 of the Basel Accord, and aims to ensure that an Authorised Person maintains adequate capital resources to support the risks associated with its activities and that it can fully absorb unexpected losses at any time. A summary of the minimum capital requirements is given in App 3.2.
            2. This Chapter also includes provisions forming part of the framework for the assessment by the Regulator, under Pillar 2 of the Basel Accord, of the capital adequacy of an Authorised Person, with further detail given in Chapter 10. The disclosure requirements placed upon an Authorised Person under Pillar 3 of the Basel Accord are covered in Chapter 11.
            3. Part 1 of this Chapter sets out the application provisions. Part 2 of this Chapter outlines the fundamental capital adequacy obligations and the systems and controls requirements to ensure compliance with this critical regulatory obligation. Part 3 of this Chapter and the related App4 include the Rules and associated guidance for the calculation of minimum Capital Requirement for different Categories of Authorised Persons. Additionally, this Part also includes requirements for the maintenance of liquid assets by firms subject to the Expenditure Based Capital Minimum. Part 4 of this Chapter specifies detailed Rules on the calculation of Capital Resources of an Authorised Person, including detailed Rules on the eligibility criteria for different components of Capital Resources which correspond to varying levels of quality. This part also specifies the requirements in respect of the Capital Conservation Buffer and associated obligations.
            4. App3 provides guidance on various aspects of stress and scenario testing which are to be considered by an Authorised Person to assist it in complying effectively with the Rules in this Chapter.

        • PRU PART 1 PRU PART 1 — Application

          • PRU 3.1 PRU 3.1 Application

            • PRU 3.1.1 PRU 3.1.1

              The Parts, Sections and Rules in this Chapter apply to an Authorised Person as stated in those provisions.

              • Guidance

                1. Part 2 (Basic Requirements) of this Chapter imposes a number of basic requirements, including the following core requirements:
                a. for an Authorised Person in Category 1, 2, 3A or 5, the components of its Capital Resources should at all times equal or exceed the thresholds specified in Section 3.16; and
                b. for an Authorised Person in Category 3B, 3C or 4, its Capital Resources should at all times equal or exceed the amount of its Capital Requirement.
                2. In particular, note that:
                a. Part 3 (Calculating Capital Requirements) applies to all firms, but with differentiated calculations for the Capital Requirement for the various Categories of Authorised Persons, as prescribed in Sections 3.4 and 3.6;
                b. Part 4 (Calculating Capital Resources) applies to all firms; and
                c. within Part 4, an exemption from the calculation of T2 Capital in relation to firms authorised to Manage a Profit Sharing Investment Account which is a PSIAu is prescribed in Rule 3.12.9.

        • PRU PART 2 PRU PART 2 — Basic Requirements

          • PRU 3.2 PRU 3.2 Application

            • PRU 3.2.1

              In this Section the Rules apply to an Authorised Person in any Category as follows:

              (a) Rule 3.2.2 applies to an Authorised Person operating as a Branch; and
              (b) Rules 3.2.3 to 3.2.5 apply to an Authorised Person operating as a Domestic Firm

            • Branches – general requirements

              • PRU 3.2.2

                An Authorised Person that is a Branch must:

                (a) ensure that it has and maintains, at all times, liquid assets and access to financial resources which are adequate in relation to the nature, size and complexity of its business both as to amount and quality to ensure that there is no significant risk that liabilities cannot be met as they fall due;
                (b) ensure that it complies at all times with its Home State Regulator's prudential requirements;
                (c) submit to the Regulator a copy of every capital adequacy summary report and Leverage Ratio report submitted to its Home State Regulator within ten business days of the due date for submission to that regulator; and
                (d) in the event of any anticipated or actual breach of any prudential requirements set by its Home State Regulator, notify the Regulator immediately with any relevant documents.

            • Domestic Firms – adequate capital resources

              • PRU 3.2.3 PRU 3.2.3

                An Authorised Person that is a Domestic Firm must have, at all times, Capital Resources which equal or exceed the amount of its Capital Requirement.

                • Guidance

                  The specific Capital Requirements for the various Categories of Authorised Persons that are Domestic Firms are dealt with in Sections 3.4 and 3.6.

            • Domestic Firms – maintaining capital resources

              • PRU 3.2.4 PRU 3.2.4

                An Authorised Person that is a Domestic Firm must:

                (a) have and maintain, at all times, Capital Resources of the types and amounts specified in, and calculated in accordance with, these Rules;
                (b) ensure that it maintains capital and liquid assets in addition to the requirement in (a) which are adequate in relation to the nature, size and complexity of its business to ensure that there is no significant risk that liabilities cannot be met as they fall due.

                • Guidance

                  1. These Rules do not prevent Authorised Persons from holding Capital Resources in excess of or applying stricter measures than required by these Rules.
                  2. For the purposes of Rule 3.2.4, an Authorised Person's Governing Body should assess whether the Capital Resources which are required by the Regulator as set out in these Rules are adequate in relation to the Authorised Person's specific business model and risk profile. Additional resources should be maintained by the Authorised Person where its Governing Body has considered that the required Capital Resources do not adequately reflect the nature and risks of the Authorised Person's business.
                  3. The liabilities referred to in Rule 3.2.4(b) include an Authorised Person's contingent and prospective liabilities, such as liabilities arising from a change in business strategy or claims made against the Authorised Person, but not liabilities that might arise from prospective transactions which the Authorised Person could avoid, for example by ceasing its operations. Liabilities from prospective transactions refers to the potential liabilities which can be avoided by adequate risk management, risk transfer or avoiding the transaction completely. This refers to any prospective transaction, for example, lending Money to a borrower or entering into a contract for the provision of services by a service provider.
                  4. An Authorised Person subject to the requirements in Chapter 10 may be required to meet an Individual Capital Requirement imposed under those Rules following the Pillar 2 review process, in addition to the Capital Requirement calculated under Pillar 1.

            • Domestic Firms – systems and controls

              • PRU 3.2.5 PRU 3.2.5

                (1) An Authorised Person must have systems and controls to enable it to determine and monitor:
                (a) its Capital Requirement; and
                (b) whether the amount of its Capital Resources is, and is likely to remain, adequate at all times to ensure compliance with the applicable capital adequacy requirements.
                (2) Such systems and controls must be capable of contributing to an analysis of:
                (a) realistic scenarios which are relevant to the circumstances of the Authorised Person; and
                (b) the effects on the Capital Requirement of the Authorised Person and on its Capital Resources if those scenarios occurred.
                (3) An Authorised Person must notify the Regulator immediately and confirm in writing any breach, or expected breach, of any of the provisions of this Chapter by the Authorised Person.

                • Guidance

                  For the purposes of Part 2, an Authorised Person is required to have appropriate systems and controls in place to enable it to be certain that it has adequate Capital Resources to meet the requirements in Part 4 on capital adequacy at all times and to allow it to demonstrate that at any particular time if required to do so by the Regulator. Where through the operation of those systems and controls an Authorised Person forms the view that it does not currently or is not likely to be able to satisfy the requirements of Rule 3.2.3 in future, that Authorised Person is required to immediately inform the Regulator in accordance with Rule 3.2.5.

                  • Guidance

                    1. App3 provides Guidance on the nature and type of stress and scenario testing that Authorised Persons should be frequently undertaking to support their view that they have adequate financial resources to meet their obligations.
                    2. The requirements in this Chapter apply to Authorised Persons on a solo basis. An Authorised Person may also be subject to Capital Resources requirements at a Group level. Group requirements are addressed in Chapter 8 of these Rules.

        • PRU PART 3 PRU PART 3 — Calculating the Capital Requirements

          • PRU 3.3 PRU 3.3 Base Capital Requirement

            • PRU 3.3.1

              This Section applies to an Authorised Person in any Category.

            • Guidance

              The Base Capital Requirement is a component of the calculation of the Capital Requirement under Sections 3.4 and 3.6.

            • PRU 3.3.2

              The table below sets out the Base Capital Requirement for each Category of Authorised Persons.
              Category Base Capital Requirement (US $)
              1 10 million
              2 2 million
              3A 500,000
              3B 4 million
              3C 250,000, except where an Authorised Person has a Financial Services Permission only to carry out the Regulated Activity of Managing a Collective Investment Fund, in which case the Base Capital Requirement is the higher of:
              a) 150,000 if the Authorised Person manages a Public Fund or any other type of fund that is available to retail customers; or
              b) 50,000 otherwise.
              4 10,000, except where an Authorised Person has a Financial Services Permission to carry out the Regulated Activity of Operating a Private Financing Platform and holds Client Assets, in which case the Base Capital Requirement is 150,000.
              5 10 million

               

            • PRU 3.3.3

              An Authorised Person must have Common Equity Tier 1 Capital (CET1 Capital), as defined in Section 3.10, of not less than its relevant Base Capital Requirement at the time that it obtains authorisation and at all times thereafter.

          • PRU 3.4 PRU 3.4 Capital Requirements for Categories 1, 2, 3A and 5

            • PRU 3.4.1

              This Section applies to an Authorised Person in Category 1, 2, 3A or 5.

            • PRU 3.4.2

              (1) The Capital Requirement for an Authorised Person is calculated, subject to (2), as the higher of:
              (a) the applicable Base Capital Requirement as set out in Section 3.3; or
              (b) its Risk Capital Requirement as set out in Section 3.5
              (2) Where 1(b) is the higher and the Authorised Person has an ICR imposed on it then the Capital Requirement is its ICR plus Risk Capital Requirement.

          • PRU 3.5 PRU 3.5 Risk Capital Requirement

            • PRU 3.5.1

              An Authorised Person must calculate its Risk Capital Requirement as the sum of the following:

              (a) the Credit Risk Capital Requirement (CRCOM);
              (b) the Market Risk Capital Requirement;
              (c) the Operational Risk Capital Requirement;
              (d) the Displaced Commercial Risk Capital Requirement, where applicable; and
              (e) the CVA Risk Capital Requirement.

            • CRCOM

              • PRU 3.5.2 PRU 3.5.2

                An Authorised Person must calculate its Credit Risk Capital Requirement in accordance with the applicable Rules in Chapter 4.

                • Guidance

                  1. Detailed Rules and Guidance in respect of the CRCOM are specified in Chapter 4. The CRCOM is based on the risk weighted assets (RWA) for all Credit Risk Exposures, securitisation Exposures and Counterparty Risk Exposures.
                  2. Rules and Guidance in respect of calculating the CRCOM for Islamic Contracts are contained in the IFR Rules.

            • Market Risk Capital Requirement

              • PRU 3.5.3 PRU 3.5.3

                An Authorised Person must calculate its Market Risk Capital Requirement in accordance with the applicable Rules in Chapter 5.

                • Guidance

                  1. Detailed Rules and Guidance in respect of the Market Risk Capital Requirement and each of its components are contained in Chapter 5.
                  2. Rules and Guidance in respect of calculating Market Risk for Islamic Contracts are contained in the IFR rules.

            • Operational Risk Capital Requirement

              • PRU 3.5.4

                An Authorised Person must calculate its Operational Risk Capital Requirement in accordance with the applicable Rules in Chapter 6.

            • Displaced Commercial Risk Capital Requirement

              • PRU 3.5.5

                An Authorised Person Managing a Profit Sharing Investment Account which is a PSIAu must calculate its Displaced Commercial Risk Capital Requirement in accordance with the IFR rules.

            • CVA Risk Capital Requirement

              • PRU 3.5.6 PRU 3.5.6

                An Authorised Person must calculate its CVA Risk Capital Requirement in accordance with the applicable Rules in App5.

                • Guidance

                  1. An Authorised Person should refer to Chapters 4, 5 and 6 to determine whether it is required to calculate a Credit Risk Capital Requirement (also referred to in these Rules as CRCOM), a Market Risk Capital Requirement or an Operational Risk Capital Requirement, respectively.
                  2. The Displaced Commercial Risk Capital Requirement will only apply to an Authorised Person Managing a Profit Sharing Investment Account which is a PSIAu.
                  3. An Authorised Person will also need to consider the relevant provisions in the IFR rules relating to Credit Risk and Market Risk for Islamic Contracts when calculating its CRCOM and Market Risk Capital Requirement.
                  4. Where the Risk Capital Requirement is the binding Capital Requirement calculated using the provisions in Section 3.4 the Regulator may impose an Individual Capital Requirement (see Chapter 10) on an Authorised Person.
                  Such a requirement is additional to the Risk Capital Requirement and is, therefore, a component of the Capital Requirement for the Authorised Person.

            • Total Risk Exposure Amount

              • PRU 3.5.7

                An Authorised Person must calculate its Total Risk Exposure Amount, after taking into account the provisions of Rule 3.5.8, as the sum of:

                (a) the Credit RWA as calculated using Rule 4.8.1(2);
                (b) the Risk Exposure Amount associated with the Market Risk Capital Requirement;
                (c) the Risk Exposure Amount associated with the Operational Risk Capital Requirement;
                (d) the Risk Exposure Amount associated with the CVA Risk Capital Requirement; and
                (e) the Risk Exposure Amount associated with Displaced Commercial Risk Capital Requirement, where applicable, calculated in accordance with IFR Rule 5.4.5.

              • PRU 3.5.8 PRU 3.5.8

                An Authorised Person must multiply the individual capital requirements referred to under points 3.5.7(b) to 3.5.7(e) by a factor of 12.5 in order to determine the Risk Exposure Amounts associated with those elements of the Total Risk Exposure Amount.

                • Guidance

                  The Total Risk Exposure Amount must be calculated by Authorised Persons in Categories 1, 2, 3A and 5 for the determination of appropriate minimum Capital Resources and for reporting purposes.

          • PRU 3.6 PRU 3.6 Capital Requirements for Categories 3B, 3C and 4

            • PRU 3.6.1

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

            • PRU 3.6.2 PRU 3.6.2

              Subject to Section 3.6A, the Capital Requirement for such an Authorised Person is calculated as the higher of:

              (a) the applicable Base Capital Requirement as set out in Section 3.3; or
              (b) the Expenditure Based Capital Minimum as set out in Section 3.7.

              • Guidance

                1. Section 3.6A specifies the Capital Requirements for Authorised Persons undertaking the Regulated Activity of Providing Money Services.
                2. The Expenditure Based Capital Minimum is a component of the calculation of the Capital Requirement under Section 3.6 and is relevant in determining whether the Regulator has to be notified under Rule 3.20.2.

          • PRU 3.6A PRU 3.6A Capital Requirement for Providing Money Services

            • PRU 3.6A.1 PRU 3.6A.1

              Subject to Rule 3.6A.7, an Authorised Person with a Financial Services Permission enabling it to carry on the Regulated Activity of Providing Money Services must calculate the Capital Requirement for each activity it undertakes as the highest of:
              (a) the applicable Base Capital Requirement as set out in Section 3.3; and
              (b)
              (i) where it undertakes currency exchange the Expenditure Based Capital Minimum as set out in Section 3.7;
              (ii) for a Money Remitter:
              (A) the Expenditure Based Capital Minimum as set out in Section 3.7; and
              (B) the Variable Capital Requirement calculated in accordance with Rule 3.6A.2;
              (iii) for a Payment Account Provider the Variable Capital Requirement calculated in accordance with Rule 3.6A.4; or
              (iv) for a Stored Value Provider the Variable Capital Requirement calculated in accordance with Rule 3.6A.6.

              • Guidance

                Where an Authorised Person undertakes two or more of the activities under the Regulated Activity of Providing Money Services at the same time, Rule 3.6A.6 specifies how the overall Capital Requirement for those activities should be calculated.

            • Money Remitters

              • PRU 3.6A.2

                A Money Remitter must calculate its Variable Capital Requirement as the sum of the following:
                (a) 1.25% of the first $10 million of monthly payment volume;
                (b) 0.5% of the next $90 million of monthly payment volume;
                (c) 0.25% of the next $150 million of monthly payment volume; and
                (d) 0.125% of any remaining monthly payment volume.

              • PRU 3.6A.3

                (1) Subject to (2), monthly payment volume for a Money Remitter must be calculated as the total value of funds remitted by the Authorised Person in its preceding financial year divided by twelve.
                (2) Where the Authorised Person has not completed a full financial year following its authorisation, the monthly payment volume must be calculated using the value of realised funds remitted since its authorisation and the projections contained in its business plan for the remainder of the financial year, subject to any adjustments required by the Regulator.

            • Payment Account Providers

              • PRU 3.6A.4

                A Payment Account Provider must calculate its Variable Capital Requirement as the sum of the following:
                (a) 2.5% of the first $10 million of monthly payment volume;
                (b) 1% of the next $90 million of monthly payment volume;
                (c) 0.5% of the next $150 million of monthly payment volume; and
                (d) 0.25% of any remaining monthly payment volume.

              • PRU 3.6A.5 PRU 3.6A.5

                (1) Subject to (2), monthly payment volume for a Payment Account Provider must be calculated as the total value of Payment Transactions executed by the Authorised Person in its preceding financial year divided by twelve.
                (2) Where the Authorised Person has not completed a full financial year following its authorisation, the monthly payment volume must be calculated using the value of realised Payment Transactions since its authorisation and the projections contained in its business plan for the remainder of the financial year, subject to any adjustments required by the Regulator.

                • Guidance

                  1. Under Rules 3.6A.3(2) and 3.6A.5 (2), the projections for the remainder of the year should be informed by the value of realised funds remitted or Payment Transactions following the authorisation of the Authorised Person.
                  2. The monthly payment volume should be split into tranches, with the first $10mn being assigned to the first tranche, the next $90mn to the second tranche and so on
                  3. The portion of the Variable Capital Requirement for each tranche is then calculated by multiplying the monthly payment volume in each tranche by the percentage factor associated with that tranche and then summing those portions to derive the overall Variable Capital Requirement.
                  4. Examples of the calculation of the Variable Capital Requirement follow for an Authorised Person acting as solely a Money Remitter or a Payment Account Provider, in both cases with a monthly payment volume of $120mn.
                   
                  Tranche
                   
                  Monthly payment volume ($mn)
                  Activity
                  Money Remitter Payment Account Provider
                  0 < … ≤ 10 10 1.25% * 10 = 0.125 2.5% * 10 = 0.250
                  10 < … ≤ 100 90 0.5% * 90 = 0.450 1%* 90 = 0.900
                  100 < … ≤ 250 20 0.25% * 20 = 0.050 0.5%* 20 = 0.100
                  … > 250 - - -
                  Total 120  
                  Variable Capital Requirement($mn) 0.625 1.250

            • Stored Value Providers

              • PRU 3.6A.6 PRU 3.6A.6

                (1) Subject to (2), a Stored Value Provider must calculate its Variable Capital Requirement as 2.5% of the average daily outstanding Stored Value, calculated on the first Business Day of each calendar month and using the outstanding Stored Value at the end of each calendar day over the preceding six calendar months.
                (2) Where the Authorised Person has not completed six months of operations following its authorisation, the average daily outstanding Stored Value must be calculated using the daily outstanding Stored Value since its authorisation and the projections contained in its business plan for the remainder of the six-month period, subject to any adjustments required by the Regulator.

                • Guidance

                  Under (2), the projections for the remainder of the six-month period should be informed by the value of realised daily outstanding Stored Values following the authorisation of the Authorised Person.

            • Multiple activities under Providing Money Services

              • PRU 3.6A.7 PRU 3.6A.7

                (1) Subject to (2), an Authorised Person undertaking more than one of the activities of being a Money Remitter, a Payment Account Provider and a Stored Value Issuer must calculate its Total Variable Capital Requirement by summing the Variable Capital Requirements calculated under Rules 3.6A.2, 3.6A.4 and 3.6A.6 as appropriate.
                (2) An Authorised Person acting as both a Money Remitter and a Payment Account Provider must calculate its overall Variable Capital Requirement for the related activities by adding together the monthly payment volumes for those activities and undertaking the calculation in Rule 3.6A.4.

                • Guidance

                  An example of the calculation of the Variable Capital Requirement follows for an Authorised Person acting at the same time as a Money Remitter and a Payment Account Provider, with monthly payment volumes of $90mn and $120mn respectively for these activities, i.e. a total monthly payment volume of $210mn.
                  Tranche Monthly payment volume ($mn) Money Remitter and Payment Account Provider
                  0 < … ≤ 10 10 2.5% * 10 = 0.250
                  10 < … ≤ 100 90 1% * 90 = 0.900
                  100 < … ≤ 250 110 0.5% * 110 = 0.550
                  … > 250 - -
                  Total 210  
                  Variable Capital Requirement ($mn) 1.700

                   

              • PRU 3.6A.8 PRU 3.6A.8

                An Authorised Person undertaking more than one of the activities under Providing Money Services must calculate its Capital Requirement as the highest of, where applicable;
                (i) the Base Capital Requirement as set out in Section 3.3;
                (ii) the Expenditure Based Capital Minimum calculated in accordance with Rule 3.7.1; and
                (iii) the Total Variable Capital Requirement.

                • Guidance

                  The Total Variable Capital Requirement for an Authorised Person is the aggregate of the Variable Capital Requirements calculated in accordance with Rules 3.6A.2, 3.6A.4, 3.6A.6 and 3.6A.7 as appropriate.

          • PRU 3.7 PRU 3.7 Expenditure Based Capital Minimum

            • PRU 3.7.1

              An Authorised Person must calculate its Expenditure Based Capital Minimum as:

              (a) in the case of an Authorised Person which holds Client Assets or Insurance Money, 18/52nds;
              (b) in the case of an Authorised Person in Category 3B or 3C which does not hold Client Assets or Insurance Money, 13/52nds; or
              (c) in the case of an Authorised Person in Category 4, which does not hold Insurance Money, 6/52nds;

              of the Annual Audited Expenditure, calculated in accordance with Rule 3.7.2.

            • Annual Audited Expenditure

              • PRU 3.7.2

                (1) Subject to Rule 3.7.3, Annual Audited Expenditure constitutes all expenses and losses that arise in the Authorised Person's normal course of business in a twelve-month accounting period (excluding exceptional items) which are recorded in the Authorised Person's audited profit and loss account, less the following items (if they are included in the Authorised Person's audited profit and loss account):
                (a) staff bonuses, except to the extent that they are non-discretionary;
                (b) the shares of Employees and Directors in profits, including Share Options, except to the extent that they are non-discretionary;
                (c) other appropriations of profits, except to the extent that they are automatic;
                (d) shared commissions and fees payable that are directly related to commissions and fees receivable, which are included with total revenue;
                (e) fees, brokerage and other charges paid to clearing houses, exchanges and intermediate brokers for the purposes of executing, registering or clearing transactions;
                (f) any expenses for which pre-payments or advances have already been made to the respective claimant (e.g. pre-paid rent, pre-paid communication charges etc.) and deducted from Capital Resources as illiquid assets;
                (g) foreign exchange losses; and
                (h) contributions to charities.
                (2) For the purposes of (1)(c), a management charge must not be treated as an appropriation of profits.

