PIB 3.15 PIB 3.15 Tier 2 capital (T2 Capital)
The T2 Capital constitutes the sum of T2 Capital elements in PIB Rule 3.15.2, subject to the deductions stipulated later in this section.
T2 Capital consists of the sum of the following elements:(a) capital instruments which meet the eligibility criteria laid down in PIB Rule 3.15.3 ; and(b) the share premium accounts related to the instruments referred to in (a).
PIB 3.15.3(1) For the purpose of PIB Rule 3.15.2(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 Firmor its Subsidiaries;(ii) an Undertakingin which the Authorised Firmhas 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 Firm;(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 Firmor its Subsidiaries;(ii) any Parentof the Authorised Firmor their Subsidiaries;(iii) any member of the Financial Groupto which the Authorised Firmbelongs; or(iv) any Undertakingthat has Close Linkswith 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 Maturityof at least 5 years;(h) the provisions governing the instruments do not include any incentive for them to be redeemed by the Authorised Firm;(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 Firmhas notified the DFSAof its intention to call, redeem or repurchase the instruments in writing and well in advance, and not before 5 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 Firmdoes 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 Firm;(m) the level of interest or dividend payments due on the instruments will not be modified based on the credit standing of the Authorised Firm, its Parentor any member of its Financial Group; and(n) where the instruments are not issued directly by the Authorised Firmor 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 Ruleto any of the following:(i) the Authorised Firm;(ii) an operating entity within its Financial Group; or(iii) any Parentof the Authorised Firm.(2) The extent to which T2 Capital instruments can be considered as eligible for inclusion in T2 Capital during the final 5 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 5 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) The following must apply where, in the case of a T2 Capital instrument, the conditions laid down in this Rulecease 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.
T2 Regulatory Deductions and Exclusions
Subject to the following
Rulesin this section, an Authorised Firmmust deduct the following from the calculation of its T2 Capital:(a) direct and indirect holdings by an Authorised Firmof own T2 Capital instruments, including own T2 instruments that an Authorised Firmcould be obliged to purchase as a result of existing contractual obligations;(b) holdings of the T2 Capital instruments of Relevant Entitieswhere those entities have a reciprocal cross holding with the Authorised Firmwhich have the effect of artificially inflating the Capital Resourcesof the Authorised Firm;(c) the amount of direct and indirect holdings by the Authorised Firmof the T2 Capital instruments of Relevant Entitieswhere the Authorised Firmdoes not have a significant investment in those entities; and(d) direct and indirect holdings by the Authorised Firmof the T2 Capital instruments of Relevant Entitieswhere the Authorised Firmhas a significant investment in those entities, excluding Underwritingpositions held for fewer than 5 working days.
Deductions Relating to Holdings of Own T2 Capital Instruments
For the purposes of PIB Rule 3.15.4(a), an
Authorised Firmmust calculate holdings of its own T2 Capital instruments on the basis of the gross long positions subject to the following exceptions:(a) an Authorised Firmmay calculate the amount of holdings in the Trading Bookon the basis of the net long position provided the long and short positions are in the same underlying Exposureand the short positions involve no Counterparty Risk;(b) an Authorised Firmmust determine the amount to be deducted for indirect holdings in the Trading Bookof own T2 Capital instruments that take the form of holdings of index Securitiesby calculating the underlying Exposureto own T2 Capital instruments in the indices; and(c) an Authorised Firmmay net gross long positions in own T2 Capital instruments in the Trading Bookresulting from holdings of index Securitiesagainst 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
For the purposes of PIB Rule 3.15.4(b), (c) and (d), the amount of holdings of T2 Capital instruments and other capital instruments of
Relevant Entitiesto be deducted, must be calculated, subject to 3.15.7, on the basis of the gross long positions.
For the purposes of PIB Rule 3.15.4(c) and (d), an
Authorised Firmmust make the deductions in accordance with the following:(a) the holdings in the Trading Bookof the capital instruments of Relevant Entitiesmust be calculated on the basis of the net long position in the same underlying Exposureprovided 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 Bookof the capital instruments of Relevant Entitiesthat take the form of holdings of index Securitiesmust be determined by calculating the underlying Exposureto the capital instruments of the Relevant Entitiesin the indices.
T2 Deductions Relating to Insignificant Investment in a Relevant Entity
PIB 3.15.8(1) For the purposes of PIB Rule 3.15.4(c), an
Authorised Firmmust 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 PIB Rule 3.13.16(1)(a);(b) the amount of direct and indirect holdings by the Authorised Firmof the T2 Capital instruments of Relevant Entitiesdivided by the aggregate amount of all direct and indirect holdings by the Authorised Firmof the CET1, AT1 and T2 Capital instruments of those Relevant Entities.(2) An Authorised Firmmust exclude Underwritingpositions held for 5 working days or fewer from the amount referred to in PIB Rule 3.13.16(1)(a) and from the calculation of the factor referred to in (1)(b).(3) An Authorised Firmmust 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 Firmof the capital instruments of Relevant Entitiesin which the Authorised Firmdoes not have a significant investment.
Exclusion in Relation to Managing a PSIA
Authorised Firmmust exclude from T2 Capital any amount by which the total of the Profit Equalisation Reserveand the Investment Risk Reserveexceeds the Displaced Commercial Risk Capital Requirementcalculated in accordance with IFR Rule 5.4.4.