MIFIDPRU 3 Own funds

1. (1) Common equity tier 1 capital has the following core characteristics:
   1. (a) it is able to absorb losses as they occur;
   2. (b) it ranks below all other claims in liquidation;
   3. (c) it is permanent;
   4. (d) there is no obligation to make a distribution; and
   5. (e) the level of distributions is not capped.
2. (2) The remainder of MIFIDPRU 3.3A contains the detailed rules and guidance for calculating common equity tier 1 capital.

1. (1) A firm must not classify an issuance of a capital instrument as a common equity tier 1 instrument unless:
   1. (a) it has obtained prior permission from the FCA; or
   2. (b) (i) it is issuing new instruments on terms which are substantially the same as instruments for which the firm has already received the FCA's prior permission; and
   3.      (ii) it notifies the FCA sufficiently far in advance of classifying the new instruments as common equity tier 1 instruments.
2. (2) The FCA will grant the permission in (1)(a) if it is satisfied that the capital instrument meets the criteria in MIFIDPRU 3.3A.5R to MIFIDPRU 3.3A.16R.
3. (3) (a) A firm must obtain the permission in (1)(a) by completing the form in MIFIDPRU 3 Annex 2R and submitting it to the FCA using the online notification and application system.

4.      (b) A firm must notify under (1)(b) by completing the form in MIFIDPRU 3 Annex 3R and submitting it to the FCA using the online notification and application system.

    

1. (1) A common equity tier 1 instrument must be classified as equity within the meaning of the applicable accounting framework.
2. (2) A firm's obligations under the instrument must not constitute a liability (including a contingent or prospective liability) that would be relevant for the purposes of section 123(2) of the Insolvency Act 1986.
3. (3) The holder of the instrument must not have any right, arising from the non-payment of any sums connected to the instrument, to petition for the winding up or administration of the firm, or any similar procedure.
4. (4) The instrument must not be secured by, or subject to, a guarantee or other arrangement which enhances the legal or economic seniority of the claim.
5. (5)    (a) The common equity tier 1 instruments must rank below all other claims in the event of liquidation, except for claims from holders of other ordinary shares which rank pari passu with the instruments.
   1. (b) The common equity tier 1 instruments must entitle their owners to a claim on the residual assets of the firm which, in the event of liquidation and after payment of all senior claims, is proportionate to the amount of such instruments issued and is not fixed or subject to a cap, except that a claim specified as a percentage of residual assets does not constitute a fixed or capped claim.
   2. (c) Each common equity tier 1 instrument must absorb losses to the same degree as all other common equity tier 1 instruments, and all common equity tier 1 instruments must absorb losses before any other own funds instruments issued by the firm.

1. (1) MIFIDPRU 3.3A.9R prevents the artificial inflation of a firm'sown funds by prohibiting a firm from funding its own capital instruments, at issuance or thereafter. This includes situations where:
   1. (a) a firm grants a loan or other funding to an investor that is used to purchase the firm's own capital instruments;
   2. (b) a firm grants any funding to an existing investor in its capital instruments;
   3. (c) a firm provides a guarantee, enters into a credit derivative, or enters into some other form of arrangement so that the credit risk in a capital instrument is or may be transferred to the firm; or
   4. (d) the funding in (a), (b) or (c) is provided to an external investor indirectly – for example, by a member of the firm'sgroup or via another intermediary.
2. (2) However, there is an exception for funding that is provided in the ordinary course of a firm's business. This covers situations where:
   1. (a) funding is provided as part of a firm's normal trading or business operations;
   2. (b) the terms are comparable to the terms the firm offers for third-party instruments; and
   3. (c) the funding is not designed to support the firm's capital position.
3. (3) For example, a market maker providing standard margin lending that happens to involve the market maker’s own capital instruments is likely to qualify for the exception. However, a structured arrangement specifically designed to fund purchases of the firm's capital instruments would not qualify. 