              • PRU 3.7.3

                (1) For the purposes of Rule 3.7.2, an Authorised Person must calculate its relevant Annual Audited Expenditure with reference to the Authorised Person's most recent audited financial statements.
                (2) If the Authorised Person's most recent audited financial statements do not represent a twelve-month accounting period, it must calculate its Annual Audited Expenditure on a pro rata basis so as to produce an equivalent annual amount.
                (3) If an Authorised Person has not completed its first twelve months of business operations, it must calculate its Annual Audited Expenditure based on forecast expenditure as reflected in the budget for the first twelve months of business operations, as submitted with its application for authorisation.
                (4) (a) If an Authorised Person:
                (i) has a material change in its expenditure (whether up or down); or
                (ii) has varied its authorised activities,
                it must recalculate its Annual Audited Expenditure and Expenditure Based Capital Minimum accordingly.
                     (b) Where an Authorised Person has recalculated its Annual Audited Expenditure and Expenditure Based Capital Minimum in accordance with (a), it must submit this recalculation to the Regulator within seven days of its completion and seek agreement/approval from the Regulator. The Regulator may within thirty days of receiving the recalculation object to the recalculation and require the Authorised Person to revise its Expenditure Based Capital Minimum.

            • Liquid assets

              • PRU 3.7.4

                (1) An Authorised Person to which this Section applies must, at all times, maintain an amount of assets which exceeds its Expenditure Based Capital Minimum in the form of liquid assets.
                (2) For the purpose of this Rule, and subject to (3), liquid assets comprise any of the following:
                (a) cash in hand;
                (b) Money deposited with a regulated bank or Deposit-taker which has a short-term credit rating of A1 or P1 (or equivalent) and above from an ECAI;
                (c) demand Deposits with a tenor of one year or less with a bank or Deposit-taker in (b);
                (d) time Deposits with a tenor of one year or less which have an option to redeem the Deposit at any time. In such cases, the Deposit amount eligible to be included as liquid assets must be calculated as net of any costs associated with such early redemption;
                (e) cash receivable from a regulated clearing house and cash Deposits with such clearing houses, other than any fees or contributions to guarantee or reserve funds of such clearing houses; or
                (f) any other asset which may be approved by the Regulator as comprising a liquid asset for the purpose of this Rule.
                (3) For the purpose of this Rule, liquid assets do not include:
                (a) any Investment, asset or Deposit which has been pledged as security or Collateral for any obligations or liabilities assumed by it or by any other third party; or
                (b) cash held in Client Money or Insurance Money accounts.

          • PRU 3.8 PRU 3.8 Application

            • PRU 3.8.1 PRU 3.8.1

              This Part applies to an Authorised Person in any Category.

              • Guidance

                The earlier Section 3.2 imposes a number of basic requirements on an Authorised Person, including requirements to have and maintain a quantity and quality of Capital Resources which would enable it to meet its capital adequacy requirements specified in Chapter 3 of these Rules.

          • PRU 3.9 PRU 3.9 Tier 1 capital

            • PRU 3.9.1 PRU 3.9.1

              Tier 1 capital must be calculated as the total of its Common Equity Tier 1 capital (referred to in these Rules as CET1 Capital) and its Additional Tier 1 capital (referred to in these Rules as AT1 Capital).

              • Guidance

                The Tier 1 capital (referred to in these Rules as T1 Capital) of an Authorised Person refers to "going concern" capital which allows an Authorised Person to continue its activities and prevent insolvency of the Authorised Person.

          • PRU 3.10 PRU 3.10 Common Equity Tier 1 capital (CET1 Capital)

            • PRU 3.10.1

              CET1 Capital constitutes the sum of CET1 capital elements in Rule 3.10.2, subject to the adjustments, deductions and exemptions stipulated later in this Part.

            • PRU 3.10.2

              CET1 Capital consists of the sum of the following capital elements:

              (a) capital instruments, provided the conditions laid down in Rule 3.10.3 are fully met;
              (b) Share premium accounts related to the instruments referred to in (a);
              (c) retained earnings;
              (d) accumulated other comprehensive income, as defined in the International Financial Reporting Standards; and
              (e) other reserves which are required to be disclosed under International Financial Reporting Standards, excluding any amounts already included in accumulated other comprehensive income or retained earnings.

            • PRU 3.10.3

              (1) For the purposes of Rule 3.10.2(a), a capital instrument is eligible for inclusion in CET1 Capital where all the following conditions are met:
              (a) the instruments are issued directly by the Authorised Person with the prior written approval of the shareholders of the Authorised Person;
              (b) the instruments are fully paid up and their purchase is not funded directly or indirectly by the Authorised Person;
              (c) the instruments meet all the following conditions as regards their classification:
              (i) they qualify as equity capital within the meaning of the Companies Regulations;
              (ii) they are classified as equity within the meaning of the International Financial Reporting Standards; and
              (iii) they are classified as equity capital for the purposes of determining balance sheet insolvency, under the Insolvency Regulations;
              (d) the instruments are clearly and separately disclosed on the balance sheet in the financial statements of the Authorised Person;
              (e) the instruments are perpetual;
              (f) the principal amount of the instruments may not be reduced or repaid, except in either of the following cases:
              (i) the liquidation of the Authorised Person; or
              (ii) discretionary repurchases of the instruments or other discretionary means of reducing capital, where the Authorised Person has notified the Regulator of its intention to do so, in writing, at least thirty days prior to taking such steps;
              (g) the provisions governing the instruments do not indicate expressly or implicitly that the principal amount of the instruments would or might be reduced or repaid other than in the liquidation of the Authorised Person, and the Authorised Person does not otherwise provide such an indication prior to or at issuance of the instruments;
              (h) the instruments meet the following conditions as regards distributions:
              (i) there are no preferential distributions, including in relation to other CET1 Capital instruments, and the terms governing the instruments do not provide preferential rights to payment of distributions;
              (ii) distributions to holders of the instruments may be paid only out of distributable items;
              (iii) the conditions governing the instruments do not include a cap or other restriction on the maximum level of distributions;
              (iv) the level of distributions is not determined on the basis of the amount for which the instruments were purchased at issuance;
              (v) the conditions governing the instruments do not include any obligation for the Authorised Person to make distributions to its holders and the Authorised Person is not otherwise subject to such an obligation;
              (vi) non-payment of distributions does not constitute an event of default of the Authorised Person; and
              (vii) the cancellation of distributions imposes no restrictions on the institution;
              (i) compared to all the capital instruments issued by the Authorised Person, the instruments absorb the first and proportionately greatest share of losses as they occur, and each instrument absorbs losses to the same degree as all other CET1 Capital instruments;
              (j) the instruments rank below all other claims in the event of insolvency or liquidation of the Authorised Person;
              (k) the instruments entitle their owners to a claim on the residual assets of the Authorised Person, which, in the event of its liquidation and after the payment of all senior claims, is proportionate to the amount of such instruments issued and is not fixed or subject to a cap;
              (l) 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 its Subsidiaries; or
              (iii) any member of its Financial Group; and
              (m) the instruments are not subject to any arrangement, contractual or otherwise, that enhances the seniority of claims under the instruments in insolvency or liquidation.
              (2) The conditions in (1)(i) must be complied with notwithstanding a write-down on a permanent basis of the principal amount of AT1 Capital instruments.
              (3) Where any of the conditions in (1) cease to be met:
              (a) the instrument must cease to qualify as a CET1 Capital instrument; and
              (b) the share premium accounts that relate to that instrument must cease to qualify as a CET1 element.

            • PRU 3.10.4 PRU 3.10.4

              For the purposes of Rule 3.10.2(c), an Authorised Person may include interim or year-end net profits in CET1 Capital before the Authorised Person has approved its annual audited accounts confirming its final profit or loss for the year, but only where:

              (a) those profits have been reviewed by the external Auditor of the Authorised Person, which is responsible for auditing its accounts; and
              (b) the Authorised Person is fully satisfied that any foreseeable charge or dividend has been deducted from the amount of those net profits.

              • Guidance

                The review of the interim or year-end profits of the Authorised Person referred to in Rule 3.13.4 should provide an adequate level of assurance that those profits have been evaluated in accordance with the principles set out in the International Financial Reporting Standards. The Regulator may request an Authorised Person to provide it with a copy of its external Auditor's opinion on whether the interim profits are reasonably stated.

            • CET1 Adjustments

              • PRU 3.10.5

                An Authorised Person must, in the calculation of CET1 Capital, exclude the following:

                (a) any increase in its equity under the International Financial Reporting Standards, including:
                (i) where such an increase is associated with future margin income that results in a gain on sale for the Authorised Person; and
                (ii) where the Authorised Person is the Originator of a securitisation, net gains that arise from the capitalisation of future income from the securitised assets that provide Credit Enhancement to positions in the securitisation;
                (b) the amount of cash flow hedge reserve related to gains or losses on cash flow hedges of Financial Instruments that are not valued at fair value, including projected cash flows; and
                (c) all unrealised gains or losses on liabilities of the Authorised Person that are valued at fair value, and which result from changes in the Authorised Person's own credit quality, except when such gains or losses are offset by a change in the fair value of another Financial Instrument which is measured at fair value and resulting from changes in the Authorised Person's own credit quality.

              • PRU 3.10.6 PRU 3.10.6

                Except for the items referred to in Rule 3.10.5, an Authorised Person must not make any adjustments to remove from its Capital Resources unrealised gains or losses on its assets or liabilities measured at fair value.

                • Guidance

                  An Authorised Person is expected to follow the guidance provided in respect of prudent valuation in Section 2.4 and in App2, in valuing all its assets measured at fair value while calculating its Capital Resources.

            • CET1 deductions

              • PRU 3.10.7

                Subject to the following Rules in this Section, an Authorised Person must deduct the following from the calculation of its CET1 Capital:

                (a) losses for the current financial year;
                (b) goodwill and other intangible assets as defined in the International Financial Reporting Standards;
                (c) deferred tax assets that rely on future profitability;
                (d) defined benefit pension fund assets of the Authorised Person;
                (e) the applicable amount, by reference to Rule 3.10.12, of direct and indirect holdings by an Authorised Person of its own CET1 Capital instruments including instruments under which an Authorised Person is under an actual or contingent obligation to effect a purchase by virtue of an existing contractual obligation;
                (f) holdings of the CET1 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;
                (g) the applicable amount, by reference to Rule 3.10.13, of direct and indirect holdings by the Authorised Person of CET1 Capital instruments of Relevant Entities where the Authorised Person does not have a significant investment in those entities;
                (h) the applicable amount, by reference to Rules 3.10.13 and 3.10.18, of direct and indirect holdings by the Authorised Person of the CET1 Capital instruments of Relevant Entities where the Authorised Person has a significant investment in those entities;
                (i) the amount of items required to be deducted from the calculation of AT1 Capital in accordance with the relevant Rules under Section 3.11, that exceeds the AT1 Capital of the Authorised Person;
                (j) the Exposure amount of the following items which qualify for a risk weight of 1000%, where the Authorised Person deducts that Exposure amount from CET1 Capital as an alternative to applying a risk weight of 1000%:
                (i) Qualifying Holdings;
                (ii) securitisation positions, in accordance with relevant Rules in Chapter 4; and
                (iii) free deliveries, in accordance with the Rules in Section A4.6; and
                (k) for an Authorised Person which is a Partnership, the amount by which the aggregate of the amounts withdrawn by its Partners or members exceeds the profits of that firm.

            • CET1 Deductions - intangible assets

              • PRU 3.10.8

                For the purposes of Rule 3.10.7(b), an Authorised Person must determine the intangible assets to be deducted in accordance with the following:

                (a) the amount to be deducted must be reduced by the amount of associated deferred tax liabilities that would be extinguished if the intangible assets became impaired or were derecognised under the International Financial Reporting Standards; and
                (b) the amount to be deducted must include goodwill included in the valuation of significant Investments of the Authorised Person.

            • CET1 Deductions - deferred tax assets

              • PRU 3.10.9 PRU 3.10.9

                (1) For the purposes of Rule 3.10.7(c), and subject to (2), the amount of deferred tax assets that rely on future profitability must be calculated without reducing it by the amount of the associated deferred tax liabilities of the Authorised Person.
                (2) The amount of deferred tax assets that rely on future profitability may be reduced by the amount of the associated deferred tax liabilities of the Authorised Person, provided the following conditions are met:
                (a) those deferred tax assets and associated deferred tax liabilities both arise from the tax law of the same tax jurisdiction; and
                (b) the taxation authority of that tax jurisdiction permits the offsetting of deferred tax assets and the associated deferred tax liabilities.

                • Guidance

                  1. Deferred tax assets are assets that may be used to reduce the amount of an Authorised Person's future tax obligations. Associated deferred tax liabilities of the Authorised Person used for the purposes of Rule 3.13.9 may not include deferred tax liabilities that reduce the amount of intangible assets or defined benefit pension fund assets required to be deducted. The amount of associated deferred tax liabilities referred to in this guidance should be allocated between the following:
                  a. deferred tax assets that rely on future profitability and arise from temporary differences that are not deducted as part of a threshold exemption for deductions from CET 1 Capital; and
                  b. all other deferred tax assets that rely on future profitability.
                  2. An Authorised Person should allocate the associated deferred tax liabilities according to the proportion of deferred tax assets that rely on future profitability that the items referred to in Guidance note 1.a. and b. represent.

              • PRU 3.10.10

                (1) An Authorised Person must apply a risk weight in accordance with Chapter 4, as applicable, to deferred tax assets that do not rely on future profitability.
                (2) For the purpose of (1), deferred tax assets that do not rely on future profitability comprise the following:
                (a) overpayments of tax by the Authorised Person for the current year;
                (b) current year tax losses of the Authorised Person carried back to previous years that give rise to a claim on, or a receivable from, a central government, regional government or local tax authority; and
                (c) deferred tax assets arising from temporary differences which, in the event the Authorised Person incurs a loss, becomes insolvent or enters liquidation, are replaced, on a mandatory and automatic basis in accordance with the applicable national law, with a claim on the central government of the jurisdiction in which the Authorised Person is incorporated which must absorb losses to the same degree as CET1 Capital instruments on a going concern basis and in the event of insolvency or liquidation of the Authorised Person.

            • CET1 Deductions - defined benefit pension fund assets

              • PRU 3.10.11

                For the purposes of Rule 3.13.7(d), the amount of defined benefit pension fund assets to be deducted from CET1 Capital must be reduced by the following:

                (a) the amount of any associated deferred tax liability which could be extinguished if the assets became impaired or were derecognised under the International Financial Reporting Standards; and
                (b) the amount of assets in the defined benefit pension fund which the Authorised Person has an unrestricted ability to use where the Authorised Person has provided adequate advance notification of its intention to use those assets to the Regulator. Those assets used to reduce the amount to be deducted must receive a risk weight in accordance with Chapter 4 of these Rules.

            • CET1 Deductions - holdings of own CET1 Capital instruments

              • PRU 3.10.12

                For the purposes of Rule 3.10.7(e), an Authorised Person must calculate holdings of its own CET1 Capital instruments on the basis of gross long positions subject to the following exceptions:

                (a) an Authorised Person must calculate the amount of holdings of own CET1 Capital instruments 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 that take the form of holdings of index Securities by calculating the underlying Exposure to own CET1 Capital instruments included in the indices; and
                (c) an Authorised Person must net gross long positions in own CET1 Capital instruments in its Trading Book resulting from holdings of index Securities against short positions in own CET1 Capital instruments resulting from short positions in the underlying indices, including where those short positions involve Counterparty Credit Risk.

            • CET1 Deductions - significant investment in a Relevant Entity

              • PRU 3.10.13

                For the purposes of Rules 3.10.7(g) and (h), an investment by an Authorised Person in a Relevant Entity must be considered as a significant investment if it meets any of the following conditions:

                (a) the Authorised Person owns more than 10% of the CET1 Capital instruments issued by that entity;
                (b) the Authorised Person has Close Links with that entity and owns CET1 Capital instruments issued by that entity; or
                (c) the Authorised Person owns CET1 Capital instruments issued by that entity and the entity is not included in consolidation pursuant to Chapter 8 of these Rules but is included in the same accounting consolidation as the Authorised Person for the purposes of financial reporting under the International Financial Reporting Standards.

            • CET1 Deductions - investments in CET1 Capital instruments of Relevant Entities

              • PRU 3.10.14

                For the purposes of Rule 3.10.7(f), (g) and (h), the amount of holdings of CET1 Capital instruments and other capital instruments of Relevant Entities to be deducted, must be calculated, subject to Rule 3.10.15, on the basis of the gross long positions.

              • PRU 3.10.15

                For the purposes of Rule 3.10.7(g) and (h), 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.

              • PRU 3.10.16

                (1) For the purposes of Rule 3.10.7(g), the amount to be deducted is calculated by multiplying the amount referred to in (a) by the factor derived from the calculation referred to in (b):
                (a) the aggregate amount by which the direct, indirect and synthetic holdings by the Authorised Person of the CET1, AT1 and T2 Capital instruments of Relevant Entities, in which the Authorised Person does not have a significant investment, exceeds 10% of the CET1 items of the Authorised Person calculated after applying the following to CET1 items:
                (i) all of the adjustments referred to in Rules 3.10.5 and 3.10.6;
                (ii) the deductions referred to in Rules 3.10.7(a) to (f) and (h) to (j), excluding the amount to be deducted for deferred tax assets that rely on future profitability and arise from temporary differences; and
                (iii) the deductions referred to in Rules 3.10.14 and 3.10.15;
                (b) the amount of direct and indirect holdings by the Authorised Person of the CET1 Capital instruments of Relevant Entities divided by the aggregate amount of direct and indirect holdings by the Authorised Person of the CET1, AT1 and T2 Capital instruments issued by those Relevant Entities.
                (2) An Authorised Person must exclude Underwriting positions held for five working days or fewer from the amount referred to in (1)(a) and from the calculation of the factor referred to in (1)(b).
                (3) The amount to be deducted pursuant to (1) must be apportioned across each CET1 Capital instrument held. An Authorised Person must determine the portion of holdings of CET1 Capital instruments that is to be deducted pursuant to (1) 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 all the capital instruments of Relevant Entities in which the Authorised Person does not have a significant investment.

              • PRU 3.10.17

                (1) The amount of holdings referred to in Rule 3.10.7(g) that is equal to or less than 10% of the CET1 items of the Authorised Person after applying the provisions laid down in Rule 3.10.16(1)(a) must not be deducted and must be subject to the applicable risk weights in accordance with Chapter 4.
                (2) An Authorised Person must determine the portion of holdings of all the capital instruments that is risk weighted by dividing the amount specified in (a) by the amount specified in (b):
                (a) the amount of holdings required to be risk weighted pursuant to Rule 3.10.17(1);
                (b) the aggregate amount of direct and indirect holdings by the Authorised Person of all the capital instruments of Relevant Entities in which the Authorised Person does not have a significant investment.

              • PRU 3.10.18

                For the purposes of Rule 3.10.7(h), the amount to be deducted from CET1 elements must exclude Underwriting positions held for five working days or fewer and must be determined in accordance with Rules 3.10.14 and 3.10.15.

            • CET1 Deductions - exemptions

              • PRU 3.10.19

                (1) In making the deductions required pursuant to Rules 3.10.7(c) and (h), an Authorised Person must not deduct the items listed in (a) and (b), where in aggregate they are equal to or less than 15% of CET1 Capital.
                (a) Deferred tax assets that are dependent on future profitability and arise from temporary differences, and in aggregate are equal to or less than 10% of the CET1 items of the Authorised Person calculated after applying the following:
                (i) adjustments referred in Rules 3.10.5 and 3.10.6; and
                (ii) deductions referred to in (a) to (g) and (i) to (j) of Rules 3.10.7, excluding deferred tax assets that rely on future profitability and arise from temporary differences.
                (b) Where an Authorised Person has a significant investment in a Relevant Entity, the direct and indirect holdings of that Authorised Person of the CET1 Capital instruments of those entities that in aggregate are equal to or less than 10% of the CET1 items of the Authorised Person calculated after applying the following:
                (i) adjustments referred in Rules 3.10.5 and 3.10.6; and
                (ii) deductions referred to in (a) to (h) and (i) to (j) of Rules 3.10.7 excluding deferred tax assets that rely on future profitability and arise from temporary differences.
                (2) Items that are not deducted pursuant to (1) must be risk weighted at 200% and subject to the requirements of Chapter 4, as applicable.

          • PRU 3.11 PRU 3.11 Additional Tier 1 capital

            • PRU 3.11.1

              Additional Tier 1Capital (referred to in these Rules as AT1 Capital) constitutes the sum of AT1 Capital elements in Rule 3.11.2, subject to the deductions stipulated later in this Section.

            • PRU 3.11.2

              AT1 Capital consists of the sum of the following capital elements:

              (a) capital instruments which meet the eligibility criteria laid down in Rule 3.11.3; and
              (b) the Share premium accounts related to the instruments referred to in (a).

