• 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.