BANK 3.2.13 Criteria for inclusion in tier 2 capital

(1) An instrument is included in tier 2 capital if all the criteria in subrules (2) to (11) 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 depositors and general creditors.
(5) The original maturity of the instrument is at least 5 years.
(6) The recognition in regulatory capital in the remaining 5 years before maturity is amortised on a straight line basis and there are no step-ups or other incentives to redeem.
(7) 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.
(8) The holder has no right to accelerate future scheduled payments of coupon or principal, except in bankruptcy or liquidation.
(9) The instrument does 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.
(10) 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.
(11) 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 tier 2 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).