1. (1) A common equity tier 1 instrument must be perpetual, with a reduction of capital only permissible where:
   1. (a) the firm is in liquidation; or
   2. (b) the firm carries out a reduction of capital which complies with MIFIDPRU 3.6A.4R or MIFIDPRU 3.6A.6R.
2. (2) A firm must not do anything to create an expectation that it will or might carry out a reduction of capital under (1)(b) when it issues the instrument, and the statutory or contractual terms of the instrument must not contain any feature which would or might give rise to such an expectation. 

1. (1) A firm generally has the right to carry out a reduction of capital under company law. However, MIFIDPRU 3.6A.4R requires that any reduction of capital is generally first approved by the FCA.
2. (2) The FCA recognises that relevant documentation may acknowledge the fact that a firm is able to carry out a reduction of capital. However, the firm must not create an expectation that it would or might carry out a reduction of capital when it issues the relevant instrument.
3. (3) An expectation that a firm would or might carry out a reduction of capital may be created by:
   1. (a) a term which creates an economic incentive for the firm to carry out a reduction of capital at a particular point in time;
   2. (b) a term which suggests that a reduction of capital may be carried out at a particular point in time, or at the initiative of any person other than the firm, even if this is conditional upon the approval of the firm'smanagement body and the FCA; or
   3. (c)  any other contractual or non-contractual indication that the firm would or might carry out a reduction of capital on a particular date, or in particular circumstances. 

1. (1) This rule applies to:
   1. (a) a partner's account in a firm that is a partnership; and
   2. (b) a member’s account in a firm that is a limited liability partnership.
2. (2) References to a partner or a partnership in this rule include a member and a limited liability partnership respectively.
3. (3) A partner's account satisfies the conditions in MIFIDPRU 3.3A.11R if:

   1. (a) capital contributed by partners is paid into the account; and 

       

   2. (b) the terms of the partnership agreement ensure that (otherwise than with prior FCA consent under MIFIDPRU 3.6A.4R or in the circumstances set out in MIFIDPRU 3.6A.6R) capital may only be withdrawn from the account by a partner (‘A’) if:
      1. (i) A ceases to be a partner and an equal amount is contributed to another partner's account by A’s former partners or any person replacing A as their partner;
      2. (ii) any reduction in the capital credited to A’s account is immediately offset by an equal contribution to other partner accounts by one or more of A’s partners (including any person becoming a partner of A at the time that the additional contribution is made);
      3. (iii) the partnership is wound up or dissolved; or
      4. (iv) the firm ceases to be authorised or no longer has a Part 4A permission. 

1. (1) A firm must not include interim profits or year-end profits in its common equity tier 1 capital before its formal decision confirming final profit or loss for the year, unless:
   1. (a) those profits have been verified by a person who is independent of the firm and is responsible for the auditing of the accounts of that firm;
   2. (b) the verification provides an adequate level of assurance that those profits have been evaluated in accordance with the principles set out in the applicable accounting framework;
   3. (c) the firm is satisfied that any foreseeable charge or dividend has been deducted from the amount of those profits on a prudent and conservative basis; and
   4. (d) the firm notifies the FCA as soon as reasonably practicable after including the profits in its common equity tier 1 capital.
2. (2) A firm must make the notification in (1)(d) by completing the form in MIFIDPRU 3 Annex 1R and submit it to the FCA using the online notification and application system. 

1. (1) When deducting foreseeable dividends under MIFIDPRU 3.3A.17R(1)(c), a firm should consider:
   1. (a) any formal decisions about dividends that have been taken by the firm'smanagement body;
   2. (b) the upper end of any dividend policy;
   3. (c) the ratio of dividends to income paid out in previous years; and
   4. (d) any other factors that might reasonably affect the firm's approach to distributions for the relevant period.
2. (2) When deducting foreseeable charges under MIFIDPRU 3.3A.17R(1)(c), a firm should consider:
   1. (a) any tax charges attributable to the profits being verified;
   2. (b) any other charges that are attributable to the relevant period but have not yet been reflected in the firm'scommon equity tier 1 capital calculation; and
   3. (c) any other factors that might reasonably be expected to affect the final profit or loss figure for the period. 

