BANK 3.2.9 Criteria for classification as common shares

(1) An instrument issued by a banking business firm is classified as a common share and included in CET 1 capital if all of the criteria in subrules (2) to (15) are satisfied.
(2) The instrument is the most subordinated claim in case of the liquidation of the firm.
(3) The holder of the instrument is entitled to a claim on the residual assets that is proportional to its share of issued capital, after all senior claims have been repaid in liquidation. The claim must be unlimited and variable and must be neither fixed nor capped.
(4) The principal amount of the instrument is perpetual and never repayable except in liquidation. Discretionary repurchases and other discretionary means of reducing capital allowed by law do not constitute repayment.

Note Under rule 3.3.6, the Regulatory Authority's approval is required for a reduction in capital.
(5) The firm does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled. The statutory or contractual terms do not provide anything that might give rise to such an expectation.
(6) Distributions are paid out of distributable items of the firm (including retained earnings) and the amount of distributions:
(a) is not tied or linked to the amount paid in at issuance; and
(b) is not subject to a contractual cap (except to the extent that a firm may not pay distributions that exceed the amount of its distributable items).
(7) There are no circumstances under which the distributions are obligatory. Non-payment of distributions does not constitute default.
(8) Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. There are no preferential distributions and in particular none for any other elements classified as the highest quality issued capital.
(9) It is the issued capital that takes the first and proportionately greatest share of any losses as they occur. Within the highest quality capital, each instrument absorbs losses on a going-concern basis proportionately and equally with all the others.

Note This criterion is taken to be satisfied even if the instrument includes a permanent write-down mechanism.
(10) The paid-in amount is recognised as equity capital (rather than as a liability) for determining balance-sheet insolvency.
(11) The paid-in amount is classified as equity in accordance with the relevant accounting standards.

Note For the firm's choice and use of accounting standards — see rule 2.1.6.
(12) The instrument is directly issued and paid-in, and the firm has not directly or indirectly funded the purchase of the instrument.
(13) 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.
(14) The instrument is issued only with the approval of the owners of the firm, either given directly by the owners or, if permitted by the applicable law, given by its governing body or by other persons authorised by the owners.
(15) The instrument is clearly and separately disclosed on the firm's balance sheet.
Amended by QFCRA RM/2015-3 (as from 1st January 2016).