            • PRU 3.11.3 PRU 3.11.3

              (1) For the purposes of Rule 3.11.2(a), a capital instrument is eligible for inclusion in AT1 Capital where all of the following conditions are met:
              (a) the instruments are issued and paid up;
              (b) the instruments are not purchased by any of the following:
              (i) the Authorised Person or its Subsidiaries; or
              (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 instruments rank below T2 Capital instruments in the event of the insolvency of the Authorised Person;
              (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 its Financial Group in accordance with Chapter 8; 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, contractual or otherwise that enhances the seniority of the claim under the instruments in insolvency or liquidation;
              (g) the instruments are perpetual and the provisions governing them include no incentive for the Authorised Person to redeem them;
              (h) where the provisions governing the instruments include one or more call Options, the option to call may be exercised at the sole discretion of the Issuer;
              (i) 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;
              (j) the provisions governing the instruments do not indicate explicitly or implicitly that the instruments would or might be called, redeemed or repurchased and the Authorised Person does not otherwise provide such an indication;
              (k) the Authorised Person does not indicate explicitly or implicitly that the Regulator would not object to a plan to call, redeem or repurchase the instruments;
              (l) distributions under the instruments meet the following conditions:
              (i) they are paid out of distributable items;
              (ii) the level of distributions made on the instruments will not be modified based on the credit standing of the Authorised Person or any of its Parents or any entities in its Financial Group;
              (iii) the provisions governing the instruments give the Authorised Person full discretion at all times to cancel the distributions on the instruments for an unlimited period and on a non-cumulative basis, and the Authorised Person may use such cancelled payments without restriction to meet its obligations as they fall due;
              (iv) cancellation of distributions does not constitute an event of default of the Authorised Person; and
              (v) the cancellation of distributions imposes no restrictions on the Authorised Person;
              (m) the instruments do not contribute to a determination that the liabilities of an Authorised Person exceed its assets, where such a determination constitutes a test of insolvency under the Insolvency Regulations;
              (n) the provisions governing the instruments require the principal amount of the instruments to be written down, or the instruments to be converted to CET1 Capital instruments, upon the occurrence of a trigger event;
              (o) 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 3.11.3(4);
              (p) the provisions governing the instruments include no feature that could hinder the recapitalisation of the Authorised Person; and
              (q) where the instruments are not issued directly by the Authorised Person or by an operating entity within the Financial Group to which the Authorised Person belongs, or by the Parent of the Authorised Person, 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 the Financial Group to which the Authorised Person belongs; or
              (iii) any Parent of the Authorised Person.
              (2) For the purposes of (1)(l)(v) and (1)(p), the provisions governing AT1 Capital instruments must not include the following:
              (a) a requirement for distributions on the instruments to be made in the event of a distribution being made on an instrument issued by the Authorised Person that ranks to the same degree as, or more junior than, an AT1 Capital instrument;
              (b) a requirement for the payment of distributions on CET1, AT1 or T2 Capital instruments to be cancelled in the event that distributions are not made on those AT1 Capital instruments; or
              (c) an obligation to substitute the payment of interest or dividend by a payment in any other form.
              (3) For the purposes of (1)(n), the following provisions apply to AT1 Capital instruments:
              (a) a trigger event occurs when the CET1 Capital of the Authorised Person falls below either of the following:
              (i) 6.625% of its Total Risk Exposure Amount; or
              (ii) a level higher than 6.625%, where determined by the Authorised Person and specified in the provisions governing the instrument;
              (b) where the provisions governing the instruments require them to be converted into CET1 Capital instruments upon the occurrence of a trigger event, those provisions must specify either of the following:
              (i) the rate of such conversion and a limit on the permitted amount of conversion; or
              (ii) a range within which the instruments will convert into CET1 Capital instruments;
              (c) where the provisions governing the instruments require their principal amount to be written down upon the occurrence of a trigger event, the write down must reduce all the following:
              (i) the claim of the holder of the instrument in the liquidation of the Authorised Person;
              (ii) the amount required to be paid in the event of the call of the instrument; and
              (iii) the distributions made on the instrument.
              (4) For the purposes of (1)(o), the following provisions apply to AT1 Capital instruments.
              (a) The provisions governing AT1 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 AT1 Capital instruments be converted into ordinary shares.
              (e) Where an Authorised Person intends to include the AT1 Capital instruments issued by a Subsidiary in a non-ADGM jurisdiction in the consolidated AT1 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.
              (5) The following must apply where, in the case of an AT1 Capital instrument, the conditions laid down in this Rule cease to be met:
              (a) that instrument must cease to qualify as an AT1 Capital instrument; and
              (b) the part of the Share premium accounts that relates to that instrument must cease to qualify as an AT1 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 AT1 Capital will be either partially or fully written down or converted into ordinary shares.

            • AT1 Deductions AT1 Deductions

              • PRU 3.11.4

                Subject to the following Rules in this Section, an Authorised Person must deduct the following from the calculation of its AT1 Capital:

                (a) direct and indirect holdings by an Authorised Person of own AT1 Capital instruments including instruments under which an Authorised Person is under an actual or contingent obligation to effect a purchase by virtue of an existing contractual obligation;
                (b) holdings of the AT1 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 determined in accordance with Rule 3.11.8 of direct and indirect holdings by the Authorised Person of the AT1 Capital instruments of Relevant Entities where the Authorised Person does not have a significant investment in those entities;
                (d) direct and indirect holdings by the Authorised Person of the AT1 Capital instruments of Relevant Entities where the Authorised Person has a significant investment in those entities, excluding Underwriting positions held for five working days or fewer; and
                (e) the amounts required to be deducted from T2 Capital pursuant to Rule 3.12.4 that exceed the T2 Capital of the Authorised Person.

            • AT1 Deductions - holdings of own AT1 Capital instruments AT1 Deductions - holdings of own AT1 Capital instruments

              • PRU 3.11.5

                For the purposes of Rule 3.11.4(a), an Authorised Person must calculate holdings of its own AT1 Capital instruments on the basis of gross long positions subject to the following exceptions:

                (a) an Authorised Person must calculate the amount of holdings of own AT1 Capital instruments 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 AT1 Capital instruments that take the form of holdings of index Securities by calculating the underlying Exposure to own AT1 Capital instruments in the indices; and
                (c) an Authorised Person must net gross long positions in own AT1 Capital instruments in the Trading Book resulting from holdings of index Securities may be netted by the Authorised Person against short positions in own AT1 instruments resulting from short positions in the underlying indices, including where those short positions involve Counterparty Credit Risk.

            • AT1 Deductions - investments in AT1 Capital instruments of Relevant Entities AT1 Deductions - investments in AT1 Capital instruments of Relevant Entities

              • PRU 3.11.6

                For the purposes of Rule 3.11.4(b), (c) and (d), the amount of holdings of AT1 Capital instruments of Relevant Entities to be deducted must be calculated on the basis of the gross long positions.

              • PRU 3.11.7

                For the purposes of Rule 3.11.4(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.

            • AT1 Deductions - significant investment in a Relevant Entity AT1 Deductions - significant investment in a Relevant Entity

              • PRU 3.11.8

                (1) For the purposes of Rule 3.11.4(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 AT1 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 AT1 Capital instruments that is to be deducted pursuant to (1) 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 all the capital instruments of Relevant Entities in which the Authorised Person does not have a significant investment.

          • 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

          • PRU 3.13 PRU 3.13 Minority interests and instruments issued by Subsidiaries

            • CET1 deductions relating to intangible assets

              • CET1 deductions relating to deferred tax assets

                • Deductions relating to defined benefit pension fund assets

                  • Deductions relating to holdings of own CET1 Capital instruments

                    • CET1 deductions relating to significant investment in a Relevant Entity

                      • Deductions relating to CET1 Capital instruments in Relevant Entities

                        • CET1 exemptions from deductions

                        • Minority interests that qualify for inclusion in consolidated CET1 Capital

                        • PRU 3.13.1

                          Minority interests must include the CET1 Capital instruments, plus the related retained earnings and Share premium accounts of a Subsidiary, only where all of the following conditions are met:

                          (a) the Subsidiary is one of the following:
                          (i) an Authorised Person; or
                          (ii) a regulated entity;
                          (b) the Subsidiary is a member of the Financial Group and included in the scope of consolidated supervision in accordance with Chapter 8; and
                          (c) those CET1 Capital instruments are owned by Persons other than the Undertakings included in the Financial Group.

                        • PRU 3.13.2

                          Minority interests that are funded, directly or indirectly, through a Special Purpose Entity (SPE) or otherwise, by the Parent of the Authorised Person or any member of its Financial Group must not qualify for inclusion in the consolidated CET1 Capital of the Financial Group.

                        • PRU 3.13.3

                          An Authorised Person must determine the amount of minority interests of a Subsidiary that is eligible for inclusion in its consolidated CET1 Capital by subtracting from the minority interests of that Subsidiary the result of multiplying the amount referred to in (a) by the percentage referred to in (b):

                          (a) the CET1 Capital of the Subsidiary minus the lesser of the following:
                          (i) the amount of CET1 Capital of that Subsidiary required to meet the sum of the Subsidiary's CET1 Capital requirement (on a solo basis) of 6.0% of its Total Risk Exposure Amount, calculated in accordance with Rule 3.5.7, and its Combined Buffer Requirement; or
                          (ii) the amount of consolidated CET1 Capital that relates to that Subsidiary that is required on a consolidated basis to meet the sum of its Financial Group's CET1 Capital requirement of 6.0% of its Total Risk Exposure Amount, calculated in accordance with Rule 3.5.7, and its Combined Buffer Requirement;
                          (b) the minority interests of the Subsidiary expressed as a percentage of all CET1 Capital instruments of that Undertaking plus the related retained earnings and Share premium accounts.

                        • Qualifying AT1, T1, T2 Capital and qualifying Capital Resources

                        • PRU 3.13.4

                          Qualifying AT1, T1, T2 Capital and qualifying Capital Resources must include the minority interest, AT1, T1 or T2 Capital instruments, as applicable, plus the related retained earnings and Share premium accounts of a Subsidiary only where the following conditions are met:

                          (a) the Subsidiary is one of the following:
                          (i) an Authorised Person; or
                          (ii) a regulated entity;
                          (b) the Subsidiary is a member of the Financial Group and included in the scope of consolidated supervision in accordance with Chapter 8; and
                          (c) those instruments are owned by Persons other than the Undertakings included in the Financial Group.

                        • Qualifying Capital Resources instruments included in consolidated T2 Capital

                          • Qualifying AT1 and T2 Capital issued by a Special Purpose Entity

                            • PRU 3.13.5 PRU 3.13.5

                              AT1 and T2 Capital instruments issued by an SPE, and the related retained earnings and Share premium accounts, may be included in qualifying AT1 or T2 Capital or qualifying Capital Resources, as applicable, only where the following conditions are met:

                              (a) the SPE issuing those instruments is included fully in the Financial Group to which the Authorised Person belongs;
                              (b) the instruments, and the related retained earnings and Share premium accounts, are included in qualifying AT1 Capital only where the conditions laid down in Rule 3.11.3(1) are satisfied;
                              (c) the instruments, and the related retained earnings and Share premium accounts, are included in qualifying T2 Capital only where the conditions laid down in Rule 3.12.3(1) are satisfied; and
                              (d) the only asset of the SPE is its investment in the Capital Resources of any of its Parents or their Subsidiaries, which are included fully in the Financial Group to which the Authorised Person belongs, the form of which satisfies the relevant conditions laid down in Rule 3.11.3(1) or Rule 3.12.3(1), as applicable.

                              • PRU 3.13.9 PRU 3.13.9

                                An Authorised Person must determine the amount of qualifying Capital Resources of a Subsidiary that is included in consolidated T2 Capital by subtracting from the qualifying Capital Resources of that Subsidiary that are included in consolidated Capital Resources, the qualifying T1 Capital of that Subsidiary that is included in consolidated T1 Capital of the Financial Group of the Authorised Person.

                                • Guidance

                                  If the Regulator considers the assets of an SPE to be minimal and insignificant for such an entity, the Regulator may consider waiving the condition specified in Rule 3.13.5(d).

                              • PRU 3.13.6

                                An Authorised Person must determine the amount of qualifying T1 Capital of a Subsidiary that is included in consolidated T1 Capital of the Authorised Person's Financial Group by subtracting from the qualifying T1 Capital of that Subsidiary the result of multiplying the amount referred to in (a) by the percentage referred to in (b):

                                (a) the lesser of the following:
                                (i) the amount of T1 Capital of that Subsidiary required to meet the sum of the Subsidiary's T1 Capital requirement (on a solo basis) of 8.0% of its Total Risk Exposure Amount, calculated in accordance with Rule 3.5.7, and its Combined Buffer Requirement; or
                                (ii) the amount of consolidated T1 Capital that relates to the Subsidiary that is required on a consolidated basis to meet the sum of its Financial Group's T1 Capital requirement of 8.0% of the Total Risk Exposure Amount, calculated in accordance with Rule 3.5.7, and its Combined Buffer Requirement;
                                (b) the qualifying T1 Capital of the Subsidiary expressed as a percentage of all T1 Capital instruments of that Subsidiary plus the related retained earnings and Share premium accounts.

                          • Qualifying T1 Capital instruments included in consolidated T1 Capital

                            • PRU 3.13.7

                              An Authorised Person must determine the amount of qualifying T1 Capital of a Subsidiary that is included in consolidated AT1 Capital by subtracting from the qualifying T1 Capital of that Subsidiary included in consolidated T1 Capital, the minority interests of that Subsidiary that are included in consolidated CET1 Capital.

                          • Qualifying T1 Capital included in consolidated AT1 Capital

                          • Qualifying Capital Resources included in consolidated Capital Resources

                            • PRU 3.13.8

                              An Authorised Person must determine the amount of qualifying Capital Resources of a Subsidiary that is included in consolidated Capital Resources of its Financial Group by subtracting from the qualifying Capital Resources of that Subsidiary, the result of multiplying the amount referred to in (a) by the percentage referred to in (b):

                              (a) the lesser of the following:
                              (i) the amount of Capital Resources of the Subsidiary required to meet the sum of the Subsidiary's total Capital Requirement (on a solo basis) of 10.0% of its Total Risk Exposure Amount, calculated in accordance with Rule 3.5.7 and its Combined Buffer Requirement; or
                              (ii) the amount of Capital Resources that relates to the Subsidiary that is required on a consolidated basis to meet the sum of its Financial Group's total Capital Requirement of 10.0% of its Total Risk Exposure Amount, calculated in accordance with Rule 3.5.7, and its Combined Buffer Requirement;
                              (b) the qualifying Capital Resources of the Subsidiary, expressed as a percentage of all Capital Resources instruments of the Subsidiary that are included in its CET1, AT1 and T2 Capital items and the related retained earnings and Share premium accounts.

          • PRU 3.14 PRU 3.14 Qualifying Holdings outside the financial sector

            • PRU 3.14.1

              (1) Where an Authorised Person has a Qualifying Holding in an Undertaking which is not one of the following:
              (a) an Undertaking that is a Relevant Entity; or
              (b) an Undertaking that carries on activities that are:
              (i) a direct extension of banking;
              (ii) ancillary to banking; or
              (iii) leasing, factoring, the management of unit trusts, the management of data processing services or any other similar activity,

              and the amount of the holding exceeds 15% of the eligible total Tier 1 of the Authorised Person, the Authorised Person must comply with the requirements in (3).

              (2) The total amount of the Qualifying Holdings of an Authorised Person in those Undertakings referred to in (1) that exceeds 60% of its Tier 1 are subject to the requirements in (3).
              (3) An Authorised Person must apply a risk weight of 1000% to the greater of the total amount of Qualifying Holdings referred to in (1) and that in (2).
              (4) As an alternative to applying a 1000% risk weight to the amounts in excess of the limits specified in (1) or (2), an Authorised Person may deduct those amounts from CET1 Capital.
              (5) Shares of Undertakings to which (1) or (2) do not apply must not be included in calculating the eligible capital limits specified in (1) where any of the following conditions are met:
              (a) those Shares are held temporarily during a financial reconstruction or rescue operation;
              (b) the holding of the Shares is an Underwriting position held for five working days or less; or
              (c) those Shares are held in the name of the Authorised Person on behalf of others.

            • PRU 3.14.2

              AT1 Capital consists of the sum of the following capital elements:

              (a) capital instruments which meet the eligibility criteria laid down in Rule 3.14.3; and
              (b) the Share premium accounts related to the instruments referred to in (a).

            • PRU 3.14.3

              (1) For the purposes of Rule 3.14.2(a), a capital instrument is eligible for inclusion in AT1 Capital where all of the following conditions are met:
              (a) the instruments are issued and paid up;
              (b) the instruments are not purchased by any of the following:
              (i) the Authorised Person or its Subsidiaries; or
              (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 instruments rank below T2 Capital instruments in the event of the insolvency of the Authorised Person;
              (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 its Financial Group in accordance with Chapter 8; 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, contractual or otherwise that enhances the seniority of the claim under the instruments in insolvency or liquidation;
              (g) the instruments are perpetual and the provisions governing them include no incentive for the Authorised Person to redeem them;
              (h) where the provisions governing the instruments include one or more call Options, the option to call may be exercised at the sole discretion of the Issuer;
              (i) 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;
              (j) the provisions governing the instruments do not indicate explicitly or implicitly that the instruments would or might be called, redeemed or repurchased and the Authorised Person does not otherwise provide such an indication;
              (k) the Authorised Person does not indicate explicitly or implicitly that the Regulator would not object to a plan to call, redeem or repurchase the instruments;
              (l) distributions under the instruments meet the following conditions:
              (i) they are paid out of distributable items;
              (ii) the level of distributions made on the instruments will not be modified based on the credit standing of the Authorised Person or any of its Parents or any entities in its Financial Group;
              (iii) the provisions governing the instruments give the Authorised Person full discretion at all times to cancel the distributions on the instruments for an unlimited period and on a non-cumulative basis, and the Authorised Person may use such cancelled payments without restriction to meet its obligations as they fall due;
              (iv) cancellation of distributions does not constitute an event of default of the Authorised Person; and
              (v) the cancellation of distributions imposes no restrictions on the Authorised Person;
              (m) the instruments do not contribute to a determination that the liabilities of an Authorised Person exceed its assets, where such a determination constitutes a test of insolvency under the Insolvency Regulations;
              (n) the provisions governing the instruments require the principal amount of the instruments to be written down, or the instruments to be converted to CET1 Capital instruments, upon the occurrence of a trigger event;
              (o) the provisions governing the instruments include no feature that could hinder the recapitalisation of the Authorised Person; and
              (p) where the instruments are not issued directly by the Authorised Person or by an operating entity within the Financial Group to which the Authorised Person belongs, or by the Parent of the Authorised Person, 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 the Financial Group to which the Authorised Person belongs; or
              (iii) any Parent of the Authorised Person.
              (2) For the purposes of (1)(l)(v) and (1)(o), the provisions governing AT1 Capital instruments must not include the following:
              (a) a requirement for distributions on the instruments to be made in the event of a distribution being made on an instrument issued by the Authorised Person that ranks to the same degree as, or more junior than, an AT1 Capital instrument;
              (b) a requirement for the payment of distributions on CET1, AT1 or T2 Capital instruments to be cancelled in the event that distributions are not made on those AT1 Capital instruments; or
              (c) an obligation to substitute the payment of interest or dividend by a payment in any other form.
              (3) For the purposes of (1)(n), the following provisions apply to AT1 Capital instruments:
              (a) a trigger event occurs when the CET1 Capital of the Authorised Person falls below either of the following:
              (i) 66.25% of its Capital Requirement; or
              (ii) a level higher than 66.25%, where determined by the Authorised Person and specified in the provisions governing the instrument;
              (b) where the provisions governing the instruments require them to be converted into CET1 Capital instruments upon the occurrence of a trigger event, those provisions must specify either of the following:
              (i) the rate of such conversion and a limit on the permitted amount of conversion; or
              (ii) a range within which the instruments will convert into CET1 Capital instruments;
              (c) where the provisions governing the instruments require their principal amount to be written down upon the occurrence of a trigger event, the write down must reduce all the following:
              (i) the claim of the holder of the instrument in the liquidation of the Authorised Person;
              (ii) the amount required to be paid in the event of the call of the instrument; and
              (iii) the distributions made on the instrument.
              (4) The following must apply where, in the case of an AT1 Capital instrument, the conditions laid down in this Rule cease to be met:
              (a) that instrument must cease to qualify as an AT1 Capital instrument; and
              (b) the part of the Share premium accounts that relates to that instrument must cease to qualify as an AT1 Capital element.

            • AT1 regulatory deductions

              • PRU 3.14.4

                Subject to the following Rules in this Section, an Authorised Person must deduct the following from the calculation of its AT1 Capital:

                (a) direct and indirect holdings by an Authorised Person of own AT1 Capital instruments including instruments under which an Authorised Person is under an actual or contingent obligation to effect a purchase by virtue of an existing contractual obligation;
                (b) holdings of the AT1 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 determined in accordance with Rule 3.14.8 of direct and indirect holdings by the Authorised Person of the AT1 Capital instruments of Relevant Entities where the Authorised Person does not have a significant investment in those entities;
                (d) direct and indirect holdings by the Authorised Person of the AT1 Capital instruments of Relevant Entities where the Authorised Person has a significant investment in those entities, excluding Underwriting positions held for five working days or fewer; and
                (e) the amounts required to be deducted from T2 Capital pursuant to Rule 3.15.4 that exceed the T2 Capital of the Authorised Person.

            • Deductions relating to holdings of own AT1 Capital instruments

              • PRU 3.14.5

                For the purposes of Rule 3.14.4(a), an Authorised Person must calculate holdings of its own AT1 Capital instruments on the basis of gross long positions subject to the following exceptions:

                (a) an Authorised Person must calculate the amount of holdings of own AT1 Capital instruments 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 AT1 Capital instruments that take the form of holdings of index Securities by calculating the underlying Exposure to own AT1 Capital instruments in the indices; and
                (c) an Authorised Person must net gross long positions in own AT1 Capital instruments in the Trading Book resulting from holdings of index Securities may be netted by the Authorised Person against short positions in own AT1 instruments resulting from short positions in the underlying indices, including where those short positions involve Counterparty Credit Risk.

            • Deductions relating to AT1 Capital instruments in Relevant Entities

              • PRU 3.14.6

                For the purposes of Rule 3.14.4(b), (c) and (d), the amount of holdings of AT1 Capital instruments of Relevant Entities to be deducted, must be calculated, subject to 3.14.7, on the basis of the gross long positions.

              • PRU 3.14.7

                For the purposes of Rule 3.14.4(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.

            • AT1 deductions relating to significant investment in a Relevant Entity

              • PRU 3.14.8

                (1) For the purposes of Rule 3.14.4(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 3.13.16(1)(a);
                (b) the amount of direct and indirect holdings by the Authorised Person of the AT1 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 3.13.16(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 AT1 Capital instruments that is to be deducted pursuant to (1) 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 all the capital instruments of Relevant Entities in which the Authorised Person does not have a significant investment.

          • PRU 3.15 PRU 3.15 Calculation of Capital Resources

            • PRU 3.15.1

              This Section applies to an Authorised Person in any Category.

            • PRU 3.15.2

              The total of Capital Resources is derived according to the following formula:

              T1 Capital + T2 Capital = Capital Resources

              where:

              (a) "T1 Capital" represents Tier 1 capital, that being the sum of CET1 Capital and AT1 Capital;
              (b) "CET1 Capital" represents Common Equity Tier 1 capital assessed in accordance with Section 3.10;
              (c) "AT1 Capital" represents Additional Tier 1 capital assessed in accordance with Section 3.11; and
              (d) "T2 Capital" represents Tier 2 capital assessed in accordance with Section 3.12.