1. (1) Deductions and filters help to ensure that a firm measures its own funds in a way that reflects its ability to absorb losses in stressed conditions or liquidation.
2. (2) They achieve this by adjusting accounting values – for example, because those values:
   1. (a) are subject to significant valuation uncertainty;
   2. (b) may not reflect realisable values in stressed conditions; 
   3. (c)  include unrealised or market-value gains and losses that may reverse with changing market conditions; or
   4. (d) are only realisable if the firm continues to operate as a going concern.

1. (1) A firm must deduct losses for the current financial year, save where the losses have already resulted in a reduction in its common equity tier 1 items.
2. (2) For the purposes of (1), a firm must:
   1. (a) apply the same accounting policies and standards as used for the year-end financial report;
   2. (b) prudently estimate and assign income and expenses to the interim period in which they are incurred;
   3. (c)  recognise material or non-recurrent events in full and without delay in the interim period during which they arise; and
   4. (d) determine profits, gains and losses, and deduct any resulting losses, as they arise.

1. (1) A firm must deduct intangible assets.

2. (2) For the purposes of (1):

    

   1. (a) a firm must also deduct any intangible assets included in the valuation of its qualifying holdings;
   2. (b) where the qualifying holding in (2)(a) is not wholly owned or controlled by the firm, the firm must only deduct the portion of intangible assets corresponding to its percentage of ownership or control; and
   3. (c)  a firm must reduce the amount to be deducted by the amount of associated deferred tax liabilities that would be extinguished if the intangible assets became impaired or were derecognised, under the applicable accounting framework.

1. (1) A firm must deduct deferred tax assets that rely on future profitability.
2. (2) For the purposes of (1):
   1. (a) a firm may offset deferred tax liabilities against associated deferred tax assets if:
      1. (i) the firm has a legally enforceable right to set off those current tax assets against current tax liabilities;
      2. (ii) the deferred tax assets and the deferred tax liabilities arise from the same tax authority and for the same taxable entity; and
      3. (iii) the deferred tax liabilities do not reduce the amount of intangible assets or defined pension fund assets deductible under MIFIDPRU 3.3A.21R or MIFIDPRU 3.3A.23R; and
   2. (b) for the calculation of deferred tax assets and liabilities at consolidated level, a taxable entity includes any number of entities which are members of the same tax group, fiscal consolidation, fiscal unity or consolidated tax return.

1. (1) A firm must deduct the value of any defined benefit pension fund assets on its balance sheet. 
2. (2) For the purposes of (1):
   1. (a) a firm must net off pension fund assets against its obligations under the fund; and
   2. (b) a firm must reduce the amount to be deducted by the amount of associated deferred tax liabilities which would be extinguished if the assets became impaired or were derecognised, under the applicable accounting framework.

1. (1) A firm must deduct direct, indirect and synthetic holdings of its own common equity tier 1 instruments.
2. (2) For the purposes of (1):
   1. (a) a firm must also apply the deduction where it could be obliged to purchase its own common equity tier 1 instrument as a result of an existing contractual obligation;
   2. (b) a firm must deduct its gross long position unless (2)(c) applies; and
   3. (c)  a firm may deduct its net long position if:
      1. (i) the long and short positions are in the same underlying exposure;
      2. (ii) the short positions are cleared through an authorised central counterparty or subject to appropriate margining requirements; and
      3. (iii) the long and short positions are both held in the trading book or are both held outside the trading book.

1. (1) A firm must deduct direct, indirect and synthetic holdings of common equity tier 1 or comparable instruments of financial sector entities which are held outside of the trading book, unless MIFIDPRU 3.3A.28R applies.
2. (2) A firm must calculate holdings based on its gross long position unless (3) applies.
3. (3) A firm may calculate holdings based on its net long position where:
   1. (a) (i) the maturity date of the short position is the same as, or longer than, the maturity date of the long position; or
   2.      (ii) the residual maturity of the short position is at least one year; and

   3. (b) the long and short positions are held outside of the trading book.

