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Dubai Financial Services Authority (DFSA): Contents

Dubai Financial Services Authority (DFSA)
Laws
Recognised Jurisdictions and Funds
Declaration Notices
Financial Markets Tribunal
Archive
Rulebook Modules
Prudential — Investment, Insurance Intermediation and Banking Module (PIB) [VER34/12-19]
PIB 3 Capital
Sourcebook Modules
Consultation Papers
Policy Statements
DFSA Codes of Practice
Amendments to Legislation
Media Releases
Notices

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  • PIB 3.15 Tier 2 capital (T2 Capital)

    • PIB 3.15.1

      The T2 Capital constitutes the sum of T2 Capital elements in PIB Rule 3.15.2, subject to the deductions stipulated later in this section.

      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 3.15.2

      T2 Capital consists of the sum of the following elements:

      (a) capital instruments which meet the eligibility criteria laid down in PIB Rule 3.15.3 ; and
      (b) the share premium accounts related to the instruments referred to in (a).
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 3.15.3

      (1) For the purpose of PIB Rule 3.15.2(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 FirmG or its SubsidiariesG ;
      (ii) an UndertakingG in which the Authorised FirmG 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 UndertakingG ;
      (c) the purchase of the instruments is not funded directly or indirectly by the Authorised FirmG ;
      (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 FirmG or its SubsidiariesG ;
      (ii) any ParentG of the Authorised FirmG or their SubsidiariesG ;
      (iii) any member of the Financial GroupG to which the Authorised FirmG belongs; or
      (iv) any UndertakingG that has Close LinksG 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 MaturityG of at least 5 years;
      (h) the provisions governing the instruments do not include any incentive for them to be redeemed by the Authorised FirmG ;
      (i) where the instruments include one or more call options, the options are exercisable at the sole discretion of the IssuerG ;
      (j) the instruments may be called, redeemed or repurchased only where the Authorised FirmG has notified the DFSAG of its intention to call, redeem or repurchase the instruments in writing and well in advance, and not before 5 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 FirmG 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 FirmG ;
      (m) the level of interest or dividend payments due on the instruments will not be modified based on the credit standing of the Authorised FirmG , its ParentG or any member of its Financial GroupG ; and
      (n) where the instruments are not issued directly by the Authorised FirmG or by an operating entity within its Financial GroupG , or by its ParentG , the proceeds are immediately available without limitation in a form that satisfies the conditions laid down in this RuleG to any of the following:
      (i) the Authorised FirmG ;
      (ii) an operating entity within its Financial GroupG ; or
      (iii) any ParentG of the Authorised FirmG .
      (2) The extent to which T2 Capital instruments can be considered as eligible for inclusion in T2 Capital during the final 5 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 5 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) The following must apply where, in the case of a T2 Capital instrument, the conditions laid down in this RuleG 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.
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • T2 Regulatory Deductions and Exclusions

      • PIB 3.15.4

        Subject to the following RulesG in this section, an Authorised FirmG must deduct the following from the calculation of its T2 Capital:

        (a) direct and indirect holdings by an Authorised FirmG of own T2 Capital instruments, including own T2 instruments that an Authorised FirmG could be obliged to purchase as a result of existing contractual obligations;
        (b) holdings of the T2 Capital instruments of Relevant EntitiesG where those entities have a reciprocal cross holding with the Authorised FirmG which have the effect of artificially inflating the Capital ResourcesG of the Authorised FirmG ;
        (c) the amount of direct and indirect holdings by the Authorised FirmG of the T2 Capital instruments of Relevant EntitiesG where the Authorised FirmG does not have a significant investment in those entities; and
        (d) direct and indirect holdings by the Authorised FirmG of the T2 Capital instruments of Relevant EntitiesG where the Authorised FirmG has a significant investment in those entities, excluding UnderwritingG positions held for fewer than 5 working days.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Deductions Relating to Holdings of Own T2 Capital Instruments

      • PIB 3.15.5

        For the purposes of PIB Rule 3.15.4(a), an Authorised FirmG 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 FirmG may calculate the amount of holdings in the Trading BookG on the basis of the net long position provided the long and short positions are in the same underlying ExposureG and the short positions involve no Counterparty RiskG ;
        (b) an Authorised FirmG must determine the amount to be deducted for indirect holdings in the Trading BookG of own T2 Capital instruments that take the form of holdings of index SecuritiesG by calculating the underlying ExposureG to own T2 Capital instruments in the indices; and
        (c) an Authorised FirmG may net gross long positions in own T2 Capital instruments in the Trading BookG resulting from holdings of index SecuritiesG against short positions in own T2 instruments resulting from short positions in the underlying indices, including where those short positions involve Counterparty RiskG .
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Deductions Relating to T2 Capital Instruments in Relevant Entities

      • PIB 3.15.6

        For the purposes of PIB Rule 3.15.4(b), (c) and (d), the amount of holdings of T2 Capital instruments and other capital instruments of Relevant EntitiesG to be deducted, must be calculated, subject to 3.15.7, on the basis of the gross long positions.

        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 3.15.7

        For the purposes of PIB Rule 3.15.4(c) and (d), an Authorised FirmG must make the deductions in accordance with the following:

        (a) the holdings in the Trading BookG of the capital instruments of Relevant EntitiesG must be calculated on the basis of the net long position in the same underlying ExposureG 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 BookG of the capital instruments of Relevant EntitiesG that take the form of holdings of index SecuritiesG must be determined by calculating the underlying ExposureG to the capital instruments of the Relevant EntitiesG in the indices.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • T2 Deductions Relating to Insignificant Investment in a Relevant Entity

      • PIB 3.15.8

        (1) For the purposes of PIB Rule 3.15.4(c), an Authorised FirmG 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 PIB Rule 3.13.16(1)(a);
        (b) the amount of direct and indirect holdings by the Authorised FirmG of the T2 Capital instruments of Relevant EntitiesG divided by the aggregate amount of all direct and indirect holdings by the Authorised FirmG of the CET1, AT1 and T2 Capital instruments of those Relevant EntitiesG .
        (2) An Authorised FirmG must exclude UnderwritingG positions held for 5 working days or fewer from the amount referred to in PIB Rule 3.13.16(1)(a) and from the calculation of the factor referred to in (1)(b).
        (3) An Authorised FirmG 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 FirmG of the capital instruments of Relevant EntitiesG in which the Authorised FirmG does not have a significant investment.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Exclusion in Relation to Managing a PSIA

      • PIB 3.15.9

        An Authorised FirmG must exclude from T2 Capital any amount by which the total of the Profit Equalisation ReserveG and the Investment Risk ReserveG exceeds the Displaced Commercial Risk Capital RequirementG calculated in accordance with IFR Rule 5.4.4.

        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]