            • PRU 3.15.3

              An Authorised Person must calculate its Capital Resources in accordance with the table below and the provisions in Sections 3.9 to 3.12.

              (A1) Elements of Common Equity Tier 1 (CET1) Capital
              (A2) Adjustments to/deductions from CET1 Capital
              (A3) CET1 Capital = A1 — A2
               
              (A4) Elements of Additional Tier 1 (AT1) Capital
              (A5) Deductions from AT1 Capital
              (A6) AT1 Capital = A4 — A5
               
              (A7) Tier 1 (T1) Capital = A3 + A6
               
              (A8) Elements of Tier 2 (T2) Capital
              (A9) Deductions from T2 Capital
              (A10) Tier 2 (T2) Capital = A8 — A9
               
              (A11) Capital Resources = A7 + A10

            • T2 regulatory deductions and exclusions

              • PRU 3.15.4

                The Capital Resources of an Authorised Person to which this section applies is defined as the sum of its CET1 Capital, AT1 Capital and T2 Capital.

            • Deductions relating to holdings of own T2 Capital instruments

              • PRU 3.15.5

                For the purposes of Rule 3.15.4(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 may 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 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 may 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 Risk.

            • Deductions relating to T2 Capital instruments in Relevant Entities

              • PRU 3.15.6

                For the purposes of Rules 3.15.4(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, subject to 3.15.7, on the basis of the gross long positions.

              • PRU 3.15.7

                For the purposes of Rules 3.15.4(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 relating to insignificant investment in a Relevant Entity

              • PRU 3.15.8

                (1) For the purposes of Rule 3.15.4(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 3.13.16(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 3.13.16(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.

            • Exclusion in relation to Managing a Profit Sharing Investment Account

              • PRU 3.15.9

                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.

          • PRU 3.16 PRU 3.16 Adequate Capital Resources for Categories 1, 2, 3A and 5

            • Application

              • Capital ratios

              • Minority interests that qualify for inclusion in consolidated CET1 Capital

                • PRU 3.16.1

                  This Section applies to an Authorised Person in Category 1, 2, 3A or 5.

                • PRU 3.16.2 PRU 3.16.2

                  Subject to 3.2.3, an Authorised Person must ensure that it complies with the following requirements at all times.

                  (a) The ratio of CET1 Capital to Total Risk Exposure Amount must not be less than 6.0%.
                  (b) The ratio of T1 Capital to Total Risk Exposure Amount must not be less than 8.0%.
                  (c) The ratio of Capital Resources to Total Risk Exposure Amount must not be less than 10.0%.

                  • Guidance

                    In Rule 3.16.2 CET1 Capital is that calculated at step A3, T1 Capital is that calculated at step A7 and Capital Resources is that calculated at step A11 of Rule 3.15.3.

                • PRU 3.16.3

                  The Regulator may impose a further requirement, termed an Individual Capital Requirement (ICR), on an Authorised Person to hold additional Capital Resources arising from Pillar 2 adjustments (see Chapter 10). Where the Authorised Person has an ICR imposed on it, then the Authorised Person must, at all times, maintain adequate Capital Resources of the type and amount as specified in Rule 10.6.1 in addition to those kept to meet the capital adequacy requirements outlined in Rule 3.2.4.

              • Qualifying AT1, T1, T2 Capital and qualifying own funds

                • PRU 3.16.4

                  Qualifying AT1, T1, T2 Capital and qualifying Capital Resources must include the minority interest, AT1, T1 or T2 Capital instruments, as applicable, plus the related retained earnings and Share premium accounts, of a Subsidiary, only where the following conditions are met:

                  (a) the Subsidiary is one of the following:
                  (i) an Authorised Person; or
                  (ii) a regulated entity;
                  (b) the Subsidiary is a member of the Financial Group and included in the scope of consolidated supervision in accordance with Chapter 8; and
                  (c) those instruments are owned by Persons other than the Undertakings included in the Financial Group.

              • Qualifying AT1 and T2 Capital issued by a Special Purpose Entity

                • PRU 3.16.5 PRU 3.16.5

                  AT1 and T2 Capital instruments issued by an SPE, and the related retained earnings and Share premium accounts, are included in qualifying AT1 or T2 Capital or qualifying Capital Resources, as applicable, only where the following conditions are met:

                  (a) the SPE issuing those instruments is included fully in the Financial Group to which the Authorised Person belongs;
                  (b) the instruments, and the related retained earnings and Share premium accounts, are included in qualifying AT1 Capital only where the conditions laid down in Rule 3.14.3(1) are satisfied;
                  (c) the instruments, and the related retained earnings and Share premium accounts, are included in qualifying T2 Capital only where the conditions laid down in Rule 3.15.3(1) are satisfied; and
                  (d) the only asset of the SPE is its investment in the Capital Resources of any of its Parents or their Subsidiaries, which are included fully in the Financial Group to which the Authorised Person belongs, the form of which satisfies the relevant conditions laid down in Rule 3.14.3(1) or Rule 3.15.3(1), as applicable.

                  • Guidance

                    If the Regulator considers the assets of a Special Purpose Entity to be minimal and insignificant for such an entity, the Regulator may consider waiving the condition specified in Rule 3.16.5(d).

              • Qualifying T1 Capital instruments included in consolidated T1 Capital

                • PRU 3.16.6

                  An Authorised Person must determine the amount of qualifying T1 Capital of a Subsidiary that is included in consolidated T1 Capital of the Authorised Person's Financial Group by subtracting from the qualifying T1 Capital of that Subsidiary the result of multiplying the amount referred to in (a) by the percentage referred to in (b):

                  (a) the lesser of the following:
                  (i) the amount of T1 Capital of that Subsidiary required to meet the sum of the Subsidiary's T1 Capital requirement (on a solo basis) of 80% of the Risk Capital Requirement and its Capital Conservation Buffer requirement of 25% of the Risk Capital Requirement; or
                  (ii) the amount of consolidated T1 Capital that relates to the Subsidiary that is required on a consolidated basis to meet the sum of its Financial Group's T1 Capital requirement of 80% of the Risk Capital Requirement and its Capital Conservation Buffer requirement of 25% of the Risk Capital Requirement;
                  (b) the qualifying T1 Capital of the Subsidiary expressed as a percentage of all T1 Capital instruments of that Subsidiary plus the related retained earnings and Share premium accounts.

              • Qualifying T1 Capital included in consolidated AT1 Capital

                • PRU 3.16.7

                  An Authorised Person must determine the amount of qualifying T1 Capital of a Subsidiary that is included in consolidated AT1 Capital by subtracting from the qualifying T1 Capital of that Subsidiary included in consolidated T1 Capital, the minority interests of that Subsidiary that are included in consolidated CET1 Capital.

              • Qualifying Capital Resources included in consolidated Capital Resources

                • PRU 3.16.8

                  An Authorised Person must determine the amount of qualifying Capital Resources of a Subsidiary that is included in consolidated Capital Resources of its Financial Group by subtracting from the qualifying Capital Resources of that Subsidiary, the result of multiplying the amount referred to in (a) by the percentage referred to in (b):

                  (a) the lesser of the following:
                  (i) the amount of Capital Resources of the Subsidiary required to meet the sum of the Subsidiary's total Capital Requirement (on a solo basis) of 100% of the Risk Capital Requirement and its Capital Conservation Buffer requirement of 25% of the Risk Capital Requirement; or
                  (ii) the amount of Capital Resources that relates to the Subsidiary that is required on a consolidated basis to meet the sum of its Financial Group's total Capital Requirement of 100% of the Risk Capital Requirement and its Capital Conservation Buffer requirement of 25% of the Risk Capital Requirement;
                  (b) the qualifying Capital Resources of the Subsidiary, expressed as a percentage of all Capital Resources instruments of the Subsidiary that are included in its CET1, AT1 and T2 Capital items and the related retained earnings and Share premium accounts.

          • PRU 3.17 PRU 3.17 Capital Conservation Buffer

            • PRU 3.17.1

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

            • PRU 3.17.2

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

            • PRU 3.17.3

              The Capital Conservation Buffer requirement is equivalent to 2.5% of the Total Risk Exposure Amount of an Authorised Person and must comprise only CET1 Capital.

            • PRU 3.17.4

              (1) An Authorised Person must maintain the required buffer amount, calculated in accordance with Rule 3.17.3, at all times.
              (2) The Capital Conservation Buffer requirement applies on both a solo and a consolidated basis, for Authorised Persons forming part of Financial Groups.

            • PRU 3.17.5

              An Authorised Person must not use CET1 Capital that is kept to meet the Capital Conservation Buffer requirement towards meeting:

              (a) its Total Risk Exposure Amount; or
              (b) any Individual Capital Requirement as may be imposed pursuant to Chapter 10.

        • PRU PART 4 — Calculating Capital Resources

        • 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.

      • PRU 4 PRU 4 CREDIT RISK

        • Introduction

          • Guidance

            1. Chapter 4 deals with the prudential requirements relating to the management of Credit Risk by an Authorised Person. Credit Risk refers to risk of incurring losses due to failure on the part of a borrower or a Counterparty to fulfil their obligations in respect of a financial transaction.
            2. This Chapter aims to ensure that an Authorised Person holds sufficient regulatory capital of acceptable quality so that it can absorb unexpected losses arising out of its Credit Risk Exposures, should the need arise and that it continues to operate in a sustainable manner.
            3. This Chapter requires an Authorised Person to:
            a. appropriately apply a risk-weight to all on-balance sheet assets and off-balance sheet Exposures for capital adequacy purposes. A risk-weight is based on a Credit Quality Grade aligned with the likelihood of Counterparty default;
            b. calculate the Credit Risk Capital Requirement for its on-balance sheet assets and off-balance sheet Exposures; and
            c. reduce the Credit Risk Capital Requirement for its on-balance sheet assets and off-balance sheet Exposures where the Exposure is covered fully or partly by some form of eligible Credit Risk mitigant.
            4. App4 provides detailed requirements, parameters, calculation methodologies and formulae in respect of the primary requirements outlined in Chapter 4.

        • PRU PART 1 PRU PART 1 — Application

          • PRU 4.1 PRU 4.1 Application

            • PRU 4.1.1 PRU 4.1.1

              This Chapter applies to an Authorised Person in Category 1, 2, 3A or 5.

              • Guidance

                1. This Chapter imposes systems and controls pertaining to Credit Risk, and prescribes the manner of calculation of the Credit Risk Capital Requirement (also referred to in these Rules as CRCOM).
                2. Rules 3.8.2 and 3.8.3 provide that the CRCOM is a component in the calculation of the overall Risk Capital Requirement of an Authorised Person, and that the CRCOM is to be calculated in accordance with this Chapter 4.
                3. The Rules in Section 4.8 provide that the Authorised Person's CRCOM is 10% of the Credit RWA of the firm, which in turn is calculated as the sum of:
                a. the RWA for Credit Risk Exposures (CR Exposures); and
                b. the RWA for securitisation Exposures (SE Exposures).
                4. This Chapter sets out the manner in which each of those components must be calculated, monitored and controlled by an Authorised Person.
                5. In addition to complying with the applicable Rules in this Chapter, an Authorised Person investing in or holding Islamic Contracts whether or not for the purpose of a PSIA will need to take account of the provisions under the IFR rules to calculate the Credit Risk for those Islamic Contracts.

        • PRU PART 2 PRU PART 2 — Credit Risk systems and controls

          • PRU 4.2 PRU 4.2 Application of this part

            • PRU 4.2.1

              This part applies to an Authorised Person in Category 1, 2, 3A or 5 with respect to both its Non-Trading Book and Trading Book transactions.

          • PRU 4.3 PRU 4.3 Credit Risk management systems

            • PRU 4.3.1 PRU 4.3.1

              An Authorised Person must implement and maintain comprehensive Credit Risk management systems which:

              (a) are appropriate to the firm's type, scope, complexity and scale of operations;
              (b) are appropriate to the diversity of its operations, including geographical diversity;
              (c) enable the firm to effectively identify, assess, monitor and control Credit Risk and to ensure that adequate Capital Resources are available at all times to cover the risks assumed; and
              (d) ensure effective implementation of the Credit Risk strategy and policy.

              • Guidance

                1. Credit Risk is the risk that a borrower or Counterparty fails to meet its obligations. Credit Risk exists in both the Non-Trading Book and the Trading Book, and both on and off the balance sheet of an Authorised Person.
                2. Obviously, Credit Risk arises from loans but there are other sources of Credit Risk such as:
                a. trade finance and acceptances;
                b. interbank transactions;
                c. commitments and guarantees;
                d. interest rate, foreign exchange and Credit Derivatives (including swaps, Options, forward rate agreements and financial Futures);
                e. bond and equity holdings; and
                f. settlement of transactions.
                3. The objective of the Credit Risk management system must be to ensure that every Authorised Person holds adequate capital to cover Credit Risk and absorb any potential losses arising from that risk. Since Authorised Persons need to provide credit as part of their usual business, this needs to be achieved by effectively managing the Credit Risk assumed by the Authorised Person as part of its credit business.
                4. Failure to manage Credit Risk effectively could cause an Authorised Person to face a situation of inadequate capital, which would threaten its safety and soundness. Such problems normally arise from:
                a. lax credit standards for borrowers and Counterparties;
                b. poor portfolio risk management; and
                c. failure to identify in good time changes in economic or other conditions that may impair the financial strength of borrowers and Counterparties.
                5. Therefore, it is essential for Authorised Persons involved in the business of Providing Credit to design, implement and maintain comprehensive and effective systems to manage Credit Risk.

            • PRU 4.3.2

              The Credit Risk management framework of an Authorised Person must have at least the following principal elements effectively implemented to ensure that the Credit Risk Exposures of the Authorised Person are of a sufficiently good quality:

              (a) an appropriate Credit Risk environment, defined by a documented Credit Risk strategy and a documented Credit Risk policy;
              (b) application of the Credit Risk strategy and policy, where appropriate, on a consolidated basis and at the level of individual subsidiaries;
              (c) sound processes for assuming and managing Credit Risk;
              (d) prudent lending controls and limits, including policies and processes for monitoring Exposures in relation to limits, and approvals of exceptions to limits;
              (e) adequate appropriately skilled human resources to manage the Credit Risk function;
              (f) independence of credit approval and review functions from credit initiation functions to avoid any real or potential conflicts of interest;
              (g) prudent procedures for approving credits, defined by a documented credit procedures manual;
              (h) effective systems for credit administration, measurement and monitoring; and
              (i) adequate controls over Credit Risk.

            • PRU 4.3.3 PRU 4.3.3

              (1) An Authorised Person must ensure that its Governing Body retains responsibility for the Credit Risk management framework and ensure it is appropriate for the nature, scale and complexity of operations, in the context of prevailing market and macro-economic conditions.
              (2) An Authorised Person must ensure that its senior management, or an appropriate designated body, regularly reviews and understands the implications as well as the limitations of the risk management information that they receive from the Credit Risk management function, in order to evaluate the suitability and effectiveness of such information in enabling them to provide effective oversight over the Credit Risk management function.
              (3) An Authorised Person must ensure that its Governing Body regularly reviews and understands the implications as well as the limitations of Credit Risk management information and reports presented to it, to ensure that the contents and the format of such reports are suitable for effective Governing Body oversight.
              (4) An Authorised Person must ensure that its Governing Body is responsible for carrying out regular stress testing on the credit portfolio which is appropriate for the nature, scale and complexity of the Credit Risks assumed by the Authorised Person. An Authorised Person must ensure that its Governing Body annually reviews the stress scenarios and takes action to address any perceived issues arising from those reviews.
              (5) An Authorised Person must establish and enforce internal controls and practices so that deviations from policies, procedures, limits and prudential guidelines are promptly reported to the appropriate level of management.

              • Guidance

                1. An Authorised Person may structure its credit processes and Credit Risk management function in a manner which suits its or its Group's internal organisational structure, culture and internal practices, provided the key functions and components relevant to Credit Risk management, as mentioned above, are present, and there must be adequate segregation of functions responsible for critical Credit Risk management processes. In particular, the credit initiation function must be independent of the credit approval and review functions to avoid any potential conflicts of interest. In cases where an Authorised Person finds it necessary to delegate small lending limits to staff in the front office for operational needs, there must be adequate safeguards, e.g. independent review of credits granted, to prevent abuse.
                2. An Authorised Person's senior management or an appropriately delegated body (such as a credit committee) should be responsible for effectively implementing the Credit Risk strategy and policy approved by the Governing Body of the Authorised Person. Senior management or such a credit committee will need to establish adequate procedures to identify, quantify, monitor and control the Credit Risk inherent in the Authorised Person's activities and at the level of both the overall portfolio and individual borrowers/Counterparties.
                3. The appropriate level at which credit decisions are taken will vary according to the type of credit offered and the size and structure of the Authorised Person. For some Authorised Persons, a credit committee may be appropriate, with formal terms of reference laid down. In other Authorised Persons, individuals may be given pre-assigned authority limits. It will usually be appropriate for the final credit approval authority to be given by staff reporting independently from those staff interacting with clients.
                4. As part of its stress testing programme for Credit Risk measurement, an Authorised Person should take into account the realistic recoveries available from security or Collateral under stressed market and macro-economic conditions.
                5. Rule 4.3.3(3) requires the Governing Body of an Authorised Person to review the management information reports presented to it by the senior management of that firm and assess the reports in respect of their utility and effectiveness in enabling the Governing Body to effectively discharge their responsibilities towards effective oversight of the firm and its Credit Risk management.

            • PRU 4.3.4 PRU 4.3.4

              An Authorised Person must also consider whether it is prudent to set out specific provisioning requirements for any country and transfer risks to which it is exposed.

              • Guidance

                Guidance on country and transfer risk Exposure is set out in Section A4.1 (Credit Risk systems and controls) in App4.

            • PRU 4.3.5 PRU 4.3.5

              Where an Authorised Person avails itself of CRM, the Authorised Person must have mechanisms in place to regularly assess the net realisable value of such mitigations taking into account prevailing market conditions.

              • Guidance

                1. Section 4.13 sets out the principles and methodologies for CRM recognition in the calculation of Credit RWA.
                2. Further Guidance on Credit Risk systems and controls (including CRM), and on the specific areas which the Credit Risk policy should cover, is set out in Section A4.1.

          • PRU 4.4 PRU 4.4 Credit Risk strategy, policy, and procedures manual

            • Credit Risk strategy

              • PRU 4.4.1 PRU 4.4.1

                (1) An Authorised Person must implement and maintain a Credit Risk strategy, which prescribes its stated degree of risk tolerance, level of capital available for credit activities, business strategy for credit activities and Credit Risk management approach.
                (2) The strategy must be:
                (a) documented;
                (b) approved by the Governing Body; and
                (c) regularly reviewed and updated by the Authorised Person at periodic intervals and at least annually, as appropriate to the nature, scale and complexity of its activities.

                • Guidance

                  1. An Authorised Person's Credit Risk strategy should reflect the aim to achieve sound credit quality while at the same time ensuring profit and business growth. Therefore the Credit Risk strategy should address the Authorised Person's approach towards the decision on an acceptable level of risk/reward relationship, after taking into account resource and capital costs.
                  2. An Authorised Person's Credit Risk strategy should allow for economic cycles and their effects on the credit portfolio during different stages of an economic cycle. For example, it should cater for a higher incidence of defaults in personal loan and credit card portfolios in times of economic recession.

            • Credit Risk policy

              • PRU 4.4.2

                (1) An Authorised Person must implement and maintain a Credit Risk policy which prescribes all the essential elements of the Credit Risk management system and associated processes.
                (2) The policy must be:
                (a) documented;
                (b) approved by the Governing Body; and
                (c) regularly reviewed and updated by the Authorised Person at periodic intervals and at least annually, as appropriate to the firm's current financial performance, credit market conditions in its main markets and its Capital Resources position as well the firm's nature, scale and complexity of its activities.
                (3) Any changes to the Credit Risk policy and how exceptions to the policy will be dealt with must be approved by the Governing Body or an appropriately delegated committee of senior management (such as a credit committee).
                (4) An Authorised Person with one or more branches outside the ADGM must implement and maintain Credit Risk policies adapted to each local market and its regulatory conditions.

              • PRU 4.4.3

                The Credit Risk policy must:

                (a) be consistent with the approved Credit Risk strategy, considering a range of factors, including but not limited to an approved degree of risk tolerance, capital allocated to Credit Risk, business strategy and market conditions in its main credit markets;
                (b) provide sound, well-defined Credit Risk norms and criteria for approval of credit applications;
                (c) clearly specify Exposure limits, product types, business segments, nature of target borrowers and the nature of Credit Risk that the Authorised Person wishes to incur;
                (d) set out, where appropriate, the amounts and terms and conditions under which Counterparties or clients may be eligible or ineligible for credit;
                (e) include minimum information that is required to be obtained for processing an application for credit;
                (f) include well-defined criteria and policies for approving new Exposures as well as renewing and refinancing existing Exposures, identifying the appropriate approval authority for the size and complexity of the Exposures;
                (g) include effective credit administration policies, including continued analysis of a borrower's ability and willingness to repay under the terms of the debt, monitoring of documentation, legal covenants, contractual requirements and Collateral, and a classification system that is consistent with the nature, size and complexity of the Authorised Person's activities or, at the least, with the asset grading system prescribed in Rule 4.5.4;
                (h) include comprehensive policies for reporting Exposures on an on-going basis;
                (i) include comprehensive policies for identifying and managing problem assets;
                (j) include a provisioning policy approved by the Governing Body which ensures that all loans are promptly and prudently provided for;
                (k) set out limits and approval processes involved for the approval of credit facilities that can be approved by the delegated authorities, and stipulate that the Governing Body retains responsibility for the governance of such limits;
                (l) require that major Credit Risk Exposures exceeding a specified amount or at a minimum all Large Exposures of the Authorised Person are approved by the Authorised Person's senior management or its designated body like credit committee; and
                (m) require that all Credit Risk Exposures that are especially risky or inconsistent with the approved credit strategy of the Authorised Person are approved by the Authorised Person's senior management or its designated body such as a credit committee.