       

1. For the purposes of MIFIDPRU 3.3A.24R, MIFIDPRU 3.3A.25R and MIFIDPRU 3.3A.27R:
2. (1) An indirect holding means an economic exposure through an intermediate entity such as a holding company or special purpose vehicle.
3. (2) A firm must calculate the amount to be deducted for indirect holdings by:
   1. (a) identifying any intermediate entities or structures through which it may be exposed to a deductible common equity tier 1 instrument;
   2. (b) making a prudent estimate of the full economic exposure of the intermediate entities or structures to deductible instruments; and
   3. (c) deducting the proportion of economic exposure that is attributable to the firm.
4. (3) A firm is not required to treat a holding in a fund as an indirect holding.
5. (4) A synthetic holding means an economic exposure through a derivative instrument, guarantee, credit protection or other similar arrangement.
6. (5) A firm must calculate the amount to be deducted for synthetic holdings by determining the maximum potential loss that would arise if the underlying deductible common equity tier 1 instrument or equivalent economic exposure had zero value, taking into account:
   1. (a) all contractual obligations relating to the position; and
   2. (b) any other features that could increase the firm's economic exposure.

1. (1) This deduction applies if a firm does not calculate its own funds in accordance with UK-adopted international accounting standards.

2. (2) Where this deduction applies, a firm must: 

   1. (a) deduct any foreseeable current and deferred tax charges relating to common equity tier 1 items that are not yet accounted for in its common equity tier 1 capital;
   2. (b) calculate the amount to be deducted using the approach in UK-adopted international accounting standards; and
   3. (c) deduct the amount of foreseeable current and deferred tax charges without netting off against any unrecognised deferred tax assets.

1. (1) A firm must deduct the higher of:
   1. (a) the sum of the amounts by which any qualifying holdings in non-financial sector entities each exceed 15% of the firm'sown funds; or
   2. (b) the amount by which all its qualifying holdings in non-financial sector entities exceed 60% of the firm'sown funds.
2. (2) The own funds limits in (1)(a) and (1)(b) must be calculated before applying this deduction.
3. (3) When calculating the amounts in (1), a firm must treat a fund as a non-financial sector entity.
4. (4) When calculating the amounts in (1), a firm must exclude:
   1. (a) shares held in the name of the firm on behalf of others;
   2. (b) shares held in the trading book; and
   3. (c) shares which are not financial fixed assets as defined in paragraph 94 of Schedule 2 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/401).

1. A firm must exclude the following from its common equity tier 1 items:
2. (1) any unrealised gain or loss on cash flow hedges of financial instruments that are not measured at fair value, except where:
   1. (a) the hedged item itself is measured at fair value; or
   2. (b) the unrealised gain or loss represents effective net investment hedges of foreign operations; and
3. (2) any gain or loss arising from changes in the value of its liabilities that are due to changes in the firm's own credit standing.

1. (1) A firm with a trading book must deduct the additional valuation adjustment in (2) from its common equity tier 1 items.
2. (2) A firm must calculate the additional valuation adjustment as 0.1% of the base value of positions in the trading book.
3. (3) The base value of positions in the trading book is the sum of the absolute value of fair-valued assets and liabilities stated in its financial statements under the applicable accounting framework, except that:
   1. (a) exactly matching offsetting fair-valued assets and liabilities must be excluded;
   2. (b) where a change in the accounting valuation of fair-valued assets and liabilities would only partially be reflected in common equity tier 1 capital, the value of those assets or liabilities must only be included in proportion to the impact of the relevant valuation change on common equity tier 1 capital; and
   3. (c) where a change in the accounting valuation of fair-valued assets and liabilities would have no impact on common equity tier 1 capital, the value of those assets or liabilities must be excluded.

