BANK 3.2.11 Criteria for inclusion in additional tier 1 capital

(1) An instrument is included in additional tier 1 capital if all of the criteria in subrules (2) to (16) are satisfied.
(2) The instrument is paid-in.
(3) The instrument is the most subordinated claim after those of depositors, general creditors and holders of the subordinated debt of the firm.
(4) The paid-in amount is neither secured nor covered by a guarantee of the firm or a related party, nor subject to any other arrangement that legally or economically enhances the seniority of the holder's claim in relation to the claims of the firm's creditors.
(5) The instrument is perpetual. It has no maturity date and there are no step-ups or other incentives to redeem.
(6) If the instrument is callable by the firm, it can only be called 5 years or more after the instrument is paid-in and only with the approval of the Regulatory Authority. The firm must not do anything to create an expectation that the exercise of the option will be approved, and, if the exercise is approved, the firm:
(a) must replace the called instrument with capital of the same or better quality and at conditions sustainable for the income capacity of the firm; or
(b) must demonstrate to the authority that its capital will exceed the firm's minimum capital requirement after the option is exercised.
(7) A repayment of principal through repurchase, redemption or other means must be approved by the Regulatory Authority. The firm must not assume, or create a market expectation, that such approval will be given.
(8) The instrument must provide for the firm to have at all times discretion not to make a distribution or pay a dividend or coupon. The exercise of the discretion must not impose restrictions on the firm (except in relation to distributions to common shareholders) and must not constitute default.
(9) Dividends and coupons must be paid out of distributable items.
(10) The instrument must not have a credit-sensitive-dividend feature under which a dividend or coupon is periodically reset based (wholly or partly) on the firm's credit standing.
(11) The instrument must not contribute to the firm's liabilities exceeding its assets if such a balance-sheet test forms part of any insolvency law applying in the jurisdiction where the instrument was issued.
(12) An instrument classified as a liability for accounting purposes must have principal loss absorption through conversion to common shares, or a write-down mechanism that allocates losses to the instrument, at a pre-specified trigger point. The conversion must be made in accordance with rule 3.2.14.
(13) A write-down of the instrument has the following effects:
(a) reducing the claim of the instrument in liquidation;
(b) reducing the amount repaid when a call option is exercised;
(c) reducing or eliminating dividend or coupon payments on the instrument.
(14) Neither the firm nor a related party over which the firm exercises control has purchased the instrument, nor has the firm directly or indirectly funded the purchase of the instrument.
(15) The instrument has no features that hinder recapitalisation. For example, it must not require the firm to compensate investors if a new instrument is issued at a lower price during a specified period.
(16) If the instrument is issued by a special purpose vehicle, the proceeds are immediately available without limitation to the firm through an instrument that satisfies the other criteria for additional tier 1 capital.

Note For the treatment of instruments issued by a special purpose vehicle — see rule 3.2.19.
Amended by QFCRA RM/2015-3 (as from 1st January 2016).