MIFIDPRU 3.4A Additional tier 1 capital

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.