1. (1) Additional tier 1 capital has the following core characteristics:
   1. (a) it converts into common equity tier 1 capital, or is written down, upon the occurrence of one or more trigger events;
   2. (b) it has no fixed maturity;
   3. (c) there is no inescapable obligation to make a distribution; and
   4. (d) distributions do not accelerate when the firm experiences stress.
2. (2) The remainder of MIFIDPRU 3.4A contains the detailed rules and guidance for calculating additional tier 1 capital.

1. (1) A firm must specify one or more trigger events in the terms of an additional tier 1 instrument.
2. (2) The trigger events specified under (1) must include a trigger event that occurs where the common equity tier 1 capital of the firm falls below a level specified by the firm that is no lower than 64% of the firm'sown funds requirement.
3. (3) The full principal amount of an additional tier 1 instrument must be written down or converted when a trigger event occurs.
4. (4) The amount recognised for additional tier 1 instruments and any associated share premium accounts must not exceed the amount of common equity tier 1 items that would be generated if there was a write down or conversion.
5. (5) Where a trigger event occurs, a firm must:
   1. (a) convene the management body or other relevant body without delay to determinate that a trigger event has occurred;
   2. (b) immediately inform the FCA;
   3. (c) inform the holders of the additional tier 1 instruments; and
   4. (d) write down or convert the instruments without delay, and within 1 month.

1. Where a firm issues additional tier 1 instruments that write down:
2. (1) the write-down must extinguish:
   1. (a) the claim of the holder in liquidation;
   2. (b) any amount required to be paid in the event of call or redemption of the instrument; and
   3. (c) any distribution on the instrument;
3. (2) the write-down must apply to all holders of additional tier 1 instruments that include the same trigger; and
4. (3) in the case of a write-up after temporary write-down:
   1. (a) any write-up must be based on profits after the firm has taken a formal decision confirming the final profits;
   2. (b) any write-up must be at the full discretion of the firm (subject to (c) to (e) below), and there must be no obligation on the firm to operate or accelerate a write-up under specific circumstances;
   3. (c) write-up must be operated on a pro rata basis among additional tier 1 instruments with the same trigger that was subject to write-down;
   4. (d) the maximum amount that can be written up must be calculated using the formula: 

      1. M = P * A/T

   5. where:
      1. • M = the maximum amount that can be written up;
      2. • P = the profit of the firm; 

      3. • A = the aggregate nominal value (before write-down) of all additional tier 1 instruments that were subject to a write-down; and 

          

      4. • T = the sum of the common equity tier 1 capital and additional tier 1 capital of the firm; and
   6. (e) any write-up amount must be treated as a payment that reduces the firm'scommon equity tier 1 capital.

1. Where a firm issues additional tier 1 instruments that convert into common equity tier 1 instruments, it must:
2. (1) specify in the provisions governing the additional tier 1 instruments either:
   1. (a) the rate of such conversion; or
   2. (b) a range within which the instruments will convert into common equity tier 1 instruments;
3. (2) retain all necessary authorisations for converting all of its additional tier 1 instruments into common equity tier 1 instruments; and
4. (3) ensure there are no procedural impediments to conversion under its constitutional or contractual arrangements.

1. (1) An additional tier 1 instrument must be perpetual, with a reduction of capital only permissible where:

    

   1. (a) the firm is in liquidation; or

       

   2. (b) the firm carries out a reduction of capital which:

       

      1. (i) complies with MIFIDPRU 3.6A.4R or MIFIDPRU 3.6A.6R; and

          

      2. (ii) does not take place before 5 years after the date of issuance, unless the conditions in MIFIDPRU 3.6A.6R(1) or (2) are met.

          

2. (2) The additional tier 1 instrument must not include any incentive for the firm to carry out a reduction of capital.

    

3. (3) A firm must not explicitly or implicitly indicate that the additional tier 1 instrument would be redeemed or repaid other than in liquidation, and the terms of the instrument must not provide such an indication.