              • PRU 4.4.4

                In relation to conflicts of interest and Related Person transactions, the policy must:

                (a) set out adequate procedures for handling conflicts of interest relating to the provision and management of credit, including measures to prevent any Person directly or indirectly benefiting from the credit being part of the process of granting or managing the credit;
                (b) subject to Rule 4.4.5, prohibit Exposures to Related Persons on terms that are more favourable than those available to Persons who are not Related Persons; and
                (c) if Exposures to Related Persons are allowed on terms which are no more favourable than those available to Persons who are not Related Persons, set out procedures that:
                (i) require such Exposures, and any write-off of such Exposures, exceeding specific amounts or otherwise posing special risks to the Authorised Person, to be made subject to the prior written approval of the firm's Governing Body or the Governing Body's delegate; and
                (ii) exclude Persons directly or indirectly benefiting from the grant or write off of such Exposures being part of the approval process.

              • PRU 4.4.5 PRU 4.4.5

                The prohibition in Rule 4.4.4(b) does not apply to Providing Credit to a Related Person under a credit policy on terms (such as for credit assessment, tenor, interest rates, amortisation schedules and requirements for Collateral) that are more favourable than those on which it provides credit to Persons who are not Related Persons, provided the credit policy:

                (a) is an Employee credit policy that is widely available to Employees of the Authorised Person;
                (b) is approved by the Authorised Person's Governing Body or the Governing Body's delegate;
                (c) clearly sets out the terms, conditions and limits (both at individual and aggregate levels) on which credit is to be provided to such Employees; and
                (d) requires adequate mechanisms to ensure on-going compliance with the terms and conditions of that credit policy, including immediate reporting to the Governing Body or the Governing Body's delegate where there is a deviation from or a breach of the terms and conditions or procedures applicable to the provision of such credit for timely and appropriate action.

                • Guidance

                  1. The requirements in these Rules do not prevent arrangements such as Employee loan schemes that allow more favourable and flexible loan terms to Employees of the Authorised Person than those available under its normal commercial arrangements. However, such a loan scheme must comply with the requirements set out in these Rules, which are designed to address conflicts of interest that may arise in the grant, approval or management of such loans. Such conflicts are especially likely to arise where one or more of the Employees concerned are Directors, Partners or senior managers.
                  2. Generally, where an Authorised Person has an Employee loan scheme under these Rules, the Regulator expects its Governing Body to have ensured, before it or its delegate approved that scheme, that the terms, conditions and particularly limits (both at individual and aggregate level) on which credit is to be provided to Employees under the scheme are adequate and effective in addressing the risks arising from such lending. The Authorised Person should also be able to demonstrate to the Regulator that the procedures it has adopted relating to an Employee loan scheme are adequate to address any risks arising from such lending. The Regulator expects to have access to records relating to lending under an Employee loan scheme upon request or during its supervisory visits. Any significant breach of or deviation from the procedures adopted in relation to an Employee loan scheme may also trigger the reporting requirements to the Regulator under GEN.

              • PRU 4.4.6

                For the purposes of the Rules in this Chapter, a Person is a "Related Person" of an Authorised Person if the Person:

                (a) is, or was in the past two years:
                (i) a member of a Group or Partnership in which the Authorised Person is or was also a member; or
                (ii) a Controller of the Authorised Person or a Close Relative of such a Controller;
                (b) is, or was in the past two years, a Director, Partner or senior manager of the Authorised Person or an entity referred to under (a)(i) or (ii), or a Close Relative of such a Director, Partner or senior manager; or
                (c) is an entity in which a Director, Partner or senior manager of the Authorised Person or an entity referred to in (a)(i) or (a)(ii), or a Close Relative of such a Director, Partner or senior manager has a significant interest by:
                (i) holding 20% or more of the Shares of that entity, or a Parent of that entity, if that entity is a company; or
                (ii) being entitled to exercise 20% or more of the voting rights in respect of that entity,
                except that a Partner is not a Related Person where that Person is a limited Partner of a Limited Partnership formed under the Limited Partnerships Act or any similar limited Partnership constituted under the law of a country or territory outside the ADGM.

            • Credit procedures manual

              • PRU 4.4.7

                An Authorised Person must implement and maintain a documented credit procedures manual, which sets out the criteria and procedures for granting new credits, for approving extensions of existing credits and exceptions, for conducting periodic and independent reviews of credits granted and for maintaining the records for credits granted.

              • PRU 4.4.8 PRU 4.4.8

                The credit procedures manual must establish:

                (a) sound, well-defined criteria for granting credit, including a thorough understanding of the borrower or Counterparty, the purpose and structure of the credit and its source of repayment;
                (b) well-defined processes for approving new Exposures as well as renewing and refinancing existing Exposures;
                (c) effective credit administration processes, including continued analysis of a borrower's ability and willingness to repay under the terms of the debt, monitoring of documentation, legal covenants, contractual requirements and Collateral;
                (d) effective processes for classification and grading of credit assets consistent with the nature, size and complexity of the Authorised Person's activities;
                (e) comprehensive processes for reporting Exposures on an ongoing basis; and
                (f) comprehensive processes for identifying problem assets, managing problem assets, monitoring their collections and for estimating the required level of provisions.

                • Guidance

                  The same criteria should be applied to both advised and unadvised facilities and should deal with all Credit Risks associated with the Authorised Person's business whether in the Non-Trading or Trading Book or on or off balance sheet.

          • PRU 4.5 PRU 4.5 Processes for credit assessment

            • PRU 4.5.1 PRU 4.5.1

              (1) When utilising external credit rating agencies as part of its credit assessment processes, an Authorised Person must:
              (a) maintain an internal credit grading system; and
              (b) stress test its capital position on at least an annual basis to consider the capital implications to the Authorised Person of a significant reduction in the credit quality and associated reduction on credit ratings from credit rating agencies for its credit portfolio.
              (2) An Authorised Person must not solely use external credit rating agency credit ratings as a basis for its assessment of the risks associated with an Exposure, in particular in respect of a Large Exposure, and must at all times conduct its own credit assessment of such an Exposure.

              • Guidance

                An Authorised Person should closely monitor the adequacy of the internal credit assessment processes, in order to assess whether there is an upward bias in internal ratings.

            • PRU 4.5.2

              An Authorised Person must implement and maintain appropriate policies, processes, systems and controls to:

              (a) administer its credit portfolios, including keeping the credit files current, getting up-to-date financial information on borrowers and other Counterparties, funds transfer, and electronic storage of important documents;
              (b) ensure that the valuations of Credit Risk mitigants employed by the Authorised Person are up-to-date, including periodic assessment of Credit Risk mitigants such as guarantees and Collateral;
              (c) review all material concentrations in its credit portfolio and report the findings of such reviews to the Governing Body; and
              (d) measure Credit Risk (including to measure Credit Risk of off-balance sheet products such as Derivatives in credit equivalent terms) and monitor the condition of individual credits to facilitate identification of problem credits and to determine the adequacy of provisions and reserves.

            • PRU 4.5.3 PRU 4.5.3

              The Credit Risk management system and, in particular, the systems, policies and processes aimed at classification of credits, monitoring and identification of problem credits, management of problem credits and provisioning for them must include all the on-balance sheet and off-balance sheet credit Exposures of the Authorised Person.

              • Guidance

                An Authorised Person should ensure that its loan portfolio is properly classified and has an effective early-warning system for problem loans.

            • PRU 4.5.4 PRU 4.5.4

              (1) An Authorised Person must establish clearly defined criteria for identifying its problem credits and/or impaired assets which ensure that credits are classified as impaired in all cases where there is some reason to believe that all amounts due (including principal and interest) will, or may, not be collected in accordance with the contractual terms of the loan agreement.
              (2) For the purpose of (1), and subject to (3), an Authorised Person must categorise its credits into five categories as detailed in the following table, where credits in the substandard, doubtful and loss categories must be considered as problem credits:
              Standard includes credits with no element of uncertainty about timely repayment of the outstanding amounts, including principal and interest. Credits are currently in regular payment status with prompt payments.
              Special mention includes credits with deteriorating or potentially deteriorating credit quality which, may adversely affect the borrower's ability to make scheduled payments on time. The credits in this category warrant close attention by the Authorised Person.
              Substandard includes credits which exhibit definitive deterioration in credit quality and impaired debt servicing capacity of the borrower.
              Doubtful includes credits which show strong credit quality deterioration, worse than those in substandard category, to the extent that the prospect of full recovery of all the outstanding amounts from the credit is questionable and consequently the probability of a credit loss is high, though the exact amount of loss cannot be determined yet.
              Loss includes credits which are assessed as uncollectable and credits with very low potential for recoverability of amounts due.
              (3) An Authorised Person may also have in place a more detailed credit grading system provided it can address the categories detailed in (2).

              • Guidance

                1. With respect to the ratings above, Authorised Persons should consider the following Exposures as classified:
                (i) special mention;
                (ii) substandard;
                (iii) doubtful; and
                (iv) loss where the loans are contractually in arrears for a minimum number of days of 30, 60, 90 — 120 and 120 — 180 days respectively.
                Authorised Persons should also consider the treatments as set out in Rule 4.5.7 (Evergreening).
                2. Credits exhibiting the following characteristics should be included in the special mention category.
                a. a declining trend in the operations of the borrower or in the borrower's ability to continue to generate cash required for repayment of the credit;
                b. any signals which indicate a potential weakness in the financial position of the borrower, but not to the point at which repayment capacity is definitely impaired; or
                c. business, economic or market conditions that may unfavourably affect the profitability and business of the borrower in the near to medium term.
                3. Credits exhibiting the following characteristics should be included in the substandard category.
                a. inability of the borrower to meet contractual repayment terms of the Credit Facility;
                b. unfavourable economic and market conditions or operating problems that would affect the profitability and cash flow generation of the borrower;
                c. weak financial condition or the inability of the borrower to generate sufficient cash flow to service the payments;
                d. difficulties experienced by the borrower in servicing its other debt obligations; or
                e. breach of any financial covenants by the borrower.

            • PRU 4.5.5

              An Authorised Person must have detailed policies, processes and resources for managing problem credits which address the following:

              (a) monitoring of credits and early identification of credit quality deterioration;
              (b) review of classification of problem credits; and
              (c) ongoing oversight of problem credits, and for collecting on past due obligations.

            • PRU 4.5.6

              An Authorised Person must ensure that each and every credit which qualifies as a Large Exposure and is classified as an impaired credit is managed individually. This includes valuation, classification and provisioning for such credits on an individual item basis.

            • PRU 4.5.7

              Any Evergreening exercise involving refinancing of past due credits must not result in their being classified as a higher category. In particular, impaired credits cannot be refinanced with the aim of classifying them as standard or special mention credits.

            • PRU 4.5.8

              An Authorised Person's provisioning policy must specify the following minimum provisioning requirements:

              (a) for substandard assets — 20% of the unsecured portion of the credit;
              (b) for doubtful assets — 50% of the unsecured portion of the credit; and
              (c) for loss assets — 100% of the unsecured portion of the credit.

            • PRU 4.5.9

              An Authorised Person must, on a periodic basis, at a minimum monthly frequency, review its problem credits (at an individual level or at a portfolio level for credits with homogeneous characteristics) and review the asset classification, provisioning and write-offs for each of those problem credits.

        • PRU PART 3 PRU PART 3 — CRCOM

          • PRU 4.6 PRU 4.6 Application

            • Guidance

              1. As indicated in Rule 4.1.1, this Chapter 4 (including this Part 3) applies to Authorised Persons in Categories 1, 2, 3A and 5. However, the provisions in this part are applied in a differentiated manner in that Category 3A firms must, and Category 2 firms may, use the Simplified Approach under Section 4.7.
              2. The Credit Risk Capital Requirement (also referred to in these Rules as CRCOM) is a component of the calculation of the overall Capital Requirement of an Authorised Person, as provided in Rules 3.8.2 and 3.8.3. The Rules in this Part 3, supplemented by App4, govern the manner of calculation of the CRCOM.

          • PRU 4.7 PRU 4.7 Simplified Approach

            • Category 3A firms

              • PRU 4.7.1 PRU 4.7.1

                (1) This Rule applies only to an Authorised Person in Category 3A.
                (2) Subject to (3) and (4), an Authorised Person must apply the Simplified Approach as prescribed in Section A4.12 in App4.
                (3) An Authorised Person is not required to apply the Simplified Approach if it obtains prior written approval of the Regulator not to do so.
                (4) After obtaining approval under (3), a firm must not revert to the Simplified Approach without obtaining further prior written approval from the Regulator.

                • Guidance

                  1. In effect, the Simplified Approach reduces undue regulatory burden on Category 3A firms to reflect more appropriately their risk profile.
                  2. In relation to (3) and (4), the Regulator may consider granting its approval for a change of approach if it is satisfied that there are no regulatory capital arbitrage opportunities. Firms should be able to demonstrate to the Regulator solid and reasonable grounds to be able to move from one approach to the other. For instance, in assessing whether or not to grant approval, the Regulator may consider whether or not there has been a material change in the business of the firm.

            • Category 2 firms

              • PRU 4.7.2 PRU 4.7.2

                (1) This Rule applies only to an Authorised Person in Category 2.
                (2) Subject to (3) and (4), an Authorised Person may apply the Simplified Approach, as prescribed in Section A4.12 in App4, upon obtaining the prior written approval to do so from the Regulator.
                (3) After obtaining approval under (2), a firm must not disapply the Simplified Approach without further prior written approval from the Regulator.
                (4) The Regulator may revoke its approval under (2) and require a firm to disapply the Simplified Approach, if the Regulator considers that this is warranted by the firm's business model and risk profile.

                • Guidance

                  In relation to (3) and (4), the Regulator may consider granting its approval for a change of approach if it is satisfied that there are no regulatory capital arbitrage opportunities. Firms should be able to demonstrate to the Regulator reasonable grounds to be able to move from one approach to the other. For instance, in assessing whether or not to grant approval, the Regulator may consider whether or not there has been a material change in the business of the firm.

          • PRU 4.8 PRU 4.8 Calculation of the CRCOM

            • PRU 4.8.1

              (1) The Credit Risk Capital Requirement is calculated as follows: CRCOM = 10% x Credit RWA
              (2) The Credit RWA of an Authorised Person is the sum of:
              (a) its risk weighted assets (RWA) for all its Credit Risk Exposures (referred to in these Rules as "CR Exposures") calculated in accordance with Rules 4.8.2 and 4.8.3;
              (b) its RWA for all its securitisation Exposures (referred to in these Rules as "SE Exposures") calculated in accordance with Rule 4.8.4 and Section 4.14; and
              (c) its RWA for its Counterparty Risk Exposures as calculated in accordance with Sections A4.6 to A4.8.

            • Calculation of RWA for Credit Risk Exposures (CR Exposures)

              • PRU 4.8.2

                An Authorised Person must include in its calculation of RWA for CR Exposures:

                (a) any on-balance sheet asset; and
                (b) any off-balance sheet item; but excluding:
                (c) any SE Exposure;
                (d) any securitised Exposure that meets the requirements for the recognition of risk transference in a Traditional Securitisation set out in Section 4.14; or
                (e) any Exposure classified as a position or instrument in the Trading Book in accordance with Section A2.1.

              • PRU 4.8.3

                To calculate its RWA for CR Exposures, an Authorised Person must:

                (a) calculate the value of the Exposure (represented as "E") for every on-balance sheet and every off-balance sheet asset in accordance with the Exposure measurement methodology specified in Section 4.9 and recognising the effects of any applicable CRM;
                (b) categorise that Exposure in accordance with the Rules in Section 4.10;
                (c) allocate an applicable Credit Quality Grade and risk weight for that Exposure in accordance with the Rules in Section 4.11 and 4.12;
                (d) calculate the RWA amount for that Exposure using the following formula:
                RWA(CR) = E x CRW
                where:
                (i) "RWA(CR)" refers to the risk-weighted Exposure amount for that CR Exposure;
                (ii) "E" refers to the Exposure value or amount, for that CR Exposure; and
                (iii) "CRW" refers to the applicable risk weight for that CR Exposure determined in accordance with (b) and (c); and
                (e) add the RWA amounts calculated in accordance with (d) for all its CR Exposures.

            • Calculation of RWA for securitisation Exposures (SE Exposures)

              • PRU 4.8.4

                To calculate its RWA for all its SE Exposures, an Authorised Person must:

                (a) calculate the value of the Exposure for each of its SE Exposures in accordance with Exposure measurement methodology specified in Section 4.9 and recognising the effects of any applicable CRM;
                (b) allocate an applicable Credit Quality Grade for that SE Exposure in accordance with the Rules in Section 4.11;
                (c) calculate the RWA amount for each SE Exposure, except for those SE Exposures which the Authorised Person is required to include as deductions from any component of Capital Resources, using the following formula:
                RWA(SE) = SE x CRW
                where:
                (i) "RWA(SE)" refers to the risk-weighted Exposure amount for that securitisation Exposure;
                (ii) "SE" refers to the Exposure value or amount for that SE Exposure calculated in accordance with (a); and
                (iii) "CRW" refers to the applicable risk weight for that SE Exposure determined in accordance with (b); and
                (d) add the RWA amounts calculated in accordance with (c) for all its SE Exposures to the RWA amounts calculated in accordance with Rule 4.8.5 in respect of its Early Amortisation Exposures.

              • PRU 4.8.5

                To calculate its RWA for Early Amortisation Exposures, an Authorised Person must:

                (a) calculate the value of the Exposure (EAE) for each of its Early Amortisation Exposures in accordance with Exposure measurement methodology specified in Section 4.9 and recognising the effects of any applicable CRM;
                (b) calculate the risk-weighted Exposure amount for each Early Amortisation Exposure using the following formula:
                RWA(EAE) = EAE x CRW
                where:
                (i) "RWA(EAE)" refers to the risk-weighted Exposure amount for that Early Amortisation Exposure;
                (ii) "EAE" refers to the Exposure value or amount, for that Early Amortisation Exposure calculated in accordance with (a); and
                (iii) "CRW" refers to the applicable risk weight for the underlying Exposure type as if the Exposure had not been securitised; and
                (c) add the RWA amounts calculated in accordance with (b) for all its Early Amortisation Exposures.

              • PRU 4.8.6

                The aggregate RWA amount for all of the SE Exposures of an Authorised Person to a securitisation and Exposures arising from CRM applied to those SE Exposures must not exceed the aggregate RWA amount corresponding to the underlying Exposures of the securitisation had they been on the balance sheet of the Authorised Person and included in the calculation of the Credit RWA of the Authorised Person. For avoidance of doubt, the aggregate RWA amount must not include any deduction for a gain-on-sale or a Credit-Enhancing Interest-Only Strip arising from the securitisation.

          • PRU 4.9 PRU 4.9 Methodology for measurement of Exposures

            • PRU 4.9.1 PRU 4.9.1

              An Authorised Person must apply the Exposure measurement methodology set out in the Rules in this part to calculate the value or amount of an Exposure for any CR Exposure or SE Exposure.

              • Guidance

                1. The measurement methodology in this Section prescribes the manner of calculation of Exposures for the purpose of determining the Credit RWA for Credit Risk (CR) Exposures as provided in Rule 4.8.3 and for securitisation (SE) Exposures as provided in Rule 4.8.4.
                2. Due regard should be given to the Guidance relating to prudent valuation in Section 2.4 and related provisions in App2.5.
                3. An Authorised Person should consult with the Regulator on the appropriate treatment to apply in the measurement of E, for transactions that have not been addressed in this part.

            • PRU 4.9.2

              An Authorised Person must calculate E for any CR Exposure or SE Exposure, net of any individual impairment provision attributable to such Exposures, as determined in accordance with the International Financial Reporting Standards.

            • Measurement of E for on-balance sheet assets

              • PRU 4.9.3 PRU 4.9.3

                For each on-balance sheet asset, E should be the Carrying Value of the asset.

                • Guidance

                  1. For any asset, E should be equal to the fair value of that asset presented in the balance sheet, except that:
                  a. for any asset held at cost, E should be equal to the cost of the asset presented in the balance sheet; and
                  b. for any available-for-sale (AFS) debt security or AFS loan, E, should be equal to the fair value less provision for impairment of that AFS debt security or AFS loan, adjusted by deducting any unrealised fair value gains and adding back any unrealised fair value losses on revaluation (broadly equivalent to the amortised cost of the AFS debt security or AFS loan less any provision for impairment).
                  2. In the case of a lease where the Authorised Person is exposed to residual value risk (i.e. potential loss due to the fair value of the leased asset declining below the estimate of its residual value reflected on the balance sheet of the Authorised Person at lease inception), the Authorised Person should calculate (i) an Exposure to the lessee equivalent to the discounted lease payment stream; and (ii) an Exposure to the residual value of the leased assets equivalent to the estimate of the residual value reflected in the balance sheet of the Authorised Person.
                  3. Any foreign exchange transaction or translation gain or loss from a foreign currency-denominated on-balance sheet item as well as interest earned on a fixed income instrument should be allocated to the Exposure to which it accrues.

            • Measurement of E for off-balance sheet items other than Counterparty Risk Exposures

              • PRU 4.9.4 PRU 4.9.4

                (1) For each off-balance sheet item other than a pre-settlement Counterparty Exposure arising from an OTC Derivative transaction, long settlement transaction or Securities Financing Transaction (referred to in these Rules as an "SFT") an Authorised Person must calculate E by:
                (a) in the case of an Early Amortisation Exposure, multiplying the amount of investors' interest by the applicable CCF set out in Rules A4.2.1 and A4.2.2 in App4; and
                (b) in all other cases, multiplying the notional amount of each item by:
                (i) the applicable CCF set out in Rule A4.2.1 in App4 if that item is a CR Exposure; or
                (ii) the applicable CCF set out in Rule A4.2.2 in App4 if that item is an SE Exposure.

                • Guidance

                  1. An Authorised Person which is exposed to the risk of the underlying Securities in an OTC Derivative transaction, long settlement transaction or SFT which is in substance similar to a forward purchase or credit substitute should calculate E, for such an Exposure, in accordance with Rule 4.9.4(1).
                  2. Investors' interest is defined as the sum of:
                  a. investors' drawn balances related to the securitised Exposures; and
                  b. E associated with investors' undrawn balances related to the SE Exposures. E is determined by allocating the undrawn balances of securitised Exposures on a pro-rata basis based on the proportions of the Originator's and investor Shares of the securitised drawn balances.
                  3. For avoidance of doubt, where an Authorised Person has provided unfunded credit protection via a total rate of return swap, E should be equal to the notional amount of the underlying reference credit for which the Authorised Person is providing protection adjusted for any payments received from or made to the protection buyer and recognised in the profit and loss account of the Authorised Person. Where an Authorised Person has provided unfunded credit protection via a credit default swap, E should be equal to the notional amount of the underlying reference credit for which the Authorised Person is providing protection.
                  4. The notional amount of an off-balance sheet item refers to the amount which has been committed but is as yet undrawn. The amount to which the CCF is applied is the lower of the value of the unused committed credit line, and the value which reflects any possible constraining availability of the facility, such as the existence of a ceiling on the potential lending amount which is related to an obligor's reported cash flow. If the facility is constrained in this way, the Authorised Person must have sufficient line monitoring and management procedures to support this contention.
                  5. Any foreign exchange transaction or translation gain or loss from a foreign currency-denominated off-balance sheet item should be allocated to the Exposure to which it accrues.

