Annex # 3: Instruments Issued by the Bank that Meet the Additional Tier 1 Criteria

Effective from 2012-12-19 - Dec 18 2012
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The following box sets out the minimum set of criteria for an instrument issued by the bank to meet or exceed in order for it to be included in Additional Tier 1 capital.
Criteria for inclusion in Additional Tier 1 capital
	1.	Issued and paid-in
	2.	Subordinated to depositors, general creditors and subordinated debt of the bank
	3.	Is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors
	4.	Is perpetual, ie there is no maturity date and there are no step-ups or other incentives to redeem
	5.	May be callable at the initiative of the issuer only after a minimum of five years:
		a.	To exercise a call option a bank must receive prior supervisory approval; and
		b.	A bank must not do anything which creates an expectation that the call will be exercised; and
		c.	Banks must not exercise a call unless:
		i.	They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank; (replacement issues can be concurrent with but not after the instrument is called); or
		ii.	The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised. (minimum refers to the regulator’s prescribed minimum requirement, which may be higher than the Basel III Pillar 1 minimum requirement)
	6.	Any repayment of principal (eg through repurchase or redemption) must be with prior supervisory approval and banks should not assume or create market expectations that supervisory approval will be given
	7.	Dividend/coupon discretion:
		a.	the bank must have full discretion at all times to cancel distributions/payments (a consequence of full discretion at all times to cancel distributions/payments is that “dividend pushers” are prohibited. An instrument with a dividend pusher obliges the issuing bank to make a dividend/coupon payment on the instrument if it has made a payment on another (typically more junior) capital instrument or share. This obligation is inconsistent with the requirement for full discretion at all times. Furthermore, the term “cancel distributions/payments” means extinguish these payments. It does not permit features that require the bank to make distributions/payments in kind.)
		b.	cancellation of discretionary payments must not be an event of default
		c.	banks must have full access to cancelled payments to meet obligations as they fall due
		d.	cancellation of distributions/payments must not impose restrictions on the bank except in relation to distributions to common stockholders.
	8.	Dividends/coupons must be paid out of distributable items
	9.	The instrument cannot have a credit sensitive dividend feature, that is a dividend/coupon that is reset periodically based in whole or in part on the banking organization’s credit standing.
	10.	The instrument cannot contribute to liabilities exceeding assets if such a balance sheet test forms part of national insolvency law.
	11.	Instruments classified as liabilities for accounting purposes must have principal loss absorption through either (i) conversion to common shares at an objective pre-specified trigger point or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger point. The write-down will have the following effects:
		a.	Reduce the claim of the instrument in liquidation;
		b.	Reduce the amount re-paid when a call is exercised; and
		c.	Partially or fully reduce coupon/dividend payments on the instrument.
	12.	Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument.
	13.	The instrument cannot have any features that hinder recapitalization, such as provisions that require the issuer to compensate investors if a new instrument is issued at a lower price during a specified time frame
	14.	If the instrument is not issued out of an operating entity (An operating entity is an entity set up to conduct business with clients with the intention of earning a profit in its own right.) or the holding company in the consolidated group (e.g. a special purpose vehicle – “SPV”), proceeds must be immediately available without limitation to an operating entity or the holding company in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in Additional Tier 1 capital.
Stock surplus (share premium) resulting from the issue of instruments included in Additional Tier 1 capital;
Stock surplus (i.e. share premium) that is not eligible for inclusion in Common Equity Tier 1, will only be permitted to be included in Additional Tier 1 capital if the shares giving rise to the stock surplus are permitted to be included in Additional Tier 1 capital.

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