    

4. (4) Where the additional tier 1 instrument includes one or more early redemption options including call options, the options must be exercisable at the sole discretion of the firm.

    

5. (5) A firm must not indicate explicitly or implicitly that the FCA would consent to a reduction of capital.

    

1. (1) An incentive to carry out a reduction of capital in MIFIDPRU 3.4A.13R(2) includes any feature that provides, at the date of issuance of a capital instrument, an expectation that the capital instrument is likely to be redeemed. 

    

2. (2) Examples of (1) include:

    

   1. (a) a term which creates an economic incentive for the firm to carry out a reduction of capital at a particular point in time; and

       

   2. (b) marketing of the instrument in a way which suggests to investors that the instrument will be called.

An additional tier 1 instrument must meet the following conditions regarding distributions: 

1. (1) the firm must at all times have full discretion to cancel distributions on the instruments for an unlimited period and on a non-cumulative basis;
2. (2) the firm must be able to use cancelled distributions to meet its obligations as they fall due, without restriction;
3. (3) failure to make distributions must not constitute an event of default;
4. (4) the additional tier 1 instrument must not include a requirement:
   1. (a) to make a distribution in the event of a distribution being made on another instrument that ranks the same or more junior;
   2. (b) that, if a distribution is not made on that instrument, a distribution cannot be made on another capital instrument; or
   3. (c) substituting the obligation to make a distribution with any other obligation to make payment in any other form; and
5. (5) the level of distribution must not change in a way that is linked to the credit standing of the firm or any member of the firm's group.

1. (1) A firm must deduct direct, indirect and synthetic holdings of its own additional tier 1 instruments.
2. (2) For the purposes of (1):
   1. (a) a firm must also apply the deduction where it could be obliged to purchase the additional tier 1 instrument as a result of an existing contractual obligation;
   2. (b) a firm must deduct its gross long position unless (2)(c) applies; and
   3. (c) a firm may deduct its net long position if:
      1. (i) the long and short positions are in the same underlying exposure;
      2. (ii) the short positions are cleared through an authorised central counterparty or subject to appropriate margining requirements; and
      3. (iii) the long and short positions are both held in the trading book or are both held outside of the trading book.

1. (1) A firm must deduct direct, indirect and synthetic holdings of additional tier 1 or comparable instruments of financial sector entities which are held outside of the trading book, unless MIFIDPRU 3.4A.21R applies.
2. (2) A firm must calculate holdings based on its gross long position unless (3) applies.
3. (3) A firm may calculate holdings based on its net long position where:
   1. (a) (i) the maturity date of the short position is the same or later than the maturity date of the long position; or
   2.      (ii) the residual maturity of the short position is at least 1 year; and
   3. (b) the long and short positions are held outside of the trading book.

1. (1) This deduction applies if a firm does not calculate its own funds in accordance with UK-adopted international accounting standards.
2. (2) Where this deduction applies, a firm must:
   1. (a) deduct any current and deferred tax charges relating to additional tier 1 items that are not yet accounted for in its common equity tier 1 capital;
   2. (b) calculate the amount to be deducted using the approach in UK-adopted international accounting standards; and
   3. (c) deduct the amount of foreseeable current and deferred tax charges without netting off against any unrecognised deferred tax assets.

1. (1) Tier 2 capital has the following core characteristics:
   1. (a) it ranks below ordinary creditors in liquidation;
   2. (b) it has an original maturity of at least 5 years;
   3. (c) it amortises over the final 5 years; and
   4. (d) distributions do not accelerate when the firm experiences stress.
2. (2) The remainder of MIFIDPRU 3.5A contains detailed rules and guidance for calculating tier 2 capital.