            • Recognition of eligible financial Collateral for on-balance sheet assets and off-balance sheet items other than Counterparty Exposures

              • PRU 4.9.5

                (1) An Authorised Person which has taken eligible financial Collateral for any transaction other than an equity Exposure, an SE Exposure, an OTC Derivative transaction, long settlement transaction or SFT may recognise the effect of such Collateral in accordance with Rules 4.9.6 and 4.9.7.
                (2) An Authorised Person must use either the:
                (a) Financial Collateral Simplified Approach (FCSA) which adopts the treatment under Rule 4.13.5 in relation to the composition of financial Collateral; or
                (b) Financial Collateral Comprehensive Approach (FCCA) which adopts the treatment under Rule 4.13.6;
                to recognise the effect of eligible financial Collateral.
                (3) An Authorised Person must apply the chosen approach consistently to its entire Non-Trading Book and must not use a combination of both approaches.

              • PRU 4.9.6

                An Authorised Person using the FCSA may recognise the effect of eligible financial Collateral in accordance with the Rules in Section 4.13.

              • PRU 4.9.7

                An Authorised Person using the FCCA may calculate the CR Exposure adjusted for eligible financial Collateral (referred to in these Rules as "E*"), in accordance with Rules in Section A4.3 of App4 and substitute E* for E when calculating the Credit Risk-weighted Exposure amount for that CR Exposure under Section 4.8.

            • Recognition of eligible financial Collateral for securitisation (SE) Exposures

              • PRU 4.9.8

                An Authorised Person that has taken eligible financial Collateral for an SE Exposure may recognise the effect of such Collateral in accordance with Rules 4.9.9 to 4.9.11.

              • PRU 4.9.9

                An Authorised Person calculating RWAs for SE Exposures must use either the FCSA or the FCCA approaches to recognise the effect of eligible financial Collateral. An Authorised Person must apply the chosen approach consistently to the entire Non-Trading Book and must not use a combination of both approaches.

              • PRU 4.9.10

                An Authorised Person using the FCSA approach for an SE Exposure may recognise the effect of eligible financial Collateral in accordance with Section 4.13 and Rule 4.14.70.

              • PRU 4.9.11

                An Authorised Person using the FCCA approach for an SE Exposure must calculate E*, the SE Exposure adjusted for eligible financial Collateral, in accordance with Rules in Section A4.3 of App4 and substitute E* for E when calculating the RWA for SE Exposure under Section 4.8.

            • Measurement of E for Counterparty Exposures

            • Measurement of E for Counterparty Exposures arising from OTC Derivative transactions and long settlement transactions

              • PRU 4.9.12

                For each OTC Derivative transaction or long settlement transaction which is not covered by a qualifying cross-product Netting agreement, an Authorised Person should calculate E for the pre-settlement Counterparty Exposure arising from that OTC Derivative transaction or long settlement transaction using the method set out in Sections A4.6 to A4.8.

            • Measurement of E for pre-settlement Counterparty Exposures arising from SFTs

              • PRU 4.9.13

                An SFT must be treated as collateralised lending, notwithstanding the wide range of structures which could be used for SFTs.

              • PRU 4.9.14

                An Authorised Person must calculate E, for a pre-settlement Counterparty Exposure arising from an SFT, other than an Exposure covered by a qualifying cross-product Netting agreement, in accordance with Rules 4.9.15 to 4.9.20.

              • PRU 4.9.15

                An Authorised Person must determine E, for a pre-settlement Counterparty Exposure arising from an SFT which is not covered by a qualifying cross-product Netting agreement as follows:

                (a) in the case where the Authorised Person has lent Securities to a Counterparty or sold Securities to a Counterparty with a commitment to repurchase those Securities at a specified price on a specified future date, the latest fair value of the Securities lent or sold; and
                (b) in the case where the Authorised Person has lent cash to a Counterparty through the borrowing of Securities from the Counterparty or paid cash for the purchase of Securities from a Counterparty with a commitment to resell those Securities at a specified price on a specified future date, the amount of cash lent or paid.

              • PRU 4.9.16

                An Authorised Person which has taken eligible financial Collateral for any SFT where the pre-settlement Counterparty Exposure is determined in accordance with Rule 4.9.15 may recognise the effect of such Collateral in accordance with Rules 4.9.17 to 4.9.20.

              • PRU 4.9.17

                An Authorised Person must use either the FCSA or the FCCA to recognise the effect of eligible financial Collateral for any SFT in the Non-Trading Book. The Authorised Person must apply the chosen approach consistently to the entire Non-Trading Book and must not use a combination of both approaches. For a pre-settlement Counterparty Exposure arising from any SFT in the Trading Book, an Authorised Person must only use the FCCA to recognise the effect of eligible financial Collateral.

              • PRU 4.9.18

                An Authorised Person using the FCSA may recognise the effect of eligible financial Collateral for any SFT in accordance with Rules A4.3.27 to A4.3.29 in App4.

              • PRU 4.9.19

                An Authorised Person which has taken eligible financial Collateral for any SFT that is not covered by a qualifying bilateral Netting agreement and using the FCCA, must calculate E* in accordance with Rules A4.3.2 to A4.3.6 in App4, and substitute E* for E when calculating the Credit Risk-weighted Exposure amount for that CR Exposure under Section 4.8.

              • PRU 4.9.20

                An Authorised Person which has taken eligible financial Collateral for an SFT that is covered by a qualifying bilateral Netting agreement and using the FCCA, must calculate E* for all its CR Exposures to any single Counterparty covered by the qualifying bilateral Netting agreement, in accordance with Rules A4.3.2 to A4.3.6 in App4 (if the Authorised Person is using supervisory haircuts or own-estimate haircuts), and substitute E* for E when calculating the Credit Risk-weighted Exposure amount for its CR Exposures to that Counterparty under Section 4.8.

            • Exceptions to the measurement of E

              • PRU 4.9.21 PRU 4.9.21

                An Authorised Person may attribute a value of zero to E for:

                (a) any pre-settlement Counterparty Exposure arising from any Derivative transaction or SFT outstanding with a central counterparty and which has not been rejected by that central counterparty, provided that the Exposure is fully collateralised on a daily basis;
                (b) any Credit Risk Exposure arising from any Derivative transaction, SFT or spot transaction which an Authorised Person has outstanding with a central counterparty for which the latter acts as a custodian on the Authorised Person's behalf, provided that the Exposure is fully collateralised on a daily basis;
                (c) any pre-settlement Counterparty Exposure arising from any Credit Derivative which an Authorised Person may recognise as eligible credit protection for a Non-Trading Book Exposure or another CCR Exposure; and
                (d) any pre-settlement Counterparty Exposure arising from any sold credit default swap in the Non-Trading Book, where the credit default swap is treated as credit protection sold by the Authorised Person.

                • Guidance

                  Credit Risk (CR) Exposures outstanding with a central counterparty would, for example, include credit Exposures arising from monies placed and from Collateral posted, with the Counterparty.

          • PRU 4.10 PRU 4.10 Categorisation of Credit Risk Exposures (CR Exposures)

            • Guidance

              This Section categorises Exposures for the purpose of determining the CRW for CR Exposures, as provided in Rule 4.8.3.

            • PRU 4.10.1 PRU 4.10.1

              An Authorised Person must categorise any CR Exposure that is not past due for more than 90 days into one of the following asset classes:

              (a) cash items, which consist of:
              (i) cash and cash equivalents;
              (ii) gold bullion held in the vaults of the Authorised Person or on an allocated basis in the vaults of another entity to the extent that it is backed by gold bullion liabilities; and
              (iii) all receivable funds arising from transactions that are settled on a DvP basis which are outstanding up to and including the 4th business day after the settlement date;
              (b) central government and Central Bank asset class, which consists of any CR Exposure to a central government or Central Bank;
              (c) the PSE asset class, which consists of any CR Exposure to a PSE;
              (d) the MDB asset class, which consists of any CR Exposure to an MDB;
              (e) bank asset class, which consists of any CR Exposure to a banking institution;
              (f) corporate asset class, which consists of any CR Exposure to any corporation, Partnership, sole proprietorship or Trustee in respect of a trust, other than Exposures categorised in sub-paragraphs (a) to (e), (g) and (h);
              (g) regulatory retail asset class, which consists of any CR Exposure meeting all of the following conditions:
              (i) the Exposure is to an individual, a group of individuals, or a small business;
              (ii) the Exposure takes the form of any of the following:
              (A) revolving credit and lines of credit, including credit cards and overdrafts;
              (B) personal term loans and leases, including instalment loans, vehicle loans and leases, student and educational loans;
              (C) small business credit facilities and commitments; or
              (D) any other product which the Regulator may specify from time to time;
              (iii) the Exposure is one of a sufficient number of Exposures with similar characteristics such that the risks associated with such lending are reduced; and
              (iv) the total Exposure to any obligor or group of obligors is not more than $2 million;
              (h) residential mortgage asset class, which consists of any CR Exposure meeting all of the following conditions:
              (i) the Exposure is to an individual or a group of individuals, or if the Exposure is to an entity other than an individual, the Authorised Person can demonstrate to the Regulator (if required to do so) that it has robust processes to ascertain that the Exposure is structured to replicate the risk profile of an Exposure to an individual or a group of individuals and that it is able to identify and manage the legal risks that arise in such structures;
              (ii) the Exposure is secured against a first lien mortgage:
              (A) of a completed residential property; or
              (B) on an exceptional basis of an uncompleted residential property in a jurisdiction approved by the Regulator;
              (iii) the Exposure is not classified as an impaired asset in accordance with these Rules; and
              (iv) the Exposure is not to a corporation, Partnership, sole proprietorship or Trustee in respect of a trust where such corporation, Partnership, sole proprietorship or trust is engaged in residential building, development or management;
              (i) the commercial real estate asset class, which consists of any CR Exposure meeting all of the following conditions:
              (i) the Exposure is to a corporation, Partnership, sole proprietorship or Trustee in respect of a trust; and
              (ii) the Exposure is secured by commercial real estate; or
              (j) other Exposures asset class, which consists of any CR Exposure which does not fall within any of the categories in sub-paragraphs (a) to (i).

              • Guidance

                The Exposures listed under item (f) include transactions settled on a payment-versus-payment basis. For avoidance of doubt, the Regulator expects that a CR Exposure to a Securities firm should be categorised within the corporate asset class.

          • PRU 4.11 PRU 4.11 Credit Quality Grade and External Credit Assessments

            • Guidance

              This Section governs credit assessments of Exposures for the purpose of determining the CRW for Credit Risk (CR) Exposures as provided in Rule 4.8.3 and for securitisation (SE) Exposures as provided in Rule 4.8.4.

            • PRU 4.11.1

              An Authorised Person must assign a CR Exposure to a Credit Quality Grade based on the external credit assessment that is applicable to the CR Exposure in accordance with tables mapping the ratings from an ECAI to Credit Quality Grades, which will be published by the Regulator.

            • PRU 4.11.2

              CR Exposures with external credit assessments from external credit rating agencies that are not recognised by the Regulator in the tables mapping the ratings to the Credit Quality Grades must be assigned to the Credit Quality Grade associated with "unrated" Exposures.

            • PRU 4.11.3

              An Authorised Person must only use an external credit assessment which is accessible to the public. An Authorised Person may not use a credit assessment that is made available only to the parties to a transaction.

            • PRU 4.11.4

              An Authorised Person must only use external credit assessments by a recognised ECAI for the purposes of mapping the ratings from that ECAI to Credit Quality Grades. The Regulator may impose conditions on the use of such external credit assessments.

            • PRU 4.11.5 PRU 4.11.5

              An Authorised Person must use its chosen recognised external credit rating agencies and their external credit assessments consistently for each type of Exposure, for both risk weighting and risk management purposes. Where an Authorised Person has two external credit assessments which map into different Credit Quality Grades, it must assign the CR Exposure to the Credit Quality Grade associated with the higher risk weight. Where an Authorised Person has three or more external credit assessments which map into two or more different Credit Quality Grades, it must assign the CR Exposure to the Credit Quality Grade associated with the higher of the two lowest risk weights.

              • Guidance

                For illustration, if there are three external credit assessments mapping into Credit Quality Grades with risk weights of 0%, 20% and 50%, then the applicable risk weight is 20%. If the external credit assessments map into Credit Quality Grades with risk weights of 20%, 50% and 50%, then the applicable risk weight is 50%.

            • PRU 4.11.6

              An Authorised Person must not recognise the effects of CRM if such mitigation is already reflected in the issue-specific external credit assessment of the CR Exposure.

            • PRU 4.11.7

              Where a CR Exposure has an issue-specific external credit assessment from a recognised ECAI, an Authorised Person must use such assessment. Where a CR Exposure does not have an issue-specific external credit assessment, an Authorised Person must:

              (a) if there is an issue-specific external credit assessment for another Exposure to the same obligor, use the issue-specific assessment for the other Exposure only if the Exposure without an issue-specific assessment ranks pari passu with or is senior to the Exposure with the issue-specific assessment;
              (b) if the obligor has an Issuer external credit assessment, use the Issuer assessment of the obligor only if the Exposure without an issue-specific assessment ranks pari passu with or is senior to any unsecured claim that is not subordinated to any other claim on the obligor; or
              (c) in all other cases, apply a risk weight equal to the higher of the risk weight that is applicable to an unrated Exposure and the risk weight associated with the external credit assessment, if any, of the obligor or another Exposure to the same obligor.

            • PRU 4.11.8

              Where a CR Exposure is risk-weighted in accordance with Rules 4.11.7(a) or (b), an Authorised Person may use a domestic currency external credit assessment only if the CR Exposure is denominated in that domestic currency

            • PRU 4.11.9

              An Authorised Person may use an external credit assessment to risk weight a CR Exposure only if the external credit assessment has taken into account and reflects the entire amount of Credit Risk Exposure the Authorised Person has with regard to all payments owed to it.

            • PRU 4.11.10

              An Authorised Person must not use unsolicited external credit assessments to assign any CR Exposure to a Credit Quality Grade, unless:

              (a) it has assessed the quality of the unsolicited external credit assessments that it intends to use and is satisfied that these are comparable in performance with solicited external credit assessments and maintains relevant records and documents to be made available to the Regulator upon request; and
              (b) it uses unsolicited external credit assessments consistently for each type of Exposures, for both risk weighting and risk management purposes.

          • PRU 4.12 PRU 4.12 Risk weights

            • PRU 4.12.1 PRU 4.12.1

              An Authorised Person with a CR Exposure must:

              (a) for a CR Exposure that is not past due for more than 90 days, determine the applicable risk weight in accordance with Rules 4.12.2 to 4.12.23;
              (b) for a CR Exposure that is past due for more than 90 days, determine the applicable risk weight in accordance with Rules 4.12.24 to 4.12.26; and
              (c) for a CR Exposure arising from an Unsettled Transaction, determine the applicable risk weight in accordance with Rules A4.6.5 to A4.6.8.

              • Guidance

                Where a CR Exposure which is not past due has a Credit Quality Grade which corresponds to a risk weight of 150%, an Authorised Person may apply the appropriate treatment and risk weights set out in Rules 4.12.24 to 4.12.26.

            • Cash items

              • PRU 4.12.2

                Subject to Rule 4.12.3, an Authorised Person may apply a 0% risk weight to any CR Exposure categorised as a cash item.

              • PRU 4.12.3

                An Authorised Person must apply a 20% risk weight to cheques, drafts and other items drawn on other banking institutions that are either payable immediately upon presentation or that are in the process of collection.

            • Central government and Central Bank asset class

              • PRU 4.12.4

                Subject to Rules 4.12.5, an Authorised Person must risk-weight any CR Exposure in the central government and Central Bank asset class in accordance with the table below.

                Risk weights for the central government and Central Bank asset class

                Credit Quality Grade 1 2 3 4 5 6 Unrated
                Risk Weight 0% 20% 50% 100% 100% 150% 100%

              • PRU 4.12.5 PRU 4.12.5

                An Authorised Person may apply a 0% risk weight to any CR Exposure to central governments or central banks of a GCC member country which are denominated and funded in the domestic currency of the GCC member country. For the purposes of this Rule, individual Emirates of the UAE will be considered as though they were GCC member countries.

                • Guidance

                  Where the requirements of Rule 4.12.5 are not met the CR Exposure should be treated in accordance with Rule 4.12.4.

            • Public sector enterprises (PSE) asset class

              • PRU 4.12.6 PRU 4.12.6

                (1) Subject to Rule 4.12.8, an Authorised Person must risk-weight any CR Exposure in the PSE asset class in accordance with the following table:

                Risk Weights for the PSE asset class

                Credit Quality Grade 1 2 3 4 5 6 Unrated
                Risk Weight 20% 50% 100% 100% 100% 150% 100%
                (2) In (1), sovereign PSEs in the UAE and GCC that exhibit Credit Risks comparable to their central government must be treated in accordance with the requirements set out in Rule 4.12.5.
                (3) For the purposes of this Rule, a sovereign PSE is a PSE which has been designated as such by its national authorities.
                (4) Any foreign currency claims on sovereign PSEs which are determined to meet the conditions of (2) must be treated as one grade less favourable than the risk weight allocated in accordance with Rules 4.12.4 and 4.12.5.

                • Guidance

                  Any PSE which exhibits risk characteristics of a commercial enterprise should be treated in accordance with Rules 4.12.13 to 4.12.15.

            • Multilateral development bank (MDB) asset class

              • PRU 4.12.7

                Subject to Rules 4.12.8 and 4.12.9, an Authorised Person must risk-weight any CR Exposure in the MDB asset class in accordance with the following table:

                Risk Weights for the MDB asset class

                Credit Quality Grade 1 2 3 4 5 6 Unrated
                Risk Weight 0% 50% 50% 100% 100% 150% 50%

              • PRU 4.12.8

                An Authorised Person must apply a 0% risk weight to any CR Exposure to the qualifying MDBs set out below:

                (a) The World Bank Group comprised of the International Bank for Reconstruction and Development (IBRD), the Multilateral Investment Guarantee Agency (MIGA), and the International Finance Corporation (IFC);
                (b) The Asian Development Bank (ADB);
                (c) The African Development Bank (AfDB);
                (d) The European Bank for Reconstruction and Development (EBRD);
                (e) The Inter-American Development Bank (IADB);
                (f) The European Investment Bank (EIB);
                (g) The European Investment Fund (EIF);
                (h) The Nordic Investment Bank (NIB);
                (i) The Caribbean Development Bank (CDB);
                (j) The Islamic Development Bank (IDB); and
                (k) The Council of Europe Development Bank (CEDB).

              • PRU 4.12.9

                An Authorised Person must apply a 0% risk weight to any CR Exposure to the Bank for International Settlements, the International Monetary Fund, the European Central Bank or the European Commission.

            • Bank asset class

              • PRU 4.12.10 PRU 4.12.10

                Subject to Rules 4.12.11 and 4.12.12, an Authorised Person must risk-weight any CR Exposure in the bank asset class in accordance with the following table:

                CRWs for the bank asset class

                Credit Quality Grade 1 2 3 4 5 6 Unrated
                Risk Weight 20% 50% 50% 100% 100% 150% 50%
                Risk Weight for Short-Term Exposures 20% 20% 20% 50% 50% 150% 20%

                • Guidance

                  For the purposes of the above table, short-term Exposures refer to Exposures with an Original Maturity of three months or less and that are not expected to be rolled over.

              • PRU 4.12.11

                An Authorised Person must risk-weight any short-term CR Exposure in the bank asset class with an issue-specific external credit assessment in accordance with the following table.

                CRWs for short-term CR Exposures in the bank asset class with issue-specific external credit assessments

                Short-Term Credit Quality Grade I II III IV
                Risk Weight 20% 50% 100% 150%

              • PRU 4.12.12

                The CRW for any CR Exposure in the bank asset class that does not have an external credit assessment by a recognised external credit rating agency must be the risk weight determined in accordance with the table in Rule 4.12.10 or the risk weight that is applicable to an CR Exposure to the central government of the jurisdiction in which the banking institution is incorporated or established, whichever is higher. If a short-term CR Exposure in the bank asset class with an issue-specific external credit assessment:

                (a) attracts a risk weight of 50% or 100%, then the Authorised Person must apply a risk weight of not lower than 100% to any unrated short-term CR Exposure to the same banking institution; or
                (b) attracts a risk weight of 150%, then the Authorised Person must apply a risk weight of 150% to any unrated CR Exposure (whether long-term or short- term) to the same banking institution.

            • Corporate asset class

              • PRU 4.12.13

                Subject to Rules 4.12.14 and 4.12.15, an Authorised Person must risk-weight any CR Exposure in the corporate asset class in accordance with the following table:

                Risk Weights for the corporate asset class

                Credit Quality Grade 1 2 3 4 5 6 Unrated
                Risk Weight 20% 50% 100% 100% 150% 150% 100%

              • PRU 4.12.14

                An Authorised Person must risk-weight any short-term CR Exposure in the corporate asset class with an issue-specific external credit assessment in accordance with the following table:

                Risk Weights for short-term CR Exposures in the corporate asset class with issue-specific external credit assessments.

                Short-Term Credit Quality Grade I II III IV
                Risk Weight 20% 50% 100% 150%

              • PRU 4.12.15

                The risk weight for any CR Exposure in the corporate asset class that does not have an external credit assessment by a recognised external credit rating agency must be the risk weight determined in accordance with the table under Rule 4.12.13 or the risk weight that is applicable to an CR Exposure to the central government of the jurisdiction in which the corporate is incorporated or established, whichever is higher. If a short-term CR Exposure in the corporate asset class with an issue-specific external credit assessment:

                (a) attracts a risk weight of 50% or 100%, then the Authorised Person must apply a risk weight of not lower than 100% to any unrated short-term CR Exposure to the same corporate; or
                (b) attracts a risk weight of 150%, then the Authorised Person must apply a risk weight of 150% to any unrated CR Exposure (whether long-term or short-term) to the same corporate.

