• 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.