1. (1) A tier 2 instrument must have an original maturity of at least 5 years, with a reduction of capital prior to maturity only permissible where:
   1. (a) the firm is in liquidation; or
   2. (b) the firm carries out a reduction of capital which:
      1. (i) has been approved by the FCA under MIFIDPRU 3.6A.4R; and
      2. (ii) does not take place before 5 years after the date of issuance, unless the conditions in MIFIDPRU 3.6A.6R(1) or (2) are met.
2. (2) A tier 2 instrument must not include any incentive for the principal amount to be redeemed or repaid prior to maturity, or a right to accelerate early redemption or repayment.
3. (3) A firm must not explicitly or implicitly indicate that the tier 2 instrument would be redeemed or repaid prior to maturity other than in liquidation, and the terms of the instrument must not provide such an indication.
4. (4) Where the tier 2 instrument includes one or more early redemption options including call options, the options must be exercisable at the sole discretion of the firm.

1. (1) An incentive for the principal amount to be redeemed or repaid in MIFIDPRU 3.5A.8R(2) includes any feature that provides, at the date of issuance of a capital instrument, an expectation that the capital instrument is likely to be redeemed before its stated maturity date.
2. (2) Examples of an incentive under (1) include:
   1. (a) a term which creates an economic incentive for the firm to reduce or repay the principal before maturity; and
   2. (b) marketing of the instrument in a way which suggests to investors that the instrument will be called before maturity.

1. Where a tier 2 instrument has a residual maturity of 5 years or less, the proportion of the instrument which qualifies as a tier 2 item must be calculated by multiplying A and B, where:
2. • A is the notional amount of the instrument on the first day of the final 5-year period of its contractual maturity divided by the number of days in that period; and
3. • B is the number of remaining days of contractual maturity of the instrument.

1. (1) A firm must deduct direct, indirect and synthetic holdings of its own tier 2 instruments
2. (2) For the purposes of (1):
   1. (a) a firm must also apply the deduction where it could be obliged to purchase the tier 2 instrument as a result of an existing contractual obligation;
   2. (b) a firm must deduct its gross long position unless (c) applies; and
   3. (c) a firm may deduct its net long position if:
      1. (i) the long and short positions are in the same underlying exposure;
      2. (ii) the short positions are cleared through an authorised central counterparty or subject to appropriate margining requirements; and
      3. (iii) the long and short positions are both held in the trading book or are both held outside of the trading book.

1. (1) A firm must deduct direct, indirect and synthetic holdings of tier 2 or comparable instruments of financial sector entities which are held outside of the trading book, unless MIFIDPRU 3.5A.16R applies.
2. (2) A firm must calculate holdings based on its the gross long position unless (3) applies.
3. (3) A firm may calculate holdings based on its net long positions where:
   1. (a) (i) the maturity date of the short position is the same or later than the maturity date of the long position; or
   2.      (ii) the residual maturity of the short position is at least 1 year; and

   3. (b) the long and short positions are held outside of the trading book.

       

1. (1) (for an entity subject to MIFIDPRU) a tier 2 instrument
2. (2) (for an insurer subject to the Solvency II Firms part of the PRA Rulebook):
   1. (a) ‘Tier 2 basic own funds’ as defined in the Own Funds (Solvency II Firms) part of the PRA Rulebook; and
   2. (b) ‘Tier 3 own funds’ that are ‘basic own funds’ as those terms are defined in the Own Funds (Solvency II Firms) part of the PRA Rulebook; and
3. (3) (for a financial sector entity not subject to (1) or (2)) any subordinated instrument that does not absorb losses on a going-concern basis.

A firm is not required to obtain the permission in MIFIDPRU 3.6A.4R if:

1. (1) the instrument is being repurchased for market making purposes; or
2. (2) all of the following conditions are met:
   1. (a) either of the conditions in MIFIDPRU 3.6A.7R are met;
   2. (b) at least 20 business days before the day on which the reduction of capital is proposed to occur, the firm has notified the FCA of:
      1. (i) the proposed reduction of capital; and
      2. (ii) the basis on which the firm has concluded that either condition in (a) is satisfied;
   3. (c) the notification in (2)(b) is made using the form in MIFIDPRU 3 Annex 5R and submitted using the online notification and application system; and

   4. (d) the FCA has not notified the firm of any objection to the proposal before the day on which the reduction of capital is proposed to occur.