            • Regulatory retail asset class

              • PRU 4.12.16

                An Authorised Person must apply a 100% risk weight to any CR Exposure in the retail asset class.

            • Residential mortgage asset class

              • PRU 4.12.17

                An Authorised Person must risk weight any CR Exposure in the residential mortgage asset class in accordance with the following table:

                Risk weights for the residential mortgage asset class

                Condition Risk Weight
                Loans fully secured on residential property to a maximum loan to value of 80% 50%
                Loans secured on residential property in excess of a loan to value of 80% 100%

            • Commercial real estate asset class

              • PRU 4.12.18

                An Authorised Person must apply a 100% risk weight to any CR Exposure in the commercial real estate asset class.

              • PRU 4.12.19

                An Authorised Person must apply a risk weight of 150% to Exposures, including Exposures in the form of Shares or Units in a Collective Investment Fund, that are associated with particularly high risks.

              • PRU 4.12.20

                For the purposes of Rule 4.12.19, Exposures with particularly high risks must include the following Investments:

                (a) Investments in venture capital funds;
                (b) Investments in hedge funds or alternative investment funds, including but not limited to Private Equity Funds;
                (c) speculative immovable property financing; and
                (d) any Investments declared by the Regulator to constitute high risk for the purpose of this Rule.

              • PRU 4.12.21

                When assessing whether an Exposure other than Exposures referred to in Rule 4.12.20 is associated with particularly high risks, an Authorised Person must take into account the following risk characteristics:

                (a) there is a high risk of loss as a result of a default of the obligor; and
                (b) it is impossible to assess adequately whether the Exposure falls under (a).

            • Exposures associated with particularly high risks

            • Other Exposures asset class

              • PRU 4.12.22

                An Authorised Person must apply a 100% risk weight to any CR Exposure in the other Exposures asset class.

              • PRU 4.12.23

                Investments in equity or regulatory capital instruments issued by banks or Securities firms must be risk weighted at 100%, unless deducted from the capital base.

            • Past due Exposures

              • PRU 4.12.24

                Subject to Rules 4.12.25 and 4.12.26, an Authorised Person must risk-weight the unsecured portion of any CR Exposure that is past due for more than 90 days in accordance with the following table.

                Risk weights for past due Exposures

                Condition Risk Weight
                Where specific provisions are less than 20% of the outstanding amount of the Exposure 150%
                Where specific provisions are no less than 20% of the outstanding amount of the Exposure 100%

              • PRU 4.12.25

                For the purposes of Rule 4.12.24, an Authorised Person must calculate the unsecured portion of any CR Exposure that is past due for more than 90 days as follows:

                (a) for an Authorised Person using the FCSA: Unsecured Portion = E - P - Cf
                where:
                (i) E = E calculated in accordance with Section 4.9;
                (ii) P = notional amount of eligible credit protection received; and
                (iii) Cf = fair value of eligible financial Collateral received; or
                (b) for an Authorised Person using the FCCA:
                Unsecured Portion = E* - P
                where:
                (i) E* = E* calculated in accordance with Section 4.9; and
                (ii) P = notional amount of eligible credit protection received.

              • PRU 4.12.26

                An Authorised Person must apply a 100% risk weight to any CR Exposure in the residential mortgage asset class that is past due for more than 90 days.

            • Risk weights for past due Exposures

              Condition Risk Weight
              Where specific provisions are less than 20% of the outstanding amount of the Exposure 150%
              Where specific provisions are no less than 20% of the outstanding amount of the Exposure 100%

          • PRU 4.13 PRU 4.13 Credit Risk mitigation

            • Guidance

              This Section sets out the principles and methodologies for the recognition of CRM in the calculation of Credit RWA.

            • General Requirements

              • PRU 4.13.1 PRU 4.13.1

                (1) An Authorised Person may not recognise the effects of CRM unless:
                (a) all documentation relating to that mitigation is binding on all relevant parties and legally enforceable in all relevant jurisdictions; and
                (b) the Authorised Person complies with the Rules set out in this Section, as applicable.
                (2) Where the calculation of Credit RWA already takes into account the Credit Risk mitigant, the provisions of this Section do not apply.

                • Guidance

                  An Authorised Person should conduct sufficient legal review to verify this and have a well-founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability. The review should cover relevant jurisdictions such as the jurisdiction whose law governs the credit protection or Collateral agreement and the jurisdiction whose law governs the transaction subject to the credit protection or Collateral agreement. There should be sufficient written documentary evidence to adequately support the conclusion drawn and rebut any legal challenge. While an Authorised Person may use either in-house or external legal counsel, it should consider whether or not in-house counsel opinion is appropriate. The senior management of the Authorised Person should ensure that an officer of the Authorised Person who is legally qualified and independent of the parties originating the transaction reviews the legal opinion and confirms that he is satisfied that an adequate review has been completed and that he agrees with the conclusions drawn. The Regulator may request a copy of any documentation to support the CRM used by the Authorised Person.

              • PRU 4.13.2

                Where an Authorised Person uses multiple CRM for a single Exposure, the Authorised Person must divide the Exposure into portions covered by each mitigation and must calculate the Credit Risk-weighted Exposure amount of each portion separately. An Authorised Person must apply the same approach when recognising eligible credit protection by a single protection provider where the eligible credit protection has differing maturities.

              • PRU 4.13.3 PRU 4.13.3

                (1) An Authorised Person must take all appropriate steps to ensure the effectiveness of the CRM arrangements it employs and to address related risks.
                (2) Where an Authorised Person reduces or transfers Credit Risk by the use of CRM, an Authorised Person must employ appropriate and effective policies and procedures to identify and control other risks which arise as a consequence of the transfer.

                • Guidance

                  1. The use of techniques to reduce or transfer Credit Risk may simultaneously increase other risks (residual risks) which include legal, operational, liquidity and Market Risks. The Regulator expects an Authorised Person to employ methods to identify and control these risks, including:
                  a. strategy;
                  b. consideration of the underlying credit;
                  c. valuation;
                  d. policies and procedures;
                  e. systems;
                  f. control of roll-off risks; and
                  g. management of Concentration Risk arising from the use of CRM and the interaction of such risk with the overall Credit Risk profile of the Authorised Person.
                  2. In order to fulfil the above, an Authorised Person should ensure a clearly articulated strategy for the use of CRM as an intrinsic part of the general credit strategy of an Authorised Person.
                  3. Where an Exposure is subject to CRM, credit managers should continue to assess the Exposure on the basis of the obligor's creditworthiness. Credit managers should obtain and analyse sufficient financial information to determine the obligor's risk profile and its management and operational capabilities.
                  4. Collateral should be revalued frequently, and the unsecured Exposure should also be monitored frequently. Frequent revaluation is prudent, and the revaluation of marketable Securities should occur on at least a daily basis. Furthermore, measures of the potential unsecured Exposure under collateralised transactions should be calculated under stressed and normal conditions. One such measure would take account of the time and cost involved if the obligor or Counterparty were to default and the Collateral had to be liquidated. Furthermore, the setting of limits for collateralised Counterparties should take account of the potential unsecured Exposure. Stress tests and scenario analysis should be conducted to enable the Authorised Person to understand the behaviour of its portfolio of CRM arrangements under unusual market conditions. Any unusual or disproportionate risk identified should be managed and controlled.
                  5. Clear policies and procedures should be established in respect of Collateral management, including:
                  a. the terms of Collateral agreements;
                  b. the types of Collateral and enforcement of Collateral terms (e.g. waivers of posting deadlines);
                  c. the management of legal risks;
                  d. the administration of agreements (e.g. detailed plans for determining default and liquidating Collateral); and
                  e. the prompt resolution of disputes, such as valuation of Collateral or positions, acceptability of Collateral, fulfilment of legal obligations and the interpretation of contract terms.
                  6. The policies and procedures referred to under Guidance note 1.d. should be supported by Collateral management systems capable of tracking the location and status of posted Collateral (including re-hypothecated Collateral), outstanding Collateral calls and settlement problems.
                  7. Where an Authorised Person obtains credit protection that differs in maturity from the underlying credit Exposure, the Authorised Person should monitor and control its roll-off risks, i.e. the fact that the Authorised Person will be fully exposed when the protection expires, and the risk that it will be unable to purchase credit protection or ensure its capital adequacy when the credit protection expires.
                  8. Taking as Collateral large quantities of instruments issued by one obligor creates Concentration Risk. An Authorised Person should have a clearly defined policy with respect to the amount of Concentration Risk it is prepared to run. Such a policy might, for example, include a cap on the amount of Collateral it would be prepared to take from a particular Issuer or market. The Authorised Person should also take Collateral and purchased credit protection into account when assessing the potential concentrations in its overall credit profile.
                  9. Notwithstanding the presence of CRM considered for the purposes of calculating Credit RWA amounts, an Authorised Person should continue to undertake a full Credit Risk assessment of the underlying Exposure.

              • PRU 4.13.4

                (1) An Authorised Person must be able to satisfy the Regulator that it has systems in place to manage potential concentration of risk arising from its use of guarantees and Credit Derivatives.
                (2) An Authorised Person must be able to demonstrate how its strategy in respect of its use of CRM techniques, and in particular use of Credit Derivatives and guarantees interacts with its management of its overall risk profile.

            • Collateral

              • Guidance

                In order to recognise the effects of CRM of the types of Collateral set out in Rules 4.13.5 to 4.13.7, an Authorised Person must ensure that the relevant requirements in Rule 4.13.8 are complied with.

              • PRU 4.13.5 PRU 4.13.5

                (1) For an Authorised Person using the FCSA, eligible financial Collateral compomises:
                (a) cash (as well as certificates of Deposit or other similar instruments issued by the Authorised Person) on Deposit with the Authorised Person;
                (b) gold;
                (c) any debt security:
                (i) with an Original Maturity of one year or less that has a short-term Credit Quality Grade of 3 or better as set out in Section 4.12; or
                (ii) with an Original Maturity of more than one year that has a Credit Quality Grade of 4 or better as set out in Section 4.12 if it is issued by a central government or Central Bank, or a Credit Quality Grade of 3 or better as set out in Section 4.12 if it is issued by any other entity;
                (d) any debt security issued by a bank that does not have an external credit assessment by a recognised ECAI if it fulfils the following criteria:
                (i) any debt security which is listed on a regulated exchange;
                (ii) the debt security is classified as senior debt, not subordinated to any other debt obligations of its Issuer;
                (iii) all other rated debt Securities issued by the same Issuer which rank equally with the mentioned debt security have a long term or short term (as applicable) Credit Quality Grade by a recognised ECAI of "3" or better;
                (iv) the Authorised Person is not aware of information to suggest that the issue would justify a Credit Quality Grade of below "3" as indicated in (iii) above; and
                (v) the Authorised Person can demonstrate to the Regulator that the market liquidity of the debt security is sufficient to enable the Authorised Person to dispose the debt security at market price;
                (e) any equity security (including convertible bonds) that is included in a main index; or
                (f) any Unit in a Collective Investment Fund where:
                (i) a price for the units is publicly quoted daily; and
                (ii) at least 90% of the deposited property of the Fund is invested in instruments listed in this Rule.
                (2) Cash-funded CLNs issued by an Authorised Person against Exposures in the Non-Trading Book which fulfil the criteria for eligible Credit Derivatives must be treated as cash collateralised transactions.
                (3) Cash, mentioned in (1)(a), includes cash on Deposit, certificates of Deposit or other similar instruments issued by the Authorised Person that are held as Collateral at a third-party bank in a non-custodial arrangement and that are pledged or assigned to the Authorised Person. This is subject to the pledge or assignment being unconditional and irrevocable. Under the FCSA, the risk weight to be applied to the Exposure covered by such Collateral must be the risk weight of the third-party bank.

                • Guidance

                  1. For the purposes of Rule 4.13.5 and 4.13.6, eligible financial Collateral excludes any T1 Capital instrument or T2 Capital instrument issued by any entity in the Financial Group of the Authorised Person, which is held by the Authorised Person or any of its Financial Group entities as Collateral.
                  2. For an Authorised Person using Units of a Fund under the FCSA approach, the use or potential use by that Fund of Derivative instruments solely to hedge Investments listed in Rule 4.13.5 should not preclude the Units in that Fund from being recognised as eligible financial Collateral.

              • PRU 4.13.6

                For an Authorised Person using the FCCA, eligible financial Collateral comprises:

                (a) any instrument listed in Rule 4.13.5;
                (b) any equity Security (including a convertible bond) that is traded on a regulated exchange; and
                (c) any Unit in a Collective Investment Fund which invests in equity Securities referred to in (b), where:
                (i) a price for the Units is publicly quoted daily; and
                (ii) at least 90% of the deposited property of the Fund is invested in instruments listed in this Rule and Rule 4.13.5.

              • PRU 4.13.7 PRU 4.13.7

                In the case of any Counterparty Risk Exposures in Rules 4.13.5 and 4.13.6 arising from an SFT which are included in the Trading Book, eligible financial Collateral includes all instruments which an Authorised Person may include in its Trading Book.

                • Guidance

                  For an Authorised Person using Units of a Fund under the FCSA approach, the use or potential use by that Fund of Derivative instruments solely to hedge Investments listed in Rule 4.13.5 should not preclude the Units in that Fund from being recognised as eligible financial Collateral.

            • Requirements for Recognition of Collateral

              • PRU 4.13.8

                An Authorised Person must ensure that the following requirements are complied with before it recognises the effects of CRM of any Collateral:

                (a) the legal mechanism by which Collateral is pledged, assigned or transferred must confer on the Authorised Person the right to liquidate or take legal possession of the Collateral, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the Counterparty (and, where applicable, of the custodian holding the Collateral);
                (b) the Authorised Person has taken all steps necessary to fulfil those requirements under the law applicable to the Authorised Person's interest in the Collateral for obtaining and maintaining an enforceable security interest by registering it with a registrar or for exercising a right to net or set off in relation to title transfer Collateral;
                (c) the credit quality of the Counterparty and the value of the Collateral do not have a material positive correlation;
                (d) Securities issued by the Counterparty or any Closely Related Counterparty are not eligible;
                (e) the Authorised Person has implemented procedures for the timely liquidation of Collateral to ensure that any legal conditions required for declaring default of Counterparty and liquidating the Collateral are observed, and that the Collateral can be liquidated promptly; and
                (f) where the Collateral is held by a custodian, the Authorised Person has taken reasonable steps to ensure that the custodian segregates the Collateral from its own assets.

            • Guarantees

              • PRU 4.13.9 PRU 4.13.9

                (1) An Authorised Person may recognise the effects of CRM of a guarantee only if it is provided by any of the following entities:
                (a) central government or Central Bank;
                (b) MDB referred to in Rule 4.12.8;
                (c) International Organisations referred to in Rule 4.12.9;
                (d) PSE;
                (e) banks and Securities firms which qualify for inclusion in bank asset class; or
                (f) any other entity that has a Credit Quality Grade "3" or above.
                (2) An Authorised Person must not recognise the effects of CRM of a guarantee unless all of the following requirements are complied with:
                (a) the guarantee is an explicitly documented obligation assumed by the guarantor;
                (b) the guarantee represents a direct claim on the guarantor;
                (c) the extent of the credit protection cover is clearly defined and incontrovertible;
                (d) other than in the event of non-payment by the Authorised Person of Money due in respect of the guarantee if applicable, there is an irrevocable obligation on the part of the guarantor to pay out a pre-determined amount upon the occurrence of a credit event, as defined under the guarantee;
                (e) the guarantee does not contain any clause, the fulfilment of which is outside the direct control of the Authorised Person, that:
                (i) would allow the guarantor to cancel the guarantee unilaterally;
                (ii) would increase the effective cost of the guarantee as a result of deteriorating credit quality of the underlying Exposure;
                (iii) could prevent the guarantor from being obliged to pay out in a timely manner in the event that the underlying obligor fails to make any payment due; or
                (iv) could allow the maturity of the guarantee agreed ex-ante to be reduced ex-post by the guarantor;
                (f) the Authorised Person is able in a timely manner to pursue the guarantor for any monies outstanding under the documentation governing the transaction on the default of, or non-payment by, the underlying obligor without first having to take legal action to pursue the underlying obligor for payment; and
                (g) the guarantee covers all types of payments that the underlying obligor is expected to make under the documentation governing the transaction, except in the case of accrued interest, accrued expenses or fees outstanding, where these are deemed immaterial.

                • Guidance

                  1. Rule 4.13.9(2)(e) does not include any guarantee with a cancellation clause where it is provided that any obligation incurred or transaction entered into prior to any cancellation, unilateral or otherwise, continues to be guaranteed by the guarantor.
                  2. The guarantee payments may be in the form of the guarantor making a lump sum payment of all monies to the Authorised Person or the guarantor assuming the future payment obligations of the Counterparty covered by the guarantee, as specified in the relevant documentation governing the guarantee.

              • PRU 4.13.10

                In addition to the requirements in Rule 4.13.9, where an Authorised Person has an Exposure that is protected by a guarantee or that is counter-guaranteed by a central government or Central Bank, a regional government or local authority or a PSE claims on which are treated as claims on the central government in whose jurisdiction they are established, a MDB or an international organisation to which a 0% risk weight is assigned under Section 4.12, an Authorised Person may treat the Exposure as being protected by a direct guarantee from the central government or Central Bank in question, provided the following requirements are complied with:

                (a) the counter-guarantee covers all Credit Risk elements of the Exposure;
                (b) both the original guarantee and the counter-guarantee comply with all the requirements for guarantees set out in this Section, except that the counter-guarantee need not be direct and explicit with respect to the original Exposure; and
                (c) the Authorised Person is able to satisfy the Regulator that the cover is robust and that nothing in the historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct guarantee by the entity in question.

            • Credit Derivatives

              • PRU 4.13.11

                (1) An Authorised Person may recognise the effects of CRM of a Credit Derivative only if it is provided by any of the following entities:
                (a) central government or Central Bank;
                (b) MDB referred to in Rules 4.12.7 to 4.12.9;
                (c) International Organisations referred to in Rule 4.12.9;
                (d) PSE;
                (e) banks and Securities firms which qualify for inclusion in bank asset class; or
                (f) any other entity that has a Credit Quality Grade "3" or better.
                (2) An Authorised Person may recognise the effects of CRM of only the following types of Credit Derivatives:
                (a) credit default swaps;
                (b) Total Return Swaps;
                (c) CLNs which are cash funded; and
                (d) instruments that are composed of, or are similar in economic substance, to one or more of the Credit Derivatives in (a) to (c).

              • PRU 4.13.12 PRU 4.13.12

                An Authorised Person must not recognise the effects of CRM of any Credit Derivative unless all of the following requirements are complied with:

                (a) the terms and conditions of any credit protection obtained via a Credit Derivative must be set out in writing by both the Authorised Person and the provider of credit protection;
                (b) the Credit Derivative must represent a direct claim on the provider of credit protection;
                (c) the extent of the credit protection cover is clearly defined and incontrovertible;
                (d) other than in the event of non-payment by the Authorised Person of Money due in respect of the Credit Derivative, there is an irrevocable obligation on the part of the provider of the credit protection to pay out a pre-determined amount upon the occurrence of a credit event, as defined under the Credit Derivative contract;
                (e) the Credit Derivative contract must not contain any clause, the fulfilment of which is outside the direct control of the Authorised Person, that:
                (i) would allow the provider of credit protection to cancel the credit protection cover unilaterally;
                (ii) would increase the effective cost of the credit protection cover as a result of deteriorating credit quality of the underlying Exposure;
                (iii) could prevent the provider of credit protection from being obliged to pay out in a timely manner in the event that the underlying obligor fails to make any payment due; or
                (iv) could allow the maturity of the credit protection agreed ex-ante to be reduced ex-post by the provider of credit protection;
                (f) the credit events specified by the contracting parties must at a minimum cover:
                (i) failure to pay the amounts due under terms of the underlying Exposure that are in effect at the time of such failure (with a grace period, if any, that is closely in line with the grace period in the underlying Exposure);
                (ii) bankruptcy, insolvency or inability of the underlying obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and
                (iii) restructuring of the underlying Exposure involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. charge-off, specific provision or other similar debit to the profit and loss account);
                (g) the Credit Derivative must not terminate prior to the maturity of the underlying Exposure or expiration of any grace period required for a default on the underlying Exposure to occur as a result of a failure to pay;
                (h) a robust valuation process to estimate loss reliably must be in place in order to estimate loss reliably for any Credit Derivative that allows for cash settlement. There must be a clearly specified period for obtaining post-credit event valuations of the underlying obligation;
                (i) where the right or ability of the Authorised Person to transfer the underlying Exposure to the credit protection provider is required for settlement, the terms of the underlying Exposure must provide that any required consent to such transfer may not be unreasonably withheld;
                (j) the identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. This determination must not be the sole responsibility of the credit protection provider. The Authorised Person must have the right or ability to inform the credit protection provider of the occurrence of a credit event; and
                (k) the underlying obligation and the reference obligation specified in the Credit Derivative contract for the purpose of determining the cash settlement value or the deliverable obligation or for the purpose of determining whether a credit event has occurred may be different only if:
                (l) (i) the reference obligation ranks pari passu with or is junior to the underlying obligation; and
                (ii) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.

                • Guidance

                  1. An Authorised Person should not recognise the effects of CRM of a Total Return Swap if it purchases credit protection through a Total Return Swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the underlying asset that is protected (either through reductions in its marked-to-market value or by an addition to reserves).
                  2. The Regulator would generally consider the requirements in (f) to have been complied with even if the requirements are not specifically set out so long as the obligations of the credit protection provider under the Credit Derivative contract would include those requirements.
                  3. The Regulator would generally consider the cash settlement methodology provided in the ISDA Credit Derivatives Definitions as satisfying the requirement for obtaining post-credit event valuations of the underlying obligation.

            • Currency mismatches

              • PRU 4.13.13

                (1) In the case where there is a currency mismatch between the credit protection and the underlying Exposure, an Authorised Person must reduce the amount of the Exposure deemed to be protected by applying a haircut, as follows:
                Protected portion GA = G (1- HFX)
                where:
                (a) G = notional amount of the credit protection; and
                (b) HFX = haircut appropriate for currency mismatch between the credit protection and underlying obligation Exposure based on a ten-business day holding period, assuming daily mark-to-market.
                (2) An Authorised Person must determine HFX in the following manner:
                (a) if the Authorised Person uses standard supervisory haircuts, HFX is 8%; and
                (b) if the Authorised Person uses own-estimate haircuts, it must estimate HFX according to Rules A4.3.6 to A4.3.26 in App4 based on a ten-business day holding period, assuming daily mark-to-market.
                (3) If the credit protection is not marked-to-market daily, HFX must be scaled in accordance with Rule A4.3.25.

            • Maturity Mismatches

              • PRU 4.13.14

                An Authorised Person may recognise the effects of CRM for an Exposure where there is a Maturity Mismatch only if the Credit Risk mitigant has an Original Maturity of at least one year and a residual maturity of more than three months. For the purposes of calculating Credit RWA, a Maturity Mismatch occurs when the residual maturity of the Credit Risk mitigant is less than that of the underlying Exposure.

              • PRU 4.13.15

                (1) An Authorised Person must determine the maturity of the underlying Exposure and the maturity of the Credit Risk mitigant conservatively. The residual maturity of the underlying Exposure must be gauged as the longest possible remaining time before the Counterparty is scheduled to fulfil its obligation, taking into account any applicable grace period.
                (2) In the case of Credit Risk the mitigant, embedded Options which may reduce the term of the credit protection must be taken into account so that the shortest possible residual maturity is used. Where a call is at the discretion of the protection seller, the residual maturity will be at the first call date. If the call is at the discretion of the Authorised Person but the terms of the arrangement at origination of the Credit Derivative contain a positive incentive for the Authorised Person to call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the residual maturity.

              • PRU 4.13.16 PRU 4.13.16

                (1) An Authorised Person must calculate the value of the CRM adjusted for any Maturity Mismatch (referred to as "PA"), using the following formula:
                PA = P(t-0.25)/(T-0.25)
                where -
                (a) P = value of the credit protection (e.g. Collateral amount, guarantee amount) adjusted for any haircuts;
                (b) t = min (T, residual maturity of the Credit Risk mitigant) expressed in years; and
                (c) T = min (5, residual maturity of the Exposure) expressed in years.
                (2) For residual maturity of the Exposure in the case of a basket of Exposures with different maturities, an Authorised Person must use the longest maturity of any of the Exposures as the maturity of all the Exposures being hedged.

                • Guidance

                  The positive incentive for an Authorised Person to call the transaction before contractual maturity as referred in Rule 4.13.15 would be, for example, a situation wherein there is a step-up in cost in conjunction with a call feature or where the effective cost of cover remains the same even if credit quality remains the same or increases.

            • On-balance sheet Netting

              • PRU 4.13.17

                (1) An Authorised Person may recognise as eligible the Netting of an on-balance sheet Exposure against an offsetting on-balance sheet item if the related Netting agreement meets the condition in Rule 4.13.19.
                (2) Eligibility for Netting is limited to reciprocal cash balances between the Authorised Person and its Counterparty. Only loans and Deposits of the Authorised Person may be subject to a modification of their Credit RWAs as a result of an on-balance sheet Netting agreement.

              • PRU 4.13.18

                (1) Assets (loans) and liabilities (Deposits) subject to recognised on-balance sheet Netting are to be treated as cash Collateral using the formula in A4.3.6, under which an Authorised Person may use zero haircuts for Exposure and Collateral.
                (2) When a currency mismatch exists, an Authorised Person must apply the standard supervisory haircut of 8% for currency mismatch.
                (3) When a Maturity Mismatch exists between the off-setting items, an Authorised Person must apply the Rules 4.13.14 to 4.13.16 to address the Maturity Mismatch.
                (4) Net credit Exposure, after taking into account recognised Netting, will be subject to the applicable CRW for the Counterparty.

              • PRU 4.13.19 PRU 4.13.19

                For an Authorised Person to recognise an on-balance sheet Netting agreement for the purposes of Rule 4.13.17, all of the following conditions must be satisfied:

                (1)
                (a) both the on-balance sheet Exposure (asset) and the offsetting on-balance sheet item (liability) are owing between the Authorised Person and the same Counterparty;
                (b) the Authorised Person nets the on-balance sheet Exposure (asset) and the offsetting on-balance sheet item (liability) in a way that is consistent with its legal rights against the Counterparty;
                (c) a legal right of set-off exists;
                (d) the agreement between the Authorised Person and the Counterparty does not contain a Walkaway Clause;
                (e) the Netting provided for in the agreement between the Authorised Person and the Counterparty is effective and enforceable in the event of default, bankruptcy, liquidation or other similar circumstances affecting either the Counterparty or the Authorised Person;
                (f) the on-balance sheet Exposure (asset) and the offsetting on-balance sheet item (liability) are monitored, controlled and managed on a net basis; and
                (g) the potential for roll-off Exposure is monitored and controlled where there is a Maturity Mismatch; and
                (2) it has, in respect of each relevant jurisdiction, a written and reasoned legal opinion which:
                (a) has been provided by an external source of legal advice of appropriate professional standing;
                (b) confirms that the requirements of (1)(a)-(e) are met for all relevant jurisdictions; and
                (c) is kept under review to ensure that it remains correct and up to date in the event of changes to the relevant laws.

                • Guidance

                  1. An Authorised Person should assess whether any qualifications, assumptions or reservations contained in the legal opinion cast doubt upon the enforceability of the Netting agreement. If, as a result of the qualifications, assumptions or reservations, there is material doubt about the enforceability of the agreement, the Authorised Person should assume that the requirements for Netting have not been met.
                  2. An Authorised Person using a standard form Netting agreement and a supporting legal opinion should ensure that the relevant requirements in Rules 4.13.17 to 4.13.19 are met. A standard form Netting agreement is a form of agreement which is prepared by a reputable, internationally recognised industry association and is supported by its own legal opinion. Where additional clauses are added to a standard form Netting agreement, the Authorised Person should satisfy itself that the amended Netting agreement continues to meet the legal and contractual requirements in Rules 4.13.17 to 4.13.19. For instance, in such cases, an Authorised Person may wish to obtain a second legal opinion to confirm that the relevant requirements in Rules 4.13.17 to 4.13.19 are still satisfied.
                  3. App4 sets out the calculation of the PFCE arising from OTC Derivative contracts, on a net basis.

          • PRU 4.14 PRU 4.14 Securitisation

            • Application

              • PRU 4.14.1

                This Section applies to an Authorised Person which:

                (a) acts as an Originator in a securitisation;
                (b) transfers Credit Risk on a single item or on a pool of items by any of the legal transfer methods set out in Rule A4.10.1;
                (c) acts as a Sponsor in a securitisation; or
                (d) provides Credit Enhancement, liquidity support, or Underwriting or dealing facilities relating to the items being transferred.

            • Interpretation

              • PRU 4.14.2 PRU 4.14.2

                For the purposes of this Chapter and App4, "securitisation" includes Traditional Securitisation, Synthetic Securitisation and Re-securitisation, as defined below:

                (a) A Traditional Securitisation is a structure where the cash flow from an underlying pool of Exposures is used to service at least two different stratified risk positions or tranches reflecting different degrees of Credit Risk. Payments to the investors depend upon the performance of the specified underlying Exposures, as opposed to being derived from an obligation of the entity originating those Exposures. A Traditional Securitisation will generally assume the movement of assets off balance sheet.
                (b) A Synthetic Securitisation is a structure with at least two different stratified risk positions or tranches that reflect different degrees of Credit Risk where Credit Risk of an underlying pool of Exposures is transferred, in whole or in part, through the use of funded (e.g. CLNs) or unfunded (e.g. credit default swaps) Credit Derivatives or guarantees that serve to hedge the Credit Risk of the portfolio. Accordingly, the investors' potential risk is dependent upon the performance of the underlying pool. A Synthetic Securitisation may or may not involve the removal of assets off balance sheet.
                (c) A Re-securitisation Exposure is a securitisation Exposure in which the associated underlying pool of Exposures is tranched and at least one of the underlying Exposures is a securitisation Exposure. In addition, an Exposure to one or more Re-securitisation Exposures is a Re-securitisation Exposure.

                • Guidance

                  The Regulator would treat other techniques to achieve the financing or re-financing of assets which are legally transferred to a scheme, by packaging them into a tradable form through the issue of Securities which are secured on the assets and serviced from the cashflows which they yield as "securitisation".

            • Systems and controls for the use of securitisations

              • PRU 4.14.3

                An Authorised Person must implement and maintain appropriate risk management systems to identify, manage, monitor and, where applicable, control all risks in relation to a securitisation transaction whether the firm is an investor, Originator or Sponsor. In particular, such risk management systems should effectively address the following risks:

                (a) the liquidity and capital implications that may arise from the items returning to the balance sheet;
                (b) the Operational Risks that may arise under a securitisation; and
                (c) reputational risks that may arise as a result of its securitisation activities.

              • PRU 4.14.4

                An Authorised Person must have appropriate policies and procedures to ensure that the economic substance of the transaction is fully reflected in the process of managing the risks arising from such transactions. An Authorised Person must have appropriate policies and procedures in place to document its systems and controls in relation to securitisation risks. These policies should include details on the capital effects of the securitisation as set out in this Chapter.

              • PRU 4.14.5 PRU 4.14.5

                An Authorised Person must conduct periodic stress tests in relation to its securitisation activities and off balance sheet Exposures, including testing of future ability to transact securitisation as a means of CRM or for liquidity purposes.

                • Guidance

                  1. The periodic stress testing in relation to securitisation activities referred to in Rule 4.14.5 should consider the firm-wide impact of those activities and Exposures in stressed market conditions and the implications for other sources of risk. Such stress tests should include both existing securitisation Exposures and transactions in the pipeline, as there is a risk of the pipeline transactions not being completed in a stressed market scenario.
                  2. The frequency and extent of stress testing to fulfil the requirements of Rule 4.14.5 should be determined on the basis of the materiality of the Authorised Person's securitisation volumes and its off-balance sheet Exposures.
                  3. An Authorised Person should have procedures in place to assess and respond to the results produced from the stress testing and these should be taken into account under the ICAAP.

              • PRU 4.14.6 PRU 4.14.6

                In order to qualify for using the Rules specified in this Section, and particularly the risk weighting approach outlined below, an Authorised Person must demonstrate the following:

                (a) a comprehensive understanding of the risk characteristics of its individual securitisation Exposures, whether on balance sheet or off balance sheet, as well as the risk characteristics of the pools underlying securitisation Exposures;
                (b) ability to access the performance information on the underlying pools on an on-going basis in a timely manner; and
                (c) a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of the Authorised Person's Exposure to the transaction, such as waterfall triggers, Credit Enhancements, liquidity enhancements, market value triggers and deal specific definitions of default.

                • Guidance

                  1. An Authorised Person which is an investor, Originator or Sponsor of a Securitisation should fully understand the risks it has assumed in order to ensure that it can accurately determine the Capital Requirements for the Exposures arising from the securitisation in accordance with the Rules in this Section.
                  2. For the purposes of Rule 4.14.6(b) information should include the percentage of loans 30, 60, 90 days past due, default rates, prepayment rates, loans in foreclosure, property type, occupancy, average credit score etc. For Re-securitisations, Authorised Persons should have information relating to not only the underlying securitisation transactions but also the characteristics and performance of the underlying pools of such transactions.

              • PRU 4.14.7 PRU 4.14.7

                Where an Authorised Person is either an Originator or a Sponsor of a Traditional Securitisation or a Synthetic Securitisation:

                (a) the Authorised Person intending to conduct the securitisation must notify the Regulator at least 30 days in advance of the proposed execution of the securitisation;
                (b) the Authorised Person conducting the securitisation must calculate its Credit RWAs for all resultant Exposures from that securitisation, in accordance with Section 4.8, provided the requirements of this Section are met; and
                (c) the Authorised Person conducting the securitisation must produce documentation reflecting the execution and economic substance of the transaction.

                • Guidance

                  The notification made to the Regulator under (a) should include, inter alia, amounts of assets subject to securitisation, amounts retained, details of securitisation including legal structure, rating, tranches, details of legal transfer and any CRM applied and implications on the capital and liquidity position on the Authorised Person.

            • Calculation of Credit RWA arising from securitisations

              • PRU 4.14.8 PRU 4.14.8

                An Authorised Person must calculate the Credit RWA amounts for Exposures arising from securitisations according to the requirements in this Section.

                • Guidance

                  1. An Authorised Person should apply the securitisation framework set out in this Section for determining the Capital Requirements on Exposures arising from traditional and Synthetic Securitisations or similar structures that contain features common to both.
                  2. This Section sets out the requirements for Originators, Authorised Persons which transfer Credit Risk from their balance sheets and Sponsors in a securitisation transaction involving Non-Trading Book Exposures. This Section also sets out the methodologies for calculation of RWA amounts for securitisation Exposures. The Rules setting out the methodologies for calculation of Market Risk Capital Requirement amounts for securitisation Exposures held in the Trading Book are specified in Chapter 5 and App5 of these Rules.
                  3. As securitisations may be structured in many different ways, an Authorised Person engaging in the activities relating to securitisations (whether traditional or a Synthetic Securitisation) must ensure that the economic substance of the transaction is fully considered, and reflected, in determining the capital treatment of a securitisation, rather than relying on the legal form of the Securitisation.

              • PRU 4.14.9

                An Authorised Person is required, subject to Rule 4.14.12, to include all securitisation Exposures in its calculation of Credit RWAs relating to securitisations, including the following:

                (a) those arising from the provision of Credit Risk mitigants to a securitisation;
                (b) investments in asset backed Securities;
                (c) retention of a subordinated tranche;
                (d) extension of a liquidity facility; and
                (e) extension of Credit Enhancement.

              • PRU 4.14.10

                An Authorised Person must include in its calculation of Credit RWA all of its securitisation Exposures held in the Non-Trading Book, except for those securitisation Exposures which the Authorised Person is required to include as deductions from T1 Capital and deductions from T2 Capital.

              • PRU 4.14.11

                Repurchased securitisation transactions must be treated as retained securitisation Exposures.

            • Deductions

              • PRU 4.14.12

                (1) An Authorised Person may deduct SE Exposures which it has chosen not to treat in accordance with Rules 4.14.8 to 4.14.11 from Capital Resources -100% from CET1.
                (2) Credit-Enhancing Interest-Only Strips (net of the deductions from CET1 Capital required at Rule 4.14.13) are deducted 100% from CET1 Capital.
                (3) Deductions from capital may be calculated net of specific provisions taken against relevant securitisation Exposures.

              • PRU 4.14.13 PRU 4.14.13

                An Authorised Person must include as deductions from CET1 Capital any increase in issued capital or reserves resulting from a securitisation, such as that associated with expected future margin income resulting in a gain-on-sale that is recognised as issued capital or reserves.

                • Guidance

                  Gain-on-sale arises when there has been an increase in equity of the Authorised Person associated with recognising the discounted value of the expected future margin income as part of regulatory capital.

              • PRU 4.14.14

                An Authorised Person must assign a securitisation Exposure to a Credit Quality Grade based on the external credit assessment (where available) that is applicable to the securitisation Exposure in accordance with relevant Rules in this Chapter.

            • Implicit Support

              • PRU 4.14.15

                An Originator or a Sponsor of a securitisation must not provide Implicit Support to a securitisation transaction with a view to reducing potential or actual losses to investors outside of its contractual obligations;

              • PRU 4.14.16

                If an Originator fails to comply with Rule 4.14.15 in respect of a securitisation, it:

                (a) must include all the underlying Exposures of the securitisation in its calculation of Credit RWAs as if those Exposures had not been securitised and were on the balance sheet of the Authorised Person;
                (b) must not recognise any gain-on-sale of assets to the securitisation; and
                (c) must disclose to investors that the Authorised Person has provided noncontractual support and the regulatory capital impact of doing so.

            • Requirements in order for a Traditional Securitisation to be excluded from the calculation of RWA

              • PRU 4.14.17

                (1) An Authorised Person which is an Originator or a Sponsor of a Traditional Securitisation may exclude securitised Exposures from the calculation of Credit RWA amounts only if all of the conditions detailed in Rule A4.10.1 have been complied with.
                (2) An Authorised Person meeting the requirements specified in Rule A4.10.1 must hold regulatory capital against any securitisation Exposures it retains.

            • Requirements in order for a Synthetic Securitisation to be excluded from the calculation of RWA

              • PRU 4.14.18 PRU 4.14.18

                (1) An Authorised Person which is an Originator or a Sponsor of a Synthetic Securitisation may recognise the effects of CRM of the Synthetic Securitisation in calculating its SE Exposure RWAs, only if:
                (a) all of the conditions detailed in Rule A4.10.2 have been complied with;
                (b) the effects of CRM are obtained through eligible credit protection, eligible financial Collateral or both; and
                (c) Credit Risk is transferred to third parties.
                (2) In relation to (b), the CRM techniques used must meet the requirements of Section 4.13.

                • Guidance

                  In relation to (1)(c) the transferor is deemed to have effective control over the transferred Credit Risk Exposures if it has the ability to repurchase the assets, or is obliged to retain the risk of the transferred assets. This does not include the retention of servicing rights.

              • PRU 4.14.19

                (1) An Authorised Person meeting the conditions in Rule 4.14.18 must still hold regulatory capital against any securitisation Exposures it retains.
                (2) The Authorised Person may recognise the effects of CRM of eligible financial Collateral pledged by any SPE, but it may not recognise any SPE which is an Issuer of securitisation Exposures as an eligible protection provider.

            • Operational requirements for use of external credit assessments

              • PRU 4.14.20

                The external credit assessment used for determining the applicable risk weight for a CR Exposure must be determined by taking into account the entire amount of Credit Risk (principal and interest) an Authorised Person is exposed to.

              • PRU 4.14.21

                Credit assessments can only be considered from an ECAI, and must meet the following criteria:

                (a) any credit assessments used for the purposes of risk weighting must be publicly available;
                (b) the external credit rating agencies must have expertise and market acceptance in rating securitisations of the nature being used for risk weighting purposes;
                (c) Authorised Persons must apply external credit rating agency ratings consistently to all tranches of securitisations;
                (d) where an Exposure has two ratings from external credit rating agencies the less favourable rating must be used; and
                (e) where an Exposure has more than two assessments by external credit rating agencies the two most favourable ratings can be selected, the review of these assessments is then determined in line with (d).

              • PRU 4.14.22

                Where any CRM has been considered as part of any rating applied to a tranche of a securitisation, the risk weighting should be used and no additional capital recognition is permitted.

              • PRU 4.14.23

                An Authorised Person must treat any securitisation Exposure as an unrated Exposure where:

                (a) the external credit assessment incorporates the credit protection provided directly to the SPE by a protection provider which is not an eligible protection provider;
                (b) the external credit assessment is at least partly based on unfunded support provided by the Authorised Person itself (e.g. if an Authorised Person buys ABCP) where it provides an unfunded securitisation Exposure extended to the ABCP Programme, such as a liquidity facility or Credit Enhancement, and that Exposure plays a role in determining the credit assessment on the ABCP, the Authorised Person must treat the ABCP as if it were not rated and continue to hold capital against the other securitisation Exposures it provides);
                (c) the Credit Risk mitigant is not obtained by the SPE but is separately obtained and applied to a specific securitisation Exposure (e.g. a particular tranche); or
                (d) the CRM does not meet the eligibility criteria for mitigation specified in Section 4.13.

              • PRU 4.14.24

                Where CRM is applied to a specific Exposure within a securitisation the Authorised Person must treat the Exposure as unrated, and then use the mitigation as set out in Section 4.13 should the Rules contained in that Section apply.

              • PRU 4.14.25

                An Authorised Person must not use an external credit rating agency rating for risk weighting purposes where the assessment is at least partly based on unfunded support provided by the Authorised Person itself.

              • PRU 4.14.26

                The treatment outlined in Rule 4.14.24 also applies to Exposures in the Authorised Person's Trading Book. An Authorised Person's Capital Requirement for such Exposures held in the Trading Book can be no less than the amount required under the Non-Trading Book.

            • Calculation of RWA amounts for securitisation Exposures

              • PRU 4.14.27

                (1) In order to calculate the RWA amount for a securitisation position, the relevant risk weight must be assigned to the Exposure value of the position in accordance with this Section, based on the credit quality of the position.
                (2) For the purposes of this Rule, the credit quality of a position must be determined by reference to the applicable credit quality assessment from a recognised external credit rating agency.

              • PRU 4.14.28

                In cases where there are Exposures to different tranches in a securitisation, the Exposure to each tranche must be considered a separate securitisation position.

              • PRU 4.14.29

                Exposure value of an off-balance sheet securitisation position must, subject to A4.2.2, be its nominal value multiplied by a CCF of 100%, wherever applicable.

              • PRU 4.14.30

                The Exposure value of a securitisation position arising from a financial Derivative must be determined in accordance with Rules 4.6.14 to 4.6.21 dealing with treatment of financial Derivatives.

            • Assigning risk weights

              • PRU 4.14.31

                An Authorised Person must assign a risk weight for any SE Exposure in accordance with the tables below, to calculate the Credit RWA amounts for that Exposure.

                Risk Weights for Long-Term securitisation Exposures

                Long Term rating category
                Credit Quality Grade 1 2 3 4 5 and above including unrated
                Risk Weight to be applied to securitisation Exposures (excluding Re-securitisation Exposures) 20% 50% 100% 350% 1000% or Deduction from Capital Resources
                Risk weight applied to Re-securitisation Exposures 40% 100% 225% 650% 1000% or Deduction from Capital Resources

                Risk Weights for Short-Term securitisation Exposures

                Short-term rating category
                Credit Quality Grade I II III IV and above including unrated
                1000%
                Risk Weight to be applied 20% 50% 100% 1000%
                Deduction from Capital Resources Risk Weight applied to Re-securitisation Exposures 40% 100% 225% 1000% or deduction from Capital Resources

              • PRU 4.14.32

                (1) In respect of securitisation positions which are assigned a 1000% risk weighting pursuant to the tables in Rule 4.14.31, an Authorised Person may as an alternative to including the position in its calculation of Credit RWA amounts, deduct from its CET1 Capital the Exposure value of such positions.
                (2) For the purposes of this Rule, the calculation of the Exposure value may reflect eligible funded credit protection consistent with applicable Rules in this Chapter.

              • PRU 4.14.33

                For an Authorised Person that is an Originator or Sponsor of a securitisation, the Credit RWA amounts calculated for its securitisation positions may be limited to the RWA amounts which would be calculated for the SE Exposures had they not been securitised subject to the presumed application of a 150% risk weight to all past due items and items belonging to regulatory high risk categories.

              • PRU 4.14.34

                Not currently in use.

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