       

• The conditions referred to in MIFIDPRU 3.6A.6R(2)(a) are that:
  1. (1) before or at the same time as the reduction of capital, the firm replaces the relevant own funds instruments with own funds instruments of equal or higher quality on terms that are sustainable for the income capacity of the firm, so that:
     1. (a) the profitability of the firm will continue to be sound and will not see any negative change in the foreseeable future after the replacement of the original own funds instruments with own funds instruments of equal or higher quality; and
     2. (b) the assessment of profitability in the foreseeable future in (1)(a) takes into account the firm's profitability in stressed situations; or
  2. (2) the firm is redeeming additional tier 1 instruments or tier 2 instruments within 5 years of their date of issue and either:
     1. (a) there is a change in the regulatory classification of the instruments that is likely to result in their exclusion from own funds or reclassification as a lower quality form of own funds, and both the following conditions are met:
        1. (i) there are reasonable grounds to conclude that the change is sufficiently certain; and
        2. (ii) the regulatory reclassification of the instruments was not reasonably foreseeable at the time of their issuance; or
     2. (b) there is a change in the applicable tax treatment of those instruments which is material and was not reasonably foreseeable at the time of their issuance.

1. (1) A firm must notify the FCA at least 20 business days before the intended issuance date of the firm's intention to issue:

   1. (a) additional tier 1 instruments; or

       

   2. (b) tier 2 instruments.
2. (2) The notification requirement in (1) does not apply if:
   1. (a) the firm has previously notified the FCA of an issuance of the same class of additional tier 1 instruments or tier 2 instruments; and
   2. (b) the terms of the new instruments are identical in all material respects to the terms of the instruments in the issuance previously notified to the FCA.
3. (3) The notification under (1) must:
   1. (a) be submitted to the FCA through the online notification and application system using the form in MIFIDPRU 3 Annex 6R; and
   2. (b) include the following:
      1. (i) confirmation of whether the instruments are intended to be classified as additional tier 1 instruments or tier 2 instruments;
      2. (ii) confirmation of whether the instruments are intended to be issued to external investors or only to other members of the firm'sgroup or connected parties;
      3. (iii) a copy of the term sheet and details of any features of the capital instrument which are novel, unusual or different from a capital instrument of a similar nature previously issued by the firm or widely available in the market;
      4. (iv) confirmation from a member of the firm'ssenior management or governing body who has oversight of the intended issuance that the instrument meets the conditions in MIFIDPRU 3.4A or MIFIDPRU 3.5A (as applicable) to be classified as additional tier 1 instruments or tier 2 instruments; and

      5. (v) a properly reasoned legal opinion from an appropriately qualified individual, confirming that the capital instruments meet the conditions in (iv).

          

• A parent undertaking must, at all times, have own funds instruments that satisfy the following conditions:
  1. (1) the parent undertaking's common equity tier 1 capital must be at least equal to:
     1. (a) the sum of the book value of the parent undertaking's holdings of the common equity tier 1 capital of the relevant financial undertakings under MIFIDPRU 2.6.5R; plus
     2. (b) the total amount of all the parent undertaking's contingent liabilities in favour of the relevant financial undertakings under MIFIDPRU 2.6.5R;
  2. (2) the sum of common equity tier 1 capital and additional tier 1 capital of the parent undertaking must be at least equal to the sum of:
     1. (a) the amounts in (1)(a) and (1)(b); plus
     2. (b) the sum of the book value of the parent undertaking's holdings in the additional tier 1 capital of the relevant financial undertakings under MIFIDPRU 2.6.5R; and
  3. (3) the sum of the parent undertaking's own funds instruments must be at least equal to the total requirement under MIFIDPRU 